Piercing

Questions to Consider in Piercing Cases in Tort

(1) Why is the plaintiff seeking to pierce the corporate veil? (2) What individual or entity would be liable if the court pierced the corporate veil? (3) What is the relationship between the individual or entity the plaintiff is seeking to hold responsible for the debt and the entity that is liable for the debt? (4) Under what circumstances does the court indicate that it would be willing to pierce the corporate veil?

Enterprise liability factors

- Enterprise Liability: However, the decision whether to pierce the corporate veil to hold one corporation liable for an affiliated corporation's debt (enterprise liability) involves other factors, including whether the corporations (1) used similar names; (2) shared officers, directors, and employees; (3) had similar business purposes; (4) had the same offices, telephone numbers, and business cards; and (5) intermingled business transactions and funds. Are the subsidiaries one of the same as eachother?

Problem 6.3. Truckers, Inc. ("Truckers") owns a fleet of trucks used to sell food. Truckers keeps meticulous corporate records and holds all of its required board and shareholder meetings. Truckers contracts with various businesses and individuals that use Truckers' trucks to sell a variety of foods from cookies to Jamaican cuisine. Although each of Truckers' trucks looks the same, they all are decorated with logos from the different businesses with which Truckers contracts. The Truckers' contract provides that each business must (a) pay Truckers all of their profits after paying reasonable salaries, making any payment to creditors, and placing a modest amount in capital reserves, and (b) maintain insurance on each truck in at least the minimum amount of insurance needed for trucks that are not primarily driven, but park in one or two areas a day for the purpose of serving food. That insurance amount is significantly lower than the insurance for trucks primarily used for driving. Just Desserts, Inc., a cup-cake business ("JD"), has such a contract with Truckers. JD rarely holds board or shareholder meetings and has very few records of its stockholders or other contractual obligations. One day, while attempting to park and serve cupcakes, the truck rented by JD negligently ran into a crowd of people causing significant personal injuries. JD does not have enough assets to pay for the injuries. The victims have asked for your advice. Can the victims hold either Truckers or one of the businesses affiliated with Truckers liable for the injuries caused by JD?

- No, they won't be able to hold trucking company liable. Truckers has observed formalities. There's no reason for confusion amongst the two businesses, no shared officers, no same offices, etc. What about general piercing? General Piercing Factors: • Substantial stock ownership • N/A • Undercapitalization o Tricky here • Failure to observe corporate formalities • Yes • Absence of corporate records • Yes • Commingling of corporate assets and corporate identities • Siphoning of corporate assets • Proof of fraud unnecessary but will increase likelihood • Involuntary Creditors: Contract vs. tort victims • Uphill battle because used in extreme circumstances to advance equity and fairness. o Here, we have a tort victim and a inc that didn't follow formalities, so piercing is likely.

Is a common trade name a basis for disregarding the corporate separateness of multiple corporations that have the same owner?

- No. A common trade name is not a basis for disregarding the corporate separateness of multiple corporations that have the same owner. (Bagel Bros Case)

What is the Court mainly concerned about w PCV cases?

- Ultimately, what the court is trying to do is "what's fair" under the circumstances of the case (fact intensive)

Test yourself: Do assessments to test your knowledge of piercing the corporate veil. (1) Under what circumstances does the issue of piercing arise? (2) What factors do courts consider when determining whether or not to pierce? (3) How do courts examine the issue of stock ownership? (4) How do courts examine the issue of undercapitalization? a. What is the impact of debt financing? b. What is the impact of insurance or lack thereof? c. What is the impact of dividend payments or lack thereof? (5) What is enterprise liability? (6) Under what circumstances does the issue of enterprise liability arise and why does it pose challenges for the piercing doctrine

Answer yourself.

In 2004 Jennifer and Chris established Just Desserts, Inc., a corporation that bakes and sells cupcakes ("JD"). Jennifer is the CFO and holds 55% of JD's shares, while Chris is the CEO and owns 45% of JD's shares. Chris has primary responsibility for owning and operating JD. JD maintains meticulous business records and strictly adheres to all corporate formalities. Throughout its history, JD has been cited several times for violating various health code violations and even was forced to close for nine months as a result of such violations. In 2008, JD negligently served cupcakes to customers with tainted ingredients causing serious health problems. While JD has sufficient capital to pay its creditors, it has taken out the minimum amount of insurance and thus does not have sufficient assets to pay the customers' claims. Can the JD customers successfully hold either Jennifer or Chris liable for their health problems?

Answer: Here, the business is adequately capitalized, observes formalities, keeps great business records, did not comingle funds. These factors lead towards not piercing. There is also no fraud or misrepresentation. However, as an equitable matter, one could argue that JD had previous health citations. Maybe some violations of the health code would constitute 'illegalities.' The Court may pierce the corporate veil based on the equitable factor. Ultimately, there's no bright line answer to this one. Courts will weigh these factors differently.

