                                                                                                                           Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-11-2003

Trustees Natl v. Lutyk
Precedential or Non-Precedential: Precedential

Docket No. 01-2394




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                                  PRECEDENTIAL

                                             Filed June 11, 2003

           UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT


                           No. 01-2394


 TRUSTEES OF THE NATIONAL ELEVATOR INDUSTRY
PENSION, HEALTH BENEFIT AND EDUCATIONAL FUNDS
                                 v.
                        ANDREW LUTYK,
                                             Appellant

        Appeal from the United States District Court
          for the Eastern District of Pennsylvania
                   Civil Action No. 00-2301
           District Judge: Honorable Marvin Katz

                  Argued: December 2, 2002
   Before: ROTH, SMITH, and CUDAHY,* Circuit Judges

                     (Filed: June 11, 2003)
                         Frank Breitman, Esq.
                         Andre C. Dasent, Esq. (argued)
                         785 Bourse Building, 21 S. 5th St.
                         Philadelphia, PA 16106
                           Attorneys for Appellant




* Honorable Richard D. Cudahy, United States Court of Appeals for the
Seventh Circuit, sitting by designation.
                              2


                      Robert P. Curley, Esq.
                      Sally M. Tedrow, Esq. (argued)
                      David D. Capuano, Esq.
                      O’Donoghue & O’Donoghue
                      325 Chestnut St., Suite 515
                      Philadelphia, PA 19106
                        Attorneys for Appellee


                 OPINION OF THE COURT

SMITH, Circuit Judge:
  On this appeal, the sole issue raised by defendant
Andrew Lutyk is whether the record of a non-jury trial
justified piercing the corporate veil of the American Elevator
Company to impose personal liability on him as its sole
shareholder for unpaid contributions the corporation owed
to health, benefit, and pension funds established by a
collective bargaining agreement. Because we believe that
the District Court did not base its decision on clearly
erroneous factual findings, we will affirm.

                              I.
   Defendant Andrew Lutyk was the president, sole director,
and sole shareholder of the American Elevator Company
(“American”), a small, closely-held corporation which
performed elevator service and repair. Lutyk incorporated
American in late 1992. Pursuant to various agreements
between American and the International Union of Elevator
Constructors, AFL-CIO, in addition to the regular wages
paid to its employees, American was obligated to make
monthly contributions to various benefit and pension
funds. American was also required to make certain wage
deductions from the employees’ salaries, then remit those
deductions to the pension fund.
  The benefit and pension funds — the National       Elevator
Industry Pension Fund, the National Elevator         Industry
Health Benefit Fund, and the National Elevator       Industry
Educational Fund (collectively, the “NEI Funds”)      — were
                             3


created and maintained pursuant to § 302(c)(5) of the Labor
Management Relations Act, 29 U.S.C. § 186(c)(5), and
administered by a Board of Trustees, the plaintiff in this
action. The Pension Fund is an employee pension benefit
plan as defined by § 3(2) of the Employee Retirement
Income Security Act (“ERISA”), 29 U.S.C. § 1002(2). The
Health Fund and Educational Fund are employee welfare
benefit plans as defined in § 3(1) of ERISA, 29 U.S.C.
§ 1002(1). All the NEI Funds are also multiemployer plans
as defined in § 3(37)(A) of ERISA, 29 U.S.C. § 1002(37)(A).
   In 1996, American began to experience financial
difficulties due to an unrelated lawsuit and misconduct by
the company’s former controller. While corporate equity
nominally included $25,000 in “Common Stock” and
$141,000 in “Additional Paid In Capital” at the end of 1995,
American’s 1996 tax return listed negative retained
earnings of $373,420, which rose to negative $433,051 by
the end of 1996. In short, by at least December 31, 1995,
no equity remained in the company. Nonetheless, American
was carrying $133,268 in supposed “Loans from
shareholders” in 1995. The available corporate records
showed that these loans rose to at least $174,881.00 at the
end of 1996 and remained there at least until December 31,
1997, but dropped to a mere $24,356.00 by the end of
1998. The District Court found that, beginning at least in
1996 and continuing until American ceased operations in
late 1999, the corporation was insolvent.
  At this time, American fell behind in meeting its
contractual obligations to contribute to the NEI Funds. In
1998, the Board of Trustees sued American to recover these
unpaid benefit contributions. That civil action culminated
in a consent judgment whereby American agreed to pay the
NEI Funds a total of $280,284.60. However, in 1999,
American ceased business operations. Although subsequent
payments were made to the NEI Funds, American paid only
$40,000 pursuant to the consent judgment, along with
$2,524.74 that had been deducted from the employees’
paychecks after the consent judgment, but not immediately
paid to the NEI Funds.
  On May 4, 2000, the Board of Trustees initiated the
present lawsuit against defendant Lutyk personally,
                                    4


alleging that he was also liable to the NEI Funds as a
fiduciary under § 409 of ERISA, § 29 U.S.C. § 1109(a).
Plaintiff sought to recover from Lutyk the full amount of
what it had been unable to collect from American, as well
as additional contributions accrued but never paid by
American after the consent judgment. The District Court
denied plaintiff ’s motion for summary judgment on the
ERISA claims, concluding that there were material issues of
fact in dispute concerning whether the unpaid
contributions to the benefit funds were plan “assets.” Tr. of
the Nat’l Elevator Indus. Pension v. Lutyk, 140 F. Supp. 2d
407, 412 (E.D. Pa. 2001) (“Lutyk I”). While reasoning that
this potentially prohibited Lutyk from having any direct
liability under ERISA, the District Court sua sponte read
our opinion in Solomon v. Klein, 770 F.2d 352 (3d Cir.
1985), to provide that by “piercing the corporate veil,” the
claims against Lutyk might be sustained. Lutyk I, 140 F.
Supp. 2d at 412-13. Although also declining to grant
summary judgment on that ground, the District Court
established piercing the corporate veil as an issue for trial.
Id. at 413-14.1
   After a non-jury trial, the District Court concluded that,
under the terms of the parties’ agreements, the unpaid
contributions in this case were not plan “assets” within the
meaning of 29 U.S.C. § 1002(21)(A)(i). Tr. of the Nat’l
Elevator Indus. Pension v. Lutyk, 140 F. Supp. 2d 447, 456
(E.D. Pa. 2001) (“Lutyk II”). Therefore, Lutyk was not a
“fiduciary” of those funds under § 409 of ERISA, 29 U.S.C.
§ 1109(a), and was not directly liable for all but $332.54 of
the debt that American owed to the NEI Funds.2
Nonetheless, because the District Court concluded that the
circumstances of the case justified piercing the corporate
veil of American, the District Court found Lutyk personally

1. Though not material to this decision, the District Court also concluded
that a three-year statute of limitations barred recovery of some of the
debts of American. See 140 F. Supp. 2d at 414.
2. The $332.54 stemmed from the liquidated damages and interest
associated with the $2,524.74 in previously unremitted employee wage
deductions, which the District Court reasoned were plan assets. Lutyk II,
140 F. Supp. 2d at 456.
                                     5


liable for the remainder of the $287,627.43 that American
then owed the NEI Funds. Id. at 460.
   The District Court asserted jurisdiction over this case
pursuant to 28 U.S.C. § 1331. We have jurisdiction over the
appeal pursuant to 28 U.S.C. § 1291.3 When a district court
conducts a non-jury trial, we “review the District Court’s
findings of facts for clear error. Application of legal precepts
to historical facts receives plenary review.” In re Unisys Sav.
Plan Litig., 173 F.3d 145, 149 (3d Cir. 1999). “It is not for
us to pass upon the numerous factual and legal issues as
though we were trying the cases [d]e novo. ‘It is not enough
to reverse the District Court that we might have appraised
the facts somewhat differently. If there is warrant for the
action of the District Court, our task on review is at an
end.’ ” Matter of Penn Cent. Transp. Co., 596 F.2d 1127,
1140 (3d Cir. 1979) (quoting Group of Inst’l Inv. v. Chicago,
M., St. P. & P. R. Co., 318 U.S. 523, 564 (1943)).

3. We asked the parties to provide us with supplemental briefing on
whether the Supreme Court’s decision in Peacock v. Thomas, 516 U.S.
349 (1996), impacts on the jurisdiction of the federal courts to
adjudicate these claims. We believe that Peacock is distinguishable
because the “complaint in [that] lawsuit alleged no violation of ERISA or
of the plan. The wrongdoing [which justified piercing the corporate veil]
alleged in the complaint occurred . . . some four to five years after [the
corporation’s] ERISA plan was terminated, and [plaintiff] did not —
indeed, could not — allege that [defendant] was a fiduciary to the
terminated plan.” Id. at 353. By contrast, the “well-pleaded complaint” in
this action asserted claims based on ERISA for both the unremitted
employee wage deductions and the unpaid employer contributions. See
Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987) (discussing
the “well-pleaded” complaint rule). The District Court below concluded
that the unpaid wage deductions were plan “assets.” Lutyk II, 140 F.
Supp. 2d at 456. Thus, Lutyk was a fiduciary derivatively liable under
federal ERISA law for $332.54. Unlike Peacock, where the plaintiff
asserted no direct violation of federal law by the defendant, it was based
on established ERISA liability in this suit that the District Court was able
to invoke the further “equitable remedy” of piercing the corporate veil to
hold Lutyk liable for the balance of the funds American owed the
Trustees. See In re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999). Whatever
implications Peacock has on the statutory authority of district courts to
“pierce the corporate veil” in ERISA cases, we are satisfied that the
District Court properly invoked federal subject-matter jurisdiction over
this dispute.
                               6


                              II.
   At summary judgment, the District Court sua sponte
invoked the “alter ego doctrine” and questioned whether,
pursuant to Solomon, 770 F.2d at 353, it might be
appropriate for the plaintiff to fix liability upon Lutyk by
piercing the corporate veil. “Piercing the corporate veil is
not itself an independent ERISA cause of action, but rather
is a means of imposing liability on an underlying cause of
action.” Peacock v. Thomas, 516 U.S. 349, 354 (1996)
(quotation omitted); see also 1 William Meade Fletcher,
Fletcher Cyclopedia of the Law of Private Corporations
§ 41.10 (2002). “The ‘classical’ piercing of the corporate veil
is an equitable remedy whereby a court disregards the
existence of the corporation to make the corporation’s
individual principals and their personal assets liable for the
debts of the corporation.” In re Blatstein, 192 F.3d 88, 100
(3d Cir. 1999) (citation omitted); see also Bd. of Tr. of
Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296
F.3d 164, 171 (3d Cir. 2002); Publicker Indus., Inc. v.
Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979).
If applicable, the doctrine permits a “charge[ ] [of] derivative
. . . liability” against the person or entity controlling the
corporation. United States v. Bestfoods, 524 U.S. 51, 64
(1998) (noting that piercing the corporate veil gives rise to
derivative liability, though direct liability was appropriate
on those facts because of the peculiar nature of CERCLA
“operator” liability). “Because alter ego is akin to and has
elements of fraud theory, we think it too must be shown by
clear and convincing evidence.” Kaplan v. First Options of
Chicago, Inc., 19 F.3d 1503, 1522 (3d Cir. 1994).
  In his brief to this Court on appeal, Lutyk’s entire
summary of argument is as follows:
    The district court erred and abused its discretion in the
    determination to pierce the corporate veil and impose
    personal liability under ERISA without sufficient record
    support.
We read Lutyk to be challenging only the District Court’s
application of the legal test for piercing the corporate veil
set forth in United States v. Pisani, 646 F.2d 83, 87-88 (3d
Cir. 1981) and the related factual findings. Our review of
                                    7


the proceedings below indicates that Lutyk made no
objection, as he did not raise the issue to us in his briefs,
with respect to the District Court’s authority to pierce the
corporate veil and impose liability on a third-party not
directly liable under ERISA.4 While our reading of the
District Court’s order indicates that the District Court
purported to pierce the corporate veil pursuant to ERISA
§ 502(a)(2), 29 U.S.C. § 1132(a)(2), and we have some
doubts regarding the District Court’s authority to do so,5
“[i]t is well established that failure to raise an issue in the
district court constitutes a waiver of the argument” in the
Court of Appeals. Brenner v. Local 514, United Bhd. of
Carpenters & Joiners of Am., 927 F.2d 1283, 1298 (3d Cir.
1991); see also Medical Protective Co. v. Watkins, 198 F.3d
100, 105 n.3 (3d Cir. 1999). Likewise, although the District
Court did not make a specific finding concerning the
amount of funds siphoned from American, Lutyk has
similarly conceded that the imposition on him of the full
judgment that remained against American of $287,627.43
was appropriate. See Peacock, 516 U.S. at 352 (declining to

4. In Solomon, we held that a corporate shareholder or officer is not an
“employer,” as that term is defined for purposes of ERISA, Solomon, 770
F.2d at 353-54, an interpretation that has achieved nearly universal
acceptance in the other federal circuits. See Antol v. Esposto, 100 F.3d
1111, 1118 n.2 (3d Cir. 1996) (string-citing cases). While we stated in
dictum that “[h]ad [those plaintiffs] proceeded on an alter ego basis our
inquiry would be different,” we did not state that such a course would
have been a means of imposing direct federal liability under ERISA.
Solomon, 770 F.2d at 353. Because “[w]e did not intend that sentence to
dispose of an important issue which we had yet to face head-on,” see,
e.g., In re FMC Corp. Packaging Sys. Div., 208 F.3d 445, 450-51 (3d Cir.
2000), it cannot be said that the dictum of Solomon and Cent. Pa.
Teamsters Pension Fund v. McCormick Dray Line, Inc., 85 F.3d 1098,
1109 (3d Cir. 1996) settles the question of direct ERISA liability against
a corporate officer or shareholder through the “alter ego” doctrine.
5. See Peacock, 516 U.S. at 354 (noting it is unresolved “if ERISA permits
a plaintiff to pierce the corporate veil to reach a defendant not otherwise
subject to suit under ERISA”); see also Mertens v. Hewitt Assoc., 508
U.S. 248, 251 (1993) (rejecting that “ERISA authorizes suits for money
damages against nonfiduciaries who knowingly participate in a
fiduciary’s breach of fiduciary duty”). But see Bd. of Tr., Sheet Metal
Workers’ Nat’l Pension Fund v. Elite Erectors, Inc., 212 F.3d 1031, 1038
(7th Cir. 2000).
                                    8


address a similar issue).6 Because the parties did not raise
these issues below and Lutyk did not invoke them on
appeal, we will assume, without deciding, that these
actions of the District Court were proper. We consider here
only the specific issue raised in this Court by Lutyk.

                                   III.
   In analyzing the conduct of Lutyk and applying the alter
ego doctrine to determine whether it was appropriate to
invoke its remedy to pierce the corporate veil, the District
Court below reasoned that “[f]ederal law governs liability for
a breach of a labor contract between union and employer,
including liability based on a theory of corporate veil
piercing.” Lutyk II, 140 F. Supp. 2d at 457 (citing Am. Bell
Inc. v. Fed’n of Tel. Workers of Pa., 736 F.2d 879, 886 (3d
Cir. 1984)). Therefore, the District Court applied our Pisani
decision and the factors outlined therein as a matter of
federal common law, 646 F.2d at 88, to determine whether
it was appropriate to pierce American’s corporate veil.
  Lutyk does not appeal the application of Pisani’s factors
or of federal “common law,” per se. However, he does
dispute the District Court’s failure to require, as an element
for establishing that the “alter ego doctrine” is applicable,
that the plaintiff prove that the corporation was intended as
a sham or facade to defraud the corporate creditors.

6. The alter ego doctrine is a “tool of equity.” Pearson v. Component Tech.
Corp., 247 F.3d 471, 484 (3d Cir. 2001); Kaplan, 19 F.3d at 1521. As “an
equitable remedy,” In re Blatstein, 192 F.3d at 100, piercing the
corporate veil is not technically a mechanism for imposing “legal”
liability, but for remedying the “fundamental unfairness [that] will result
from a failure to disregard the corporate form.” See, generally, Fletcher,
supra, § 41.25. “[A]lter ego status is determined by conduct of the parties
that is material to the dispute at hand,” Kaplan, 19 F.3d at 1522; thus,
the theory of harm alleged may affect the scope of the remedy that equity
demands. The Trustees did not assert that American was, in its entirety,
a “sham” or “facade”; nonetheless, full liability for American’s debts is
appropriate as Lutyk implicitly conceded to siphoning at least
$287,627.43 from American. The District Court noted “[t]here [was] no
dispute among the parties that if Lutyk were to be found liable . . . , he
would be liable for the full amount of the unpaid employer payments.”
Lutyk II, 140 F. Supp. 2d at 452.
                             9


