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Ryan Racing LLC v. Gentilozzi

United States District Court, W.D. Michigan, Southern Division

January 31, 2017

RYAN RACING, LLC, Plaintiff,
PAUL GENTILOZZI et al., Defendants.



         This matter is before the Court following a five-day bench trial that began on December 5, 2016. The Court makes the following findings of fact and conclusions of law in accordance with Rule 52(a) of the Federal Rules of Civil Procedure.

         I. Background

         Plaintiff Ryan Racing, LLC, is an entity owned by professional race car driver Ryan Hunter-Reay. Defendants Rocketsports, Inc. (“Rocketsports”), RSR Racing, LLC (“RSR”), Gentilozzi Real Estate and Management Company, Inc. (“GRE”), Victor Development II, LLC (“Victor II”), Atrium Partners (“Atrium”), Westland Center Partners (“WCP”), 320 North Washington Square Partnership (“320 North Washington Square”), and 3400 West Road, LLC (“3400 West Road”) are entities owned, in whole or part, by Defendant Paul Gentilozzi.[1] Rocketsports and RSR were engaged in the business of motorsports. Gentilozzi's other entities owned or were involved in the business of real estate.

         Rocketsports is an S corporation formed by Gentilozzi in 1991. Gentilozzi was and is the sole owner of Rocketsports. From 1985 to 2009, Gentilozzi and Rocketsports raced cars associated with several manufacturers, including Ford, Oldsmobile, Chevrolet, and Jaguar. In 2005, Plaintiff and R&R Racing Enterprises LLC (“R&R”) entered into an agreement with Rocketsports whereby Hunter-Reay would provide driving services for Rocketsports throughout the 2005 season of the Champ Car World Series. Partway through the season, Gentilozzi prematurely terminated the contract on behalf of Rocketsports. In an email to Hunter-Reay, Gentilozzi claimed that the racing season had been a disappointment, but he accepted responsibility for Rocketsports' inability to provide a car that Hunter-Reay needed “to achieve [his] potential.” (JX 194.)[2] In October 2005, R&R notified Rocketsports that it had breached the contract by terminating it prior to the end of the racing season and by harming Hunter-Reay's reputation. (PX 6.) R&R also notified Rocketsports that the damages resulting from the breach were expected to be in the “millions of dollars[.]” (Id.) Gentilozzi's attorneys responded with a letter accusing Hunter-Reay of breaching the contract and falsely claiming that he caused $1.2 million in crash damages. (JX 195.) In July 2008, Plaintiff filed a demand for arbitration against Rocketsports based on the asserted breaches of the contract, claiming losses of over $3.5 million. (PX 1.) In August 2009, the arbitrator found in favor of Plaintiff and issued an award for approximately $2.7 million. The Ingham County Circuit Court confirmed the award in a judgment issued in September 2009. Thus far, Plaintiff has collected approximately $230 of that judgment.

         In April 2009, while the arbitration proceedings were still ongoing, Gentilozzi formed a new corporate entity for his racing business, RSR. Gentilozzi is the majority owner and manager of RSR. Plaintiff submitted its closing brief to the arbitrator on or about July 17, 2009. (PX 3.) On July 31, 2009, eighteen days before the arbitration award issued against Rocketsports, Rocketsports transferred substantially all of its assets to RSR. According to the Asset Purchase Agreement (“APA”) between Rocketsports and RSR, Rocketsports purportedly transferred $734, 870 worth of assets to RSR in exchange for the assumption of $1, 292, 147 in liabilities. Thereafter, Rocketsports effectively ceased operations. Because Plaintiff was unable to recover any significant portion of the judgment from Rocketsports, Plaintiff filed this action in 2012 to collect on the judgment from Gentilozzi, RSR, and the other Defendants, Gentilozzi's real estate entities. Plaintiff asserts four claims in its complaint: (1) fraudulent transfer under the Michigan Uniform Fraudulent Transfer Act (“UFTA”), Mich. Comp. Laws § 566.31; (2) conspiracy to commit a fraudulent conveyance; (3) successor liability against RSR; and (4) piercing the corporate veil of Rocketsports against Gentilozzi.

         II. Piercing the Corporate Veil

         In Count 4 of the complaint, Plaintiff seeks to recover on its judgment against Rocketsports from Gentilozzi, who was at all times the sole owner and the manager of the company. Under Michigan law, [3] there is a presumption that the corporate form will be respected. Seasword v. Hilti, Inc., 537 N.W.2d 221, 224 (Mich. 1995) (citing Herman v. Mobile Homes Corp., 26 N.W.2d 757, 761 (Mich. 1947)). This presumption, often referred to as the corporate veil, is that the entity is separate and distinct from its owner or owners. Id. “Courts will honor this presumption even when a single individual owns and operates the entity.” Green v. Ziegelman, 873 N.W.2d 794, 803 (Mich. Ct. App. 2015) (“Green II”). However, “[c]omplete identity of interest between [the] sole shareholder and corporation may lead courts to treat them as one for certain purposes.” Kline v. Kline, 305 N.W.2d 297, 298 (Mich. Ct. App. 1981). Generally, the corporate veil “may be pierced only where an otherwise separate corporate existence has been used to ‘subvert justice or cause a result that [is] contrary to some overriding public policy.'” Seasword, 537 N.W.2d at 224 (alteration in original) (quoting Wells v. Firestone Tire & Rubber Co., 364 N.W.2d 670, 674 (Mich. 1984)). “‘[T]he fiction of a distinct corporate entity separate from the stockholders is a convenience introduced in the law to subserve the ends of justice. When this fiction is invoked to subvert justice, it is ignored by the courts.'” Green II, 873 N.W.2d at 803 (quoting Wells, 364 N.W.2d at 673); see also Kline, 305 N.W.2d at 299 (“A court's treatment of a corporate entity clearly rests on notions of equity, whether it is an action at law or at equity.”).

         Generally, Michigan courts will not pierce the corporate veil unless (1) the corporate entity was a mere instrumentality of another entity or individual; (2) the corporate entity was used to commit a fraud or wrong; and (3) the plaintiff suffered an unjust loss. Foodland Distribs. v. Al-Naimi, 559 N.W.2d 379, 381 (Mich. Ct. App. 1996) (citing SCD Chem. Distribs., Inc. v. Medley, 512 N.W.2d 86, 90 (Mich. Ct. App. 1994)); see also Gledhill v. Fisher & Co., 262 N.W. 371, 372 (Mich. 1935). However, “there is no mechanical test for determining when the existence of a separate entity must be disregarded . . . whether to disregard the separate existence of an entity depends on the totality of circumstances.” Green II, 873 N.W.2d at 807. “Each case involving disregard of the corporate entity rests on its own special facts.” Kline, 305 N.W.2d at 299.

         As this Court recognized in a prior opinion in this case, a veil-piercing claim “is not by itself a cause of action.” In re RCS Eng'd Prods. Co., Inc., 102 F.3d 223 (6th Cir. 1996). Rather, it is “an equitable remedy sparingly invoked to cure certain injustices that would otherwise go unredressed in situations ‘where the corporate entity has been used to avoid legal obligations.'” Gallagher v. Persha, Nos. 325471, 327840, 2016 WL 3199073 (Mich. Ct. App. June 9, 2016) (quoting Wells, 364 N.W.2d at 674). In a prior opinion, this Court examined whether Plaintiff could pierce the corporate veil against Gentilozzi to collect on a judgment entered against Rocketsports, even though Gentilozzi was not a party to the proceedings in which the judgment was entered. This Court noted the decision in Green v. Ziegelman, 767 N.W.2d 660 (Mich. Ct. App. 2009) (“Green I”), in which the Michigan Court of Appeals held that post-judgment supplementary proceedings under Mich. Comp. Laws § 600.6104(5) and Rule 2.621 of the Michigan Court Rules could not be used to pierce the corporate veil and enforce a judgment against a third party. Id. at 668. However, this Court distinguished Green I because Plaintiff asserted new claims against Gentilozzi in Counts 1 and 2 (fraudulent transfer and conspiracy to commit fraudulent conveyance) that were not required to have been brought in the state-court action. (2/19/2015 Op. 8-9, ECF No. 162.) Thus, Plaintiff could seek to pierce to corporate veil of Rocketsports and reach the assets of Gentilozzi as a remedy for the claims asserted in Counts 1 and 2. The Court subsequently held that, because Plaintiff had not shown that it was entitled to summary judgment on its fraudulent-transfer claims, it was not entitled to summary judgment on its veil-piercing claim. (Id. at 34.)

