BA §8 - CORPORATIONS: PIERCING THE CORPORATE VEIL

Tendency of Courts to PCV: Tort v. Contract

Generally, courts are more willing to PCV for a tort victim than for a contract claimant.

Piercing the Corporate Veil (PCV)

1. The general rule is that a shareholder is not liable for the debts of a corporation, but the exception to this rule occurs when the corporate veil is pierced to avoid fraud or injustice. 2. Shareholders may be subject to unlimited liability where the corporate entity is cast aside by a court of equity. 3. Suits to pierce the corporate veil are generally brought by creditors.

PCV and Control of the Corporation: Walkovsky v. Carlton

1. Whenever anyone uses control of the corporation to further his own, rather than the corporation's business, he will be liable for the corporation's acts. 2. But, where a corporation is a fragment of a larger corporate combination which actually conducts the business, a court will NOT pierce the veil to hold individual shareholders liable.

Deep Rock Doctrine: Equity At Corporate Insolvency or Bankruptcy

1. Where a corporation becomes insolvent, debts owing to shareholders may be subordinated to the claims of other creditors. 2. The effect is that shareholders' claims against the corporation are not paid until all creditors are satisfied, secured or unsecured. 3. This is an equitable remedy available where bad faith by the shareholder is established by undercapitalization or mismanagement.

PCV and Multiple Subsidiaries: Roman Catholic Archbishop of SF

1. Where a parent corporation controls several subsidiaries, the corporate veil of one subsidiary may NOT be pierced to satisfy the liability of another subsidiary. 2. The alter ego theory may NOT be applied where the unsatisfied creditor-plaintiff will merely not be able to collect if the corporate veil is not pierced.

Example Of Piercing the Veil Fact Pattern

1. X is the shareholder and CEO of Glowco Inc. which is a corporation that hauls and disposes of nuclear waste. 2. Glowco does not carry insurance. 3. Glowco has an initial capitalization of $1k. 4. X commingles personal and corporate funds. 5. V is injured when one of Glowco's trucks melts down. 6. Can V sue X?

Lack of Corporate Formalities (aka Alter Ego): Adequate Ground for Piercing the Veil (1/3)

aka the Alter Ego. 1. Where the corporation has been so utilized by its owners (shareholders) that no separate entity has been maintained, and the corporation is merely an alter ego of the owners, there may be grounds to pierce the veil. 2. Alter ego is simply failure to observe sufficient corporate formalities.

PCV and Liability of Parent Corporation to Subsidiary: Silicone Gel Breast Implants

1. An entity which is the sold shareholder of a corporation that makes a product subject to a products liability action, but which does not itself manufacture or market the product, 2. MAY be found liable through piercing the corporate veil under a theory of direct liability.

Answer to Piercing the Veil Example

1. Answer: General rule is that shareholders like X are not liable for corporate obligations, however courts will pierce the corporate veil to avoid fraud or injustice. 2. In this case, X has failed to observe sufficient formalities by commingling funds. 3. Also, Glowco is undercapitalized because it operates in a dangerous business, has no insurance and minimal capitalization. 4. The court will pierce the corporate veil to render X liable to V. Remember, courts are generally more willing to PCV for a tort victim than for a contract claimant.

Who May pierce the Corporate Veil?

1. Creditors 2. Shareholders (or LLC Members)

Inadequate Capitalization: Adequate Ground for Piercing the Veil (2/3)

1. Inadequate capitalization is simply failure to maintain sufficient funds to cover foreseeable liabilities. 2. A corporation is inadequately capitalized when its shareholders have not invested enough capital to meet the corporation's prospective business risks and obligations that could reasonably be expected to arise in that business at the time of the corporation's formation. 3. The determination of inadequate capitalization is made at the time of incorporation. 4. Look to see if the dominant owner (shareholder) has milked the corporation of its capital, thereby preventing it from accumulating capital to meet expanding business needs.

Enterprise Liability Theory: Adequate Ground for Piercing the Veil (3/3)

Affiliated corporations are considered fragments of one business enterprise where the subsidiary is wholly owned by the parent.

Requirements for Piercing the Corporate Veil (PCV): "IF I LIE"

Including fraud/injustice, two or more of the following factors are required to establish adequate grounds for disregarding the corporate veil. 1. Lack of corporate formalities, 2. Inadequate capitalization at incorporation, 3. Enterprise liability theory.

PCV and Creditors Who Cannot Collect

Just because a creditor cannot collect is NOT a reason in and of itself to pierce the corporate veil.

PCV Is a Balance to De Fatco/Estoppel Doctrines

PCV Doctrine counterbalances the de factor corporation and corporation by estoppel doctrines, for here a valid corporate existence is ignored in equity to service the ends of justice.

PCV and Unity of Interest: Sea-Land Services

The corporate veil will be pierced where there is a unity of interest and ownership between the corporation and an individual, AND where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice.