Also known as: piercing the corporate veil · pierced the corporate veil · pierces the corporate veil · corporate veil piercing · disregard corporate entity · alter ego doctrine
Written by attorneys — see sources below.
A doctrine that permits a court to disregard the separate legal personality of a corporation and hold its shareholders personally liable for corporate obligations. The doctrine applies when a plaintiff shows both unity of interest and ownership between the corporation and its controlling shareholder such that the corporation has no separate existence and circumstances where respecting the corporate form would sanction fraud or promote injustice. Courts evaluate factors including undercapitalization, failure to observe corporate formalities, commingling of assets, siphoning of funds, and use of the entity as a mere facade.
Priscilla Parks formed Prism Analytics with minimal capital and used its accounts to pay her personal expenses while ignoring board meetings and record-keeping. When a supplier obtained a judgment against the company that Prism could not pay, the supplier sued Parks individually. The court disregarded the corporate form because the unity of interest and ownership left no separate personality and respecting the fiction would sanction injustice.
Pedro Pacheco controlled Pacific Bank through a single-asset subsidiary that lacked adequate capital and never held formal meetings. After the subsidiary defaulted on a loan, the lender sought to reach Pacheco's personal assets. The court applied a totality test and found inadequate capitalization, siphoning of funds, and nonfunctioning officers sufficient to pierce the veil.
Penelope Price created Platinum Partners as an undercapitalized shell that failed to observe any corporate formalities and existed only to shield her from personal liability on contracts. When a creditor could not collect from the shell, the creditor sued Price directly. The court pierced the veil because the entity was merely an instrumentality and adherence to the corporate fiction would promote injustice.
Preston Pratt incorporated each of his taxis separately with only minimal assets required by law. After one taxi injured a passenger, the passenger sought to hold Pratt personally liable. The court refused to pierce the veil because undercapitalization alone did not show the corporate form was used to defraud creditors or operated as Pratt's alter ego.
Pamela Phillips incorporated each taxi as a separate entity with minimal capital and transferred all revenues to her central management company. After an accident left one corporation judgment-proof, the injured party sued Phillips personally. The court examined whether the structure operated as an alter ego for personal benefit rather than a legitimate risk-allocation device.
Four years prior to commencement of suit, the plaintiff was severely injured in New York City when run down by a taxicab owned by Seon Cab Corporation and negligently operated by Márchese. Carlton is a stockholder of ten corporations including Seon, each having only two cabs registered in its name with the minimum automobile liability insurance of $10,000 carried on any one cab. Although seemingly independent, the corporations are alleged to be operated as a single entity, unit and enterprise with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants. The plaintiff asserts he is entitled to hold the stockholders personally liable because the multiple corporate structure constitutes an unlawful attempt to defraud members of the general public who might be injured by the cabs. The complaint alleges that none of the corporations had a separate existence of their own, that the separate corporations were undercapitalized, and that their assets have been intermingled. Carlton moved pursuant to CPLR 3211(a)(7) to dismiss the complaint on the ground that as to him it fails to state a cause of action. Special Term granted the motion, but the Appellate Division by a divided vote reversed. Carlton appeals to the Court of Appeals from the nonfinal order by leave of the Appellate Division on a certified question.
Peak Performance owned a subsidiary that conducted all operations from the parent's offices with shared employees and no independent records. After the subsidiary incurred environmental liabilities it could not pay, the plaintiff sought to reach the parent's assets. The court assessed whether the parent so dominated the subsidiary that the two lacked separate personalities.
In 1957, Ott Chemical Co. began manufacturing chemicals at a plant near Muskegon, Michigan, and its dumping of hazardous substances polluted the soil and ground water at the site. In 1965, CPC International Inc. incorporated a wholly owned subsidiary, Ott Chemical Co., to buy the assets of the original Ott company in exchange for CPC stock, and the new Ott company continued chemical manufacturing and pollution at the site while sharing officers and directors with CPC, including Arnold Ott. In 1972, CPC sold Ott II to Story Chemical Company, which operated the plant until its bankruptcy in 1977. The Michigan Department of Natural Resources then examined the site and found thousands of leaking drums and saturated soil and water, prompting negotiations that led Aerojet-General Corp. to arrange transfer of the site in 1977 through its subsidiaries Cordova Chemical Company and Cordova Chemical Company of Michigan, which manufactured chemicals there until 1986. By 1981, the Environmental Protection Agency had begun planning a long-term cleanup of the site expected to cost tens of millions of dollars. In 1989, the United States filed suit under CERCLA section 107 against CPC, Aerojet, their subsidiaries, and Arnold Ott to recover response costs, following stipulations that the Muskegon plant was a facility, hazardous substances had been released, and the government had incurred reimbursable costs. After a 15-day bench trial in 1991 on liability issues, the District Court held CPC and Aerojet liable as operators. A divided panel of the Sixth Circuit reversed in part, and on rehearing en banc the court again reversed the District Court in part by a 7-to-6 vote. The Supreme Court granted certiorari in 1997 to address the conflict among circuits regarding parent corporation liability under CERCLA.
Courts apply a totality-of-the-circumstances test that includes inadequate capitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency, siphoning of funds by the dominant shareholder, nonfunctioning officers or directors, absence of corporate records, and whether the corporation was merely a facade for the dominant stockholder.
Supporting sources
…defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on…
…at least diminished where the parties are subsidiaries of American corporations." Id., at 933. In effect, the Court of Appeals pierced the corporate veil
No. Undercapitalization by itself does not justify piercing absent proof that the corporation was used to defraud creditors or operated as the alter ego of its shareholders for their personal benefit.
Supporting sources
A plaintiff must show both unity of interest and ownership such that the separate personalities of the corporation and the individual no longer exist and circumstances where adherence to the corporate fiction would sanction fraud or promote injustice.
Supporting sources
No. Empirical studies show that veil piercing occurs only in close corporations or corporate groups and never in publicly held corporations.
Courts recognize that single-asset corporations are common in certain industries, but will still pierce the veil when the structure is combined with inadequate capitalization, siphoning of funds, and failure to observe formalities that together demonstrate alter-ego operation.
Supporting sources