Enterprise Liability

As indicated in the overview, enterprise liability arises when someone seeks to hold one company liable for the debts of another company based on the notion that both companies are part of a common corporate family or "enterprise." This form of piercing liability is challenging because there is no ownership interest between the two companies at issue, and ownership is often viewed as a necessary, though not sufficient factor, for purposes of piercing. However, courts have indicated that in lieu of such ownership, demonstrating that companies are a part of the same enterprise, and thus benefit from the activities of one another, may serve to justify piercing.

Just Desserts, Inc. ("JD") has been in the business of baking and selling cupcakes for fifteen years, and is one of the most popular cupcake companies in the nation. Chris owns 70% of JD's shares and is the founder and CEO of JD. One of the main reasons for JD's popularity is that each year JD donates 100% of its net profits to a charity chosen based on its customers vote. JD also has a reputation for not paying dividends and has never paid dividends in its fifteen-year history. JD also has a reputation for paying all of its creditors on a timely basis—though many of its directors have complained that JD does not keep good business records and only sporadically holds board meetings. On June 10, Jennifer entered into a five-year contract with JD pursuant to which Jennifer agreed to be JD's sole supplier of napkins, bags, and other paper products. Two months later, JD told Jennifer that it had insufficient assets to pay for Jennifer's contract. What is the likelihood that Jennifer can hold Chris liable for JD's contract with her?

Factors: • Substantial stock ownership • He owns 70% of stock, so yes. • Undercapitalization • They are actually making money. They pay all of their employees, they just give net profit to charity. So, no. • Failure to observe corporate formalities • Points to piercing, sometimes didn't • Absence of corporate records • Have records, but not good ones • Commingling of corporate assets and corporate identities • None • Siphoning of corporate assets • None • Proof of fraud unnecessary but will increase likelihood • None • Involuntary Creditors: Contract vs. tort victims • Its Contract, so less likely to pierce. • Uphill battle because used in extreme circumstances to advance equity and fairness. Overall, I don't think the veil gets pierced.

General Piercing Factors

Note: All of these factors go towards whether the Shareholder was using the corporation as a "sham" or whether he/she used it in the proper way. • Substantial stock ownership • More stock ownership=more likely to pierce • Undercapitalization of the company • Not enough $ in the company. - non-payment of dividends goes to this (but not determinative) • Failure to observe corporate formalities • E.g.: Absence of having board meetings • Absence of corporate records • E.g.: A lot of things aren't written down • Commingling of corporate assets and corporate identities • Not keeping shareholder and corp's bank account separate • Siphoning of corporate assets • Proof of fraud unnecessary but will increase likelihood • Not necessary, but can be helpful because courts consider equity • Involuntary Creditors: Contract vs. tort victims • When you're dealing in Contract, it is something you are intentionally doing. So K Creditor is doing it voluntarily. • On the other hand, a tort plaintiff is involuntary. They didn't sign up for this in any capacity. So, the thought is that courts are more willing to pierce the corporate veil in the context of tort liability. • Moral of the Story: Uphill battle because used in extreme circumstances to advance equity and fairness. • Limited Liability is one of the chief benefits of incorporating, so its not easy to pierce corporate veil Why these factors: The absence of corporate formalities, documentation hints that there is evidence that the shareholder and company are one and the same.

What is veil piercing?

Veil Piercing is the exception to this general rule of limited liability. - Shareholders of corporations have limited liability, and thus the general rule is that such shareholders cannot be held personally liable for corporate obligations. Piercing the corporate veil represents an exception to this general rule. - Veil piercing is fact intensive and occurs on a case-by-case basis. This means that a plaintiff may prove that a shareholder may be held personally liable for the debts of a corporation related to one transaction, but not another. If shareholders have abused the corporate form, creditors can seek to hold a shareholder or shareholders responsible for the corps debt.

Why is the disregard of corporate formalities important in PCV?

a. Shows a lack of responsibility on behalf of the corporation and also signals that the corp and shareholder are acting as one in the same

Common Forms of Piercing

• From the corporate entity to the individual shareholder or shareholders of the corporation. - From the corporate entity to the corporate parent that owns the entity. That is, from subsidiary to parent. - From the corporate entity to the subsidiary of that entity. This is known as reverse piercing because it goes from the parent to the subsidiary. • From the corporate entity to another corporate entity that has the same corporate parent. This is referred to as enterprise, sibling, or horizontal liability because the corporations share the same corporate parent.

General Rule of Limited Liability in Corps

• MBCA § 6.22(b) (Limited) Liability of Shareholders: "Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.