Because neither party challenges the application of our
alter ego doctrine to this case, we will also assume without
deciding that those factors apply, and consider whether
“fraudulent intent” is indeed a required element of the
analysis. Cf. United States v. Bestfoods, 524 U.S. 51, 63 n.9
(1998) (declining to discuss whether the state or federal
alter ego doctrine applied to determine derivative liability
under CERCLA). In Pearson v. Component Tech. Corp., 247
F.3d 471 (3d Cir. 2001), this Court discussed the factors of
the “Third Circuit alter ego test,” id. at 484, and noted
some of the differences between our test, and others. One
of the “most important differences across jurisdictions
seem[s] to reside largely in . . . whether an element of
‘fraudulent intent,’ inequitable conduct, or injustice is
explicitly required. . .” Id. at 484 n.2. Nonetheless, in
determining whether to “pierce the corporate veil,” we
considered
    the following factors: gross undercapitalization, failure
    to observe corporate formalities, nonpayment of
    dividends, insolvency of debtor corporation, siphoning
    of funds from the debtor corporation by the dominant
    stockholder, nonfunctioning of officers and directors,
    absence of corporate records, and whether the
    corporation is merely a facade for the operations of the
    dominant stockholder. See American Bell, 736 F.2d at
    886.
Id. at 484-85 (emphasis added). We have never
characterized these “factors” as elements of a rigid test.
See, e.g., American Bell, 736 F.2d at 886 (these factors are
“not the exclusive approach”); Pisani, 646 F.2d at 88. What
we have done is to essentially inquire “into whether the
debtor corporation is little more than a legal fiction.”
Pearson, 247 F.3d at 485. While “piercing of the corporate
veil is an equitable remedy,” In re Blatstein, 192 F.3d at
100, and therefore “the situation must present an element
of injustice or fundamental unfairness, . . . a number of
these factors can be sufficient to show such unfairness.”
Pisani, 646 F.2d at 88 (quotation omitted); see also
Fletcher, supra, §§ 41.25, 41.32 (“constructive fraud and
avoiding an inequitable result is often enough”). Because
our test does not require proof of actual fraud as a
                                    10


prerequisite for piercing the corporate veil, the District
Court’s failure here to require that the plaintiff prove that
American was established as a “facade” was not an error of
law.7

                                   IV.
   “[A]lter ego . . . must be shown by clear and convincing
evidence.” Kaplan, 19 F.3d at 1522. Nonetheless, “[w]hen
findings [of a district court] are based on determinations
regarding the credibility of witnesses, Rule 52(a) demands
even greater deference to the trial court’s findings” by the
court of appeals. Ragan v. Tri-County Excavating, Inc., 62
F.3d 501, 507 (3d Cir. 1995). Furthermore, where, as here,
the appellant fails to point to specific evidence either in the
record or not in the record before the District Court which
shows that the Court’s findings were made in “clear error,”
id. at 506, we are inclined to affirm the District Court.
  The District Court reasoned that factual findings with
respect to the following “factors” weighed in favor of
piercing the corporate veil: the insolvency of the debtor
corporation, American’s undercapitalization, the siphoning
of American’s funds by Lutyk, and the dearth of corporate
formalities and corporate records, as well as the element
that injustice would occur if Lutyk was not made
responsible. See Pisani, 646 F.2d at 88 (listing factors). We
conclude that, with the exception of the District Court’s
conclusion regarding American’s undercapitalization, the
District Court’s findings are adequately supported by the
record and not clearly erroneous.
  The District Court’s finding with respect to American’s
insolvency is well supported by the record. The scant
corporate records before the Court demonstrated that
corporate equity was negative and that liabilities exceeded
corporate assets. Nonetheless, the very purpose of the
corporate form is to limit the liability of investors to the

7. We note, however, that where the conduct alleged to justify piercing
the corporate veil is that the corporation as a whole is a “sham” or
“facade,” a finding “akin to . . . fraud” is necessary. See Kaplan, 19 F.3d
at 1521-23.
                              11