         Plaintiff's pre-trial brief, and Defendants' pre-trial and post-trial briefs, apparently assume that Plaintiff must succeed on its fraudulent-transfer claims in order to pierce the corporate veil of Rocketsports. That is not the case. After this Court issued its opinion in February 2015, the Michigan Court of Appeals clarified that a plaintiff could bring a new action against a shareholder under a theory of piercing the corporate veil “in an attempt to enforce [a] judgment” entered against the corporation. Gallagher, 2016 WL 3199073. “[T]he concern that there be a separate cause of action to support this type of equitable relief does not arise when . . . there already exists a judgment based on one or more causes of action.” Id. “As a result, when a judgment already exists against a corporate entity, an additional cause of action is not needed to impose liability against a shareholder or officer if a court finds the necessary facts to pierce the corporate veil.” Id. In this case, Plaintiff seeks to pierce the corporate veil as a remedy for its breach-of-contract claim against Rocketsports. Thus, as long as Plaintiff can establish the necessary facts to pierce the corporate veil with regard to this claim, it can seek equitable relief against Gentilozzi without relying upon its fraud claims in Counts 1 and 2 for the underlying cause of action.

         Applying the three-part test in Foodland, supra, the Court concludes that Plaintiff can pierce the corporate veil of Rocketsports to reach the assets of Gentilozzi, because (1) Rocketsports was a mere instrumentality of Gentilozzi, (2) Gentilozzi used Rocketsports to commit a wrong against Plaintiff, and (3) Plaintiff suffered an unjust loss.

         A. Rocketsports was a mere instrumentality of Gentilozzi

         “[W]hen considering whether to disregard the separate existence of an artificial entity, a court must first examine the totality of the evidence surrounding the owner's use of an artificial entity and, in particular, the manner in which the entity was employed in the matter at issue.” Green II, 873 N.W.2d at 807. To show that one entity is the “mere instrumentality” of another, courts look to these factors:

(1) whether the corporation is undercapitalized, (2) whether separate books are kept, (3) whether there are separate finances for the corporation, (4) whether the corporation is used for fraud or illegality, (5) whether corporate formalities have been followed, and (6) whether the corporation is a sham.

Glenn v. TPI Petroleum, Inc., 854 N.W.2d 509, 520 (Mich. Ct. App. 2014); accord Laborers' Pension Trust Fund v. Sid Weinberger Homes, Inc., 872 F.2d 702, 704-05 (6th Cir. 1988). Michigan courts have also considered the commingling of funds and the extent to which the shareholder controlled the decisions of the entity. See Foodland Distribs., 559 N.W.2d at 381; Herman, 26 N.W.2d at 763 (parent company's “domination and control” over its subsidiaries was “so complete” that the subsidiaries were instrumentalities of the parent).

         (1) Control

         Gentilozzi dominated the decisions of Rocketsports. He was its sole shareholder and the manager of the business, with the final authority over all decisions. (Van Kemp Dep. 30.) He was also the most significant source of its funding. By the end of 2005, the year that Rocketsports entered into the contract with Plaintiff, its loan debt to Gentilozzi was over $6 million dollars, far exceeding the value of its assets and any other debt that Rocketsports owed. (JX 134.) By the end of 2009, its debt to Gentilozzi was over $9 million dollars. (Id.)

         Bethany Whitford worked in the accounting department for GRE, which kept track of Rocketsports' books, as well as the books for Gentilozzi's real estate entities. She testified that at the end of each month, Gentilozzi would determine which of Rocketsports' bills it would pay. If Rocketsports needed funds, it would obtain a loan from Gentilozzi or one of his other entities, depending on where funds were available. From 2005 through 2009, there were approximately 500 loan transactions between Rocketsports, Gentilozzi, and Gentilozzi's real estate entities. (JX 142.) Gentilozzi alone determined when Rocketsports would borrow money, which entity it would borrow from, and when it would repay those loans. Gentilozzi and virtually all of his real estate businesses loaned money to, and received payments from, Rocketsports. (See JX 109.) Sometimes the loans were issued and repaid on the same day. Gentilozzi viewed all of this money as his own, and the loans to Rocketsports as loans to himself. This factor weighs in favor of piercing the corporate veil.

