Business Ethics Jon-T Chemicals, Inc. (Chemicals), was an Oklahoma corporation engaged in the fertilizer and chemicals business. John H. Thomas was its majority shareholder and its president and board chairman. Chemicals incorporated Jon-T Farms, Inc. (Farms), as a wholly owned subsidiary, to engage in the farming and land-leasing business. Chemicals invested $10,000 to establish Farms. All the directors and officers of Farms were directors and officers of Chemicals, and Thomas was its president and board chairman. In addition, Farms used officers, computers, and accountants of Chemicals without paying a fee, and Chemicals paid the salary of Farms &’s only employee. Chemicals made regular informal advances to pay Farms &’s expenses. These payments reached $7.5 million by January 1975. Thomas and Farms engaged in a scheme whereby they submitted fraudulent applications for agricultural subsidies from the federal government under the Uplands Cotton Program. As a result of these applications, the Commodity Credit Corporation, a government agency, paid over $2.5 million in subsidies to Thomas and Farms. After discovering the fraud, the federal government obtained criminal convictions against Thomas and Farms. In a separate civil action, the federal government obtained a $4.7 million judgment against Thomas and Farms, finding them jointly and severally liable for the tort of fraud. Farms declared bankruptcy, and Thomas was unable to pay the judgment. Because Thomas and Farms were insolvent, the federal government sued Chemicals to recover the judgment. Was Farms the alter ego of Chemicals, permitting the United States to pierce the corporate veil and recover the judgment from Chemicals? Did Thomas act ethically in this case? United States of America v. Jon-T Chemicals, Inc., 768 F.2d 686, Web 1985 U.S. App. Lexis 21255 (United States Court of Appeals for the Fifth Circuit)
A big advantage of corporate existence is the limited liability protecting individuals from liability for corporate obligations, but Courts will look at the legitimacy of corporate existence and ask if the limited liability protection should be sustained or whether the corporate veil should be pierced. What factors will lead a Court to pierce the corporate veil? In end of Chapter Case 37.12, should the corporate veil be pierced? Why or why not?