capital they pay in, see Zubik v. Zubik, 384 F.2d 267, 273
(3d Cir. 1967); insolvency, without more, is not a factor
which can justify piercing a corporate veil. See American
Bell, 736 F.2d at 886 (requiring “specific, unusual
circumstances”). However, insolvency may raise questions
concerning the conduct of corporate officers and
shareholders which otherwise would be presumed
appropriate, see Fletcher, supra, § 41.40; here, it causes us
to closely scrutinize the actions of Lutyk.
   In particular, the District Court’s findings with respect to
American’s insolvency are strong evidence to support the
Court’s conclusion that Lutyk was siphoning funds. See
Pisani, 646 F.2d at 88 (affirming piercing of the corporate
veil when the shareholder “repaid the [shareholder] loans to
himself with corporate funds while the corporation was
failing”). The corporate records before the District Court
indicated that American owed Lutyk on “loans” of
$174,881.00 at the end of 1996 and 1997. Over the next
year, as American plunged deeper into insolvency and the
corporation failed to pay the contributions it owed the NEI
Funds under the collective bargaining agreements, the
amount of those “shareholder loans” dropped precipitously
to $24,356.00. While Lutyk disputes the fact that those
loans were repaid, he points to no evidence in the record
indicating that the District Court’s finding was clear error.
Beyond the “loans” that Lutyk caused American to repay
him, American’s ledgers also show that Lutyk directly
withdrew increasing amounts of cash from the corporation
as it declined. The District Court noted that in 1997, Lutyk
apparently took from the corporation $28,100 through so-
called “partner’s drawings.” Those drawings increased to
$35,913 in 1998. Then, in the first three months of 1999
alone, Lutyk took from the company a further $38,688 in
that manner.
   Of course, not “every payment to a stockholder during
insolvency would justify piercing the corporate veil,”
Kaplan, 19 F.3d at 1522, and some portion of those
payments may have been legitimate given the finding that
American paid its President no salary. However, these
irregularly scheduled, erratic, but not insignificant
“drawings” underscore the District Court’s findings and
                             12


conclusions on two other factors relevant to piercing the
corporate veil: Lutyk’s substantial disregard of corporate
formalities in his management and ownership of American
and a significant commingling by Lutyk of American’s
assets with his own. The District Court noted that it
received from Lutyk few of American’s tax returns,
accounting ledgers, receipts, or other documents which are
commonly maintained by an ordinary corporation in its
operations. While Lutyk asserts that the lack of formal
documentation was due to a storage facility being flooded,
the District Judge who heard the witnesses testify did not
credit this assertion, and nothing was provided by Lutyk to
corroborate his testimony on this alleged flood.
  Beyond the “partner’s drawings,” Lutyk seemed to freely
take funds from the company accounts as he saw fit and
when he saw fit. That American paid its “President” no
salary, while cutting against siphoning, indicates a lack of
respect for the corporate form and of American as a
separate entity. Evidence before the District Court also
indicated that American employed members of Lutyk’s
family for substantially inflated compensation. His
daughter, originally hired by American as an office manager
for five dollars an hour during the first five to six years of
American’s existence, saw her compensation grow to fifteen,
then twenty, dollars an hour by the end of American’s
operations. At the same time, his wife was suddenly added
to American’s payroll in 1998 at fifteen dollars an hour,
though she had no prior work experience. Other evidence
demonstrated that corporate funds were used to pay
entertainment expenses for Lutyk and his daughter, though
the vast majority of these expenses were without a
description or identifiable business purpose. The few travel
and entertainment expenses that were documented
included yacht and golf club fees, though Lutyk admitted
he scarcely brought corporate clients to these clubs and
paid these fees personally for many years prior to the
incorporation of American.
  Perhaps as important as what the District Court did
consider was what it properly did not consider. See
Pearson, 247 F.3d at 495 (factors need be “relevant”); In re
Blatstein, 192 F.3d at 100 (same); Pisani, 646 F.2d at 88
                             13


