Sept. 4, 2012 – A Texas businessman is on the hook for approximately $1.67 million for missing contract funds received from a Wisconsin corporation, a state appeals court has ruled.

Michels Corporation (Michels), based in Wisconsin, contracted with Texas-based Sooner Sales Inc. (Sooner) to obtain a specified amount of drill pipe, the steel piping used on drilling rigs. Michels is in the pipeline construction business, and Sooner distributes drill pipe.

The corporations entered into a contract in 2008, whereby Michels paid $7.3 million to Sooner Sales to procure drill pipe from a manufacturer. However, Michels did not receive approximately $1.67 million worth of drill pipe as promised. It contacted Sooner owner Gary Haub, who admitted that Sooner did not pay the manufacturer, and the funds were gone.

Haub is the president and sole shareholder, director, and employee of Sooner. Michels sued Sooner Sales for breach of contract to recover the $1.67 million and asked the court to “pierce the corporate veil” to make Haub jointly and severally liable.

The Dodge County Circuit Court granted Michels’ summary judgment motion, ruling that Haub was on the hook for the missing money. In Michels Corp. v. Haub, 2012AP165 (Aug. 30, 2012), the District IV Wisconsin Court Appeals affirmed, concluding that Haub was liable.

Recognizing that shareholders cannot use corporations as instrumentalities to evade obligations, the three-judge appeals panel rejected Haub’s argument that “a deal is a deal” and Michels, a sophisticated company, contracted with Sooner, not Haub.

“As Michel aptly responds, it is a given that Haub was not a party to the Michels-Sooner contract, and knowing this does not resolve whether it is proper to pierce Sooner’s corporate veil,” wrote Judge Paul Lundsten. “The fact that Haub is not a party to the contract is what makes it necessary to engage in a piercing-the-corporate-veil analysis.”

The appeals court agreed with the circuit court’s conclusions that Haub “controlled” the corporation and did not act “separately” in any meaningful way. It also rejected Haub’s argument that Texas law should apply, concluding that even if Texas law controlled, the outcome would be the same. The panel noted that Haub did not properly raise the issue.

Joe Forward is the legal writer for the State Bar of Wisconsin.