/SANK-shun uh FRAW-d or pruh-MOTE in-JUS-tis/·phrase
Also known as:sanction fraud or promote injustice · veil-piercing test · alter ego doctrine element
Written by attorneys · grounded in primary & secondary sources — see below
A factual circumstance in which respecting the corporation's separate existence would permit an owner to evade accountability for obligations incurred through the entity's operations or to engage in inequitable conduct.
Sources & Authorities
How it applies
Common Examples
2
Undercapitalized Shell Used to Evade Liability
Sebastian Santos formed Stonehaven Properties with minimal capital and no separate bank account. He commingled all rental income with his personal funds and paid his own expenses from the corporate account. When a tenant obtained a large judgment for habitability violations, the company had no assets left. A court disregarded the entity because honoring its separate existence would allow Santos to escape responsibility for foreseeable obligations created through his control.
Alter Ego Stripped of Assets After Suit
Sophia Singh created Synergy Systems with nominal capitalization and ignored all corporate formalities. After a supplier obtained a judgment, Singh transferred the remaining equipment and cash to another entity she controlled. The original company became judgment-proof. A court pierced the veil because preserving the corporate form would let Singh avoid liability for debts incurred while operating the business as her personal instrumentality.
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Cases
Hornbooks
Study Supplements
Common questions
Frequently Asked
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Does an unsatisfied judgment alone satisfy this element?+
No. Courts require more than the mere prospect of an unpaid claim. The element is met only when the owner has abused the corporate form through undercapitalization, commingling, or disregard of formalities in a way that would leave creditors without recourse if the entity is respected.
Supporting sources
How does this element interact with the unity-of-interest prong?+
Both prongs must be satisfied. Unity of interest shows the corporation lacked a separate personality. This element then asks whether that lack of separateness, if respected, would produce an inequitable result such as allowing an owner to externalize foreseeable liabilities onto an empty shell.
Supporting sources
Can this element be met without proof of actual fraud?+
Yes. Many courts accept a showing that respecting the form would promote injustice even without intentional deceit. Examples include leaving an undercapitalized entity unable to meet foreseeable obligations after the owner has stripped assets or ignored formalities.
Supporting sources
941 F.2d 519 (7th Cir. 1991)Business Associations
…no longer exist; and second, circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. 753 F.2d at 569-70 (quoting Macaluso v. Jenkins , 