(same); see also Kaplan, 19 F.3d at 1522 (“alter ego status
is determined by conduct of the parties that is material to
the dispute at hand”). In piercing the corporate veil, the
District Court did not afford any weight to either
American’s failure to pay dividends or the non-functionality
of the corporation’s officers, other directors, and
shareholders. Ordinarily, findings on those two factors
would weigh in favor of applying the alter ego doctrine. See,
e.g., Pisani, 646 F.2d at 88 (listing factors). Nonetheless,
such failures by a closely-held corporation such as
American are not unusual, and not a strong factor in favor
of piercing the corporate veil of such a company. See 18
Am. Jur. 2d Corporations § 48 (2002) (“lack of formalities in
a closely-held or family corporation does not often have as
much consequence as where other kinds of corporations
are involved”). Furthermore, many jurisdictions actually
hold that the payment of dividends at a time when a
corporation is insolvent favors piercing the corporate veil.
See, e.g., Bd. of Tr. of Teamsters Local 863 Pension Fund v.
Foodtown, Inc., 296 F.3d 164, 173 (3d Cir. 2002)
(discussing New Jersey law).
  Nonetheless, we believe that the District Court erred in
concluding that American was “grossly undercapitalized for
purposes of its corporate undertaking,” Lutyk II, 140 F.
Supp. 2d at 458, and, on these facts, inappropriately gave
that finding significant weight. It appears that the District
Court conflated an inquiry into American’s supposed
“undercapitalization” with its earlier inquiry into American’s
insolvency. Though there is substantial overlap between
these concepts, and they are often confused, as a matter of
corporate law, mere insolvency is distinct from
undercapitalization. See, generally, Fletcher, supra, § 41.33
(a “corporation that was adequately capitalized when
formed, but which subsequently suffers financial reverses is
not undercapitalized”).
  Preliminarily, we view this inquiry as having little
relevancy to determining whether piercing the corporate veil
was justified here. The alter ego doctrine is not applied by
a test, but by consideration of relevant “factors . . . [to
determine] whether the debtor corporation is little more
than a legal fiction.” See Pearson, 247 F.3d at 484-85. A
                             14


shortage of capital, as with all the factors of the alter ego
doctrine, is not per se a reason to pierce the corporate veil.
See 18 Am. Jur. 2d, supra, § 49. Companies commonly
become insolvent, then bankrupt; piercing the corporate
veil is an exception reserved for extreme situations, rather
than the rule. See American Bell, 736 F.2d at 886 (piercing
the corporate veil has “demanding” requirements to be
applied only in “specific, unusual circumstances”). Rather,
the inquiry into corporate capitalization is most relevant for
the inference it provides into whether the corporation was
established to defraud its creditors or other improper
purpose such as avoiding the risks known to be attendant
to a type of business. See Fletcher, supra, § 41.33; 18 Am.
Jur. 2d, supra, § 49. No such accusations appear in this
record.
   Assuming that American’s capitalization “for the
purposes of the corporate undertaking” was relevant, Lutyk
II, 140 F. Supp. 2d at 458, in conducting such an inquiry
courts generally “look to initial capitalization, asking
whether a company was adequately capitalized at the time
of its organization.” Matter of Multiponics, Inc., 622 F.2d
709, 717 (5th Cir. 1980); see also Fletcher, supra, § 41.33.
“Necessarily, this inquiry is highly factual and may vary
substantially with the industry, company, size of the debt,
account methods employed, and like factors. The primary
inquiry of this Court is to ask whether, under the
circumstances, reasonably prudent [individuals] with
general business background would deem the company
undercapitalized.” Multiponics, 622 F.2d at 717.
   In “the application of the alter ego theory to pierce the
corporate veil . . . [t]he burden of proof on this issue rests
with the party attempting to negate the existence of a
separate entity.” See Publicker Indus., Inc. v. Roman
Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979).
Nonetheless, the record below is devoid of any evidence or
finding as to the level of capital required for a corporation
of American’s size to conduct elevator service, maintenance,
and repair. For a small, closely-held corporation such as
American, the $166,000 in initial capitalization may well
have been sufficient for that corporate undertaking under
normal operating conditions.
                              15


  The District Court found that capitalization in American
was limited to the $25,000 paid in for the common stock,
stating that “no evidence was presented to support or
explain the significance of the[ ] line items” listing $141,000
in “additional paid-in capital.” We are unclear as to why
any explanation was required, considering that term’s
conventional use in the accounting profession. There is no
evidence in the record contradicting the company balance
sheets and tax returns, which show an additional $141,000
in capital was paid in. Supp. App. 85. Lutyk also testified
that his capital contribution to American was greater than
the $25,000 for the common stock, an assertion that was
not contradicted by any other witness. In concluding that
American was undercapitalized for its corporate purpose,
the District Court relied solely on its insolvency and the
ratio of American’s capital stock to its shareholder loans as
of December 31, 1995 and thereafter.
   Further complicating the inquiry into capitalization is the
District Court’s finding that American’s “financial woes
were due to the costs of an unrelated lawsuit and
misconduct by a prior controller,” not underinvestment,
mismanagement, or other negligence by Lutyk. Lutyk II,
140 F. Supp. 2d at 453. Over that period of financial
difficulty, Lutyk’s shareholder loans of $95,768.00 nearly
doubled to $174,881.00 to keep American from failing. We
believe that
    [u]nder such circumstances, loans . . . cannot be
    sufficient to satisfy this prong, particularly in this
    context where . . . [Lutyk] was instead by this point
    conducting a “rescue” operation in an attempt to
    “return the Company to profitability[.]” We surely do
    not want to discourage [shareholders of closely held
    corporations] from attempting to keep their . . .
    operations afloat with temporary loans by holding that
    the mere fact that loans were even necessary
    establishes . . . liability.
Pearson, 247 F.3d at 503; see also Carpenters Health and
Welfare Fund of Philadelphia and Vicinity by Gray v.
Kenneth R. Ambrose, Inc., 727 F.2d 279, 284 (3d Cir. 1983),
abrogation on other grounds recognized by Antol v. Esposto,
100 F.3d 1111, 1119 (3d Cir. 1996). While American’s
                              16


