Husband’s Divorce Settlement Forecloses Action by His Corporation Against Wife

In Habjan v. Habjan, ___ A.2d ___ (Pa.Super.2013), the Superior Court was confronted with a question of whether to “pierce the corporate veil” by holding Husband responsible for a lawsuit initiated by his business corporation against Wife, thereby abrogating the release that Husband gave her in his marital settlement agreement.

Husband and Wife were each 50% owners and officers of a corporation formed during the marriage to operate motels in Clarion County. Husband served as president, while Wife served as treasurer and secretary, directing the management of the hotels and supervising daily operations. Both spouses invested their funds into the business and drew compensation for their respective duties. Most decisions were made around the dinner table, but Husband and Wife observed basic corporate formalities such as passing corporate resolutions and maintaining separate corporate bank accounts. Months prior to separation, Husband held a special meeting without notice to Wife and appointed his daughter to replace Wife as a corporate officer. Subsequently, he fired Wife, extinguished her signatory power on the corporate bank accounts, shut off her access to corporate computers, locked her out of her office, and demanded the return of corporate property. Wife responded by filing a divorce action. Eventually, the parties signed a marital settlement agreement, in which Husband retained the corporate assets, and the parties provided mutual releases and indemnification. The settlement agreement set a deadline for investigating and resolving any undisclosed claims related to corporate debts.

On the last day of the deadline, Husband faxed a list of claims to Wife’s lawyer. No further efforts were made to investigate or resolve those claims. One year later, the corporation sued Wife for breach of fiduciary duties, raising eight claims that had been previously asserted by Husband in the divorce prior to the settlement agreement. Wife filed a Petition for Contempt against Husband, claiming that he violated the marital settlement agreement releases, and Husband filed a Counter-Petition for Contempt against Wife. The trial court heard four days of testimony, and issued an order finding both parties in contempt. Husband was ordered to go to jail if he did not discontinue the Corporation’s lawsuit against Wife, and ordered him to pay Wife’s legal fees. Wife was ordered to pay a $10,000 fine to Husband for maligning and harassing him, to be suspended on the condition that she stay away from his businesses. Wife was also ordered to pay Husband’s legal fees. Husband appealed, arguing that the trial court had no power to order the Corporation to terminate its lawsuit, since the Corporation was a separate legal entity and not a party to the marital settlement agreement.

First, the Superior Court examined case law related to “piercing the corporate veil.” If Husband could demonstrate that the company was not a mere instrumentality of his personal will, then perhaps the Corporation’s claims against Wife were not released when Husband signed the marital settlement agreement. The trial judge and Superior Court were apparently not persuaded that the corporate formalities were sufficient to distinguish the company from its owner under these circumstances. Tellingly, the claims that the company brought against Wife in its lawsuit were virtually identical to claims that Husband had raised against Wife prior to signing the settlement agreement. The Court dismissed Husband’s argument that the corporate veil cannot be pierced unless there is a specific finding that the owner has used the corporation to commit fraud, illegality or wrongdoing. Rather, the veil can be pierced whenever necessary to avoid injustice.

The Superior Court also rejected Husband’s argument that the marital settlement agreement release language did not extend to the Corporation. The Court held that release language need not specifically name all parties if the terms of the release clearly extend to other parties. On all aspects of its order, the trial court’s decision was affirmed.