When the corporate shield… isn’t one.
New York Case holds film producer liable despite corporate shield.
Earlier this year, a New York Court issued a ruling against a film producer that's troubling not just for the losing defendant, but provides a cautionary tale for countless others who do business relying on their small, undercapitalized corporations and LLCs to protect them if things go awry.
In Carlone v. The Lion & The Bull Films, Inc., the Southern District Court of New York “pierced the corporate veil” of the defendant company. The Plaintiff, it seems had provided a loan of $115,000 toward the budget of a motion picture, and when the production company failed to repay the loan as promised, Plaintiff sued… not just the company, but also its principal.
What went wrong
Here's what went wrong for the man behind the company. The corporation was thinly capitalized, having only a few dollars in the bank when formed, and no other assets. It hadn't conducted any business other than the financing deal for the film, nor did it have a separate corporate headquarters, instead operating out of the producer's home. Additionally, the company hadn't conducted itself according to the usual corporate formalities, holding no formal board meetings, keeping no minutes, etc.
So, the Court essentially treated the company as a sham, (as the producer's “alter ego”) and held the producer personally liable for the company's failure to pay back the loan.
Takeaway
The takeaway from this? Merely having the company isn't enough to ensure that the corporation protects its owners from liability. Each State's law is a little bit different, but the principles behind this doctrine of “piercing the corporate veil” are well established. Corporations need to be properly capitalized, observe formalities, and to treat business with the proper solemnity. Shareholders and Directors must take pains to avoid the inference that the company is being used for personal purposes.
The entertainment industry is tricky enough without troubles like those encountered by the defendant in this case. If you're operating your business as a corporation or LLC, it's wise to make sure the protection you think you have is actually there. Consulting an attorney familiar with corporate and business law will help you ensure you're doing things right.
I can help. For a modest fee, I'll take a look at your corporate structure, history, and operations, and help you determine the best way to protect your company. Consider it a “checkup” for your company's legal health.
As a longtime subscriber of your newsletter and relatively inexperienced in entertainment law as a specialty, there has been, in each edition, at least a gem or two of wisdom. I very much enjoy your writing style and your professional yet accessible presentation style in your videos. Thank you in particular for today’s heads-up on the topic of “corporate shield” and tips on ensuring the legitimacy of a corporation, and any protection it affords its principals, will withstand the scrutiny of a court, should it ever need to.
In the case of the New York film producer’s experience, I’d also include somewhere in the “What went wrong” paragraph the fact that he made an obligation on his company’s behalf which he failed to honor. You may call me old-fashioned, but my opinion is that may have been at the root of his downfall and the court’s determination to hold him personally accountable.
Thank you, as always, for sharing with us a bit of your hard-earned wisdom in your newsletters.
It goes without saying that, when I am in need of an attorney with specialty in entertainment law – your firm is at the top of my contact list.
All the best to you and yours,
Craig Richards, producer/writer/director
Dolphin Heart Productions LLC
Thanks, Craig, for your kind words.
Yes, of course, the parties wouldn’t have been in court dealing with the corporate shield issue if the defendants had just repaid the loan as promised.