December 31, 1995 ratio of loans to equity was not
irrelevant for proving American was undercapitalized for its
“purposes” in 1992, Multiponics, 622 F.2d at 717 (“evidence
of inadequate subsequent capitalization [insolvency] may be
indicative of initial undercapitalization”), its usefulness was
severely limited by the finding that American’s financial
trouble stemmed from exceptional events that occurred
after incorporation. Because evidence justifying piercing the
corporate veil must be “clear and convincing,” Kaplan, 19
F.3d at 1522, that, without more, was insufficient.
   Although we reject the District Court’s conclusion that
American was “undercapitalized,” as that term is relevant to
the alter ego doctrine, we emphasize that the finding
regarding American’s substantial insolvency during the final
years of its operations adds great support to the Court’s
conclusion regarding the siphoning of funds. Cf. Crane v.
Green & Freedman Baking Co., 134 F.3d 17, 23 (1st Cir.
1998) (“wrongful diversion of corporate assets to or for
controlling individuals at a time when the corporation is in
financial distress . . . can justify piercing the corporate
veil”). Although “ ‘rescue’ operation[s]” by the shareholders
of a closely held corporation do not ordinarily justify
piercing the corporate veil, see Pearson, 247 F.3d at 503,
once Lutyk apparently became convinced that the “ship”
was indeed lost in December 1998, that insolvency makes
American’s paying off of the “shareholder loans” to Lutyk,
to the detriment of other creditors, highly suspect. See
Pisani, 646 F.2d at 88; Multiponics, 622 F.2d at 718 (“proof
of subsequent undercapitalization [insolvency] may be
further proof of inequitable conduct, such as actions of
gross mismanagement, self interest, and the like”).
  Thus, we believe that the evidence in the record supports
both the District Court’s conclusion that “the situation . . .
present[s] an element of injustice or fundamental
unfairness” and its decision to pierce the corporate veil.
Pisani, 646 F.2d at 88. While American spiraled deeper into
debt and failed to make its employee benefit payments to
the NEI funds, Lutyk was able to withdraw a significant
portion of the money he had “loaned” to the endeavor.
Simultaneously, Lutyk increased the level of funds he
personally withdrew from the corporation and that
                              17


American paid to his immediate family. Yet American’s
obligations to its creditors grew; and those employees of
American who were not members of the controlling
shareholder’s family saw a significant portion of their
compensation go unpaid. The “fundamental unfairness” of
this situation is patent. Id.

                              V.
  In sum, we are not persuaded that the District Court was
“without sufficient record support” to pierce the corporate
veil. With the exception of the District Court’s conclusion
regarding undercapitalization, the evidence from the trial
adequately supports the District Court’s findings, and it
properly applied those findings in determining that piercing
the corporate veil was appropriate. Of those findings, most
egregious was Lutyk’s siphoning of funds over the final
months of American’s operations while the company was
known to be deeply insolvent, though the record is replete
with other evidence of abuse of the corporate form.
Although Lutyk may have initially founded American as a
bona fide corporation for conducting elevator work, his
conduct in the management of that company, particularly
over the final years of the company’s operations, is clear
and convincing evidence of sufficient abuse of the corporate
form for his personal benefit so as to justify the equitable
remedy of piercing the corporate veil. The judgment of the
District Court will be affirmed.

A True Copy:
        Teste:

                   Clerk of the United States Court of Appeals
                               for the Third Circuit
