$ 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 infor-mal advances to pay Farms’s expenses. These payments reached $ 7.5 million. Thomas and Farms engaged in
Ethics Jon- T Chemicals, Inc. ( Chemicals), was an Oklahoma corporation engaged in the fertilizer and chemicals business. John H. Thomas was its major-ity 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 infor-mal advances to pay Farms’s expenses. These payments reached $ 7.5 million. Thomas and Farms engaged in a scheme whereby they submitted fraudulent applications for agricul-tural subsidies from the federal government under the Uplands Cotton Program. As a result of these applica-tions, the Commodity Credit Corporation, a govern-ment agency, paid more than $ 2.5 million in subsidies to Thomas and Farms. After discovering the fraud, the fed-eral 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 govern-ment 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 judg-ment from Chemicals? Did Thomas act ethically in this case?
Farms' very existence implies that its purpose is to record commercial costs and exploit legal loopholes. The "Veil of Incorporation" principle permits a business to be treated as a separate entity from its stockholders and to be sued for any legal wrongdoings.
In this case, government subsidies were obtained fraudulently in addition to the costs that were incurred. As a result, the corporate veil can be penetrated, and the directors and shareholders can be held liable for the court-ordered payment.
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