         (2) Corporate formalities

         One promissory note for $10, 000, signed in 1991, covered all of the loans to Rocketsports from Gentilozzi. The note required monthly payments of not less than $100.00 at a rate of 3% interest, but the terms of the note were not followed and no amendments to the note were ever made. The transfers of money to and from Gentilozzi's real estate entities were tracked on the general ledgers of Rocketsports and the respective real estate entities, each of which maintained separate books, but the loans were not subject to any formal terms or conditions. No evidence was presented of any meeting minutes, corporate resolutions, business plans, or cash-flow projections for the company. This factor also weighs in favor of piercing the corporate veil. See Woodridge Hills Ass'n v. Williams, No. 310940, 2013 WL 5762990, at *2 (Mich. Ct. App. Oct. 24, 2013) (absence of formal loan documentation together with practice of loaning money and taking repayment whenever desired “shows a general disregard for corporate formalities”).

         (3) Commingling of funds and resources

         As indicated above, Gentilozzi frequently transferred money back and forth between Rocketsports and other entities that he owned. Gentilozzi also frequently used the same credit cards to pay his own personal expenses as well as the business expenses of Rocketsports, and Rocketsports paid the credit card bill. Consequently, Rocketsports paid for many of his personal expenses, including gambling debts, gifts, and extravagant travel and lodging expenses. Typically, when Rocketsports paid for Gentilozzi's personal expenses, he would have the accounting department treat those payments as reducing Rocketsports' loan from Gentilozzi. (Gentilozzi Aff., JX 121.) At other times, he would pay Rocketsports' bills personally, and would direct that his payment be added to his personal loan to the business. (Id.) But ultimately, Gentilozzi made the final decision as to whether expenses were treated as business-related or personal.

         On some occasions, Rocketsports received nothing in return for its payment of Gentilozzi's expenses. Among the expenses paid by Rocketsports were thousands of dollars' worth of travel and entertainment expenses benefitting Gentilozzi and his acquaintances, including: airline tickets, restaurant bills, and hotel expenses. For instance, when Rocketsports employees traveled to attend a race, Rocketsports paid the airfare for Gentilozzi's wife, Debra Gentilozzi, to attend the event. Rocketsports also gave her a “per diem, ” even though she was not a Rocketsports employee. Although Gentilozzi claimed that she worked with others at Rocketsports to provide hospitality for team sponsors, she was not assigned a particular role at these events; she would simply mingle with guests and occasionally assist a sponsor. (Van Kemp Dep. 26, 97; Howard Dep. 20; D. Gentilozzi Dep. 21.)

         Rocketsports also paid for travel and lodging expenses for a number of other women not associated with the company, including Melissa Reding, Tara Graeber (or “Terra Graebner”), and Tina Cochran. (See JX 211-213.) Rocketsports paid for Reding's travel to and from Canada, Mexico, Italy, Ireland, California, Detroit, Houston, and Las Vegas. (Id.) Reding traveled with Gentilozzi and stayed with him in his hotel room; she never attended any business-related events. (Reding Dep. 26, 31.) As Gentilozzi acknowledged, it was not proper for Rocketsports to pay for her travel expenses, or for the travel expenses of Cochran, which Gentilozzi paid as a personal favor to the owner of a casino. Gentilozzi claimed that he did not know Graeber/Graebner because “everybody” used his credit card. The total amount of Gentilozzi's personal charges paid by Rocketsports without receiving any benefit in return is unclear, as Plaintiff did not provide an exact estimate. The total amount for personal airfare expenses improperly charged to Rocketsports is probably less than $30, 000, though it is more likely than not that additional personal expenses were paid for by Rocketsports other than airfare. Improper expenses for airfare can be readily identified according to the names on the plane tickets, which appear on the credit card bills paid by Rocketsports. Other expenses are not so easily identified, including charges for lodging, which Gentilozzi frequently charged to his business credit card and approved as either personal or business expenses without documenting the basis for one or the other. Relative to Rocketsports' other expenditures, however, the amount of personal expenses paid by Rocketsports without receiving consideration in return is small. For instance, in June 2005 Rocketsports spent approximately $60, 000 on travel and lodging expenses for that month alone. (JX 209.) Plaintiff's expert identified approximately $200, 000 of what appeared to be personal charges paid by Rocketsports on several business credit cards, though almost all of these charges were properly booked as repayments of Rocketsports' loan from Gentilozzi. This factors weighs only slightly in favor of piercing the corporate veil.

         (4) Use of Rocketsports resources for personal benefit

         In addition to having Rocketsports pay for a portion of his personal expenses, Gentilozzi raced for Rocketsports approximately 200 times. Unlike other drivers who used Rocketsports' services, he never paid the company for this privilege. It was not unusual for drivers to pay Rocketsports up to $500, 000 per year for its services. Gentilozzi claimed that he gave all of his winnings to the business, but he offered no evidence of his winnings, or of adequate compensation to Rocketsports for its services.[4]

         In addition, Gentilozzi used Rocketsports' assets as collateral for a mortgage on real estate that Rocketsports rented from 3400 West Road. Rocketsports was merely a tenant and paid rent to use the space. It did not own the building, it was not obligated to pay the mortgage, and it received no discernible benefit for having a lien imposed on its assets. This factor also weighs in favor of piercing the corporate veil.

         (5) Capitalization / ability to pay creditors

         Rocketsports was insolvent from 2005, the year that it entered into its agreement with Plaintiff, until 2009, the year that it transferred its assets to RSR. As reflected in its balance sheets, its liabilities substantially exceeded its assets in each of those years. There is no evidence of capital contributions to Rocketsports after 1991, the year that Rocketsports was incorporated, and there were longstanding cash flow problems at Rocketsports from 2004 to 2009. (Glover Dep. 41.) Its monthly bank account balance was negative approximately half of that time. (Pl.'s Demonstrative Slides.) Rocketsports regularly needed loans from Gentilozzi to cover its expenses.

         From 2005 to 2009, Gentilozzi and his real estate entities loaned $7, 689, 789 to Rocketsports, and Rocketsports transferred $5, 462, 283 back to them. (JX 142.) (Similarly, in 2009 and 2010, Gentilozzi and his real estate entities loaned $2, 593, 503 to RSR, and RSR transferred $2, 577, 164 back to them.) Although Rocketsports consistently failed to make a profit during this time period-it suffered losses in every year but one, and its total losses in that timeframe were approximately $3.5 million (Defs.' Demonstrative Slides)-it repaid Gentilozzi and his entities most of what was loaned. In addition, it paid over $455, 000 in rent to 3400 West Road and at least $51, 000 in accounting fees to GRE (Pl.'s Demonstrative Slides). Whenever Gentilozzi asked for his money back from Rocketsports, Rocketsports paid it. (Glover Dep. 81-82.) Other creditors were not as fortunate. In August 2008, Podium Sports sued Rocketsports to recover a $500, 000 deposit that Rocketsports refused to return.[5]In addition, when Rocketsports ceased its business in 2009, it was left with approximately $1 million in trade payables. (Hawkins Report at 10, JX 130.) Around the time that Rocketsports transferred substantially all of its assets to RSR, it wrote approximately $850, 000 of debt off of its books. More than half of this debt was owed to Gentilozzi's real estate entities, but other portions of the debt were owed to vendors who were never paid by Rocketsports. Rocketsports should have treated the cancellation of this debt as imputed income for tax purposes, but did not do so in its tax return.

         Even banks lending money to Rocketsports recognized that, financially, Rocketsports was an extension of Gentilozzi. Independent Bank loaned money to Rocketsports in 2006 and 2007. Even though Rocketsports' assets were used as collateral for the loan, the loans were also personally guaranteed by Gentilozzi. According to Cheryl Bartholic, who managed the loans, the bank was aware that Rocketsports was indebted to Gentilozzi, that Rocketsports did not make money consistently, that Gentilozzi's real estate entities were the main source of his income, and that there were many transfers of funds to and from Rocketsports and Gentilozzi's other entities. The bank was not concerned about Rocketsports' financial condition, or the transfers between Rocketsports and the other entities, because the bank relied on the personal guarantee from Gentilozzi.

         Because Rocketsports consistently relied upon loans from Gentilozzi to fund its business, and because it was insolvent, it was able to pick and choose which creditors to pay. Gentilozzi could breach the contract with Plaintiff knowing that Plaintiff would have no meaningful recourse: Gentilozzi could abandon Rocketsports at any time and leave it uncollectible, which is what he did. At the same time, Gentilozzi personally benefitted from Rocketsports' losses because he used them to offset his tax liability for the income he received from his other businesses.[6] This factor also weighs in favor of piercing the corporate veil.

         (6) Separate books

         GRE maintained separate books for Rocketsports and Gentilozzi's other entities, keeping an accurate record of all the loan transactions between Rocketsports and the other entities, as well as the income and expenses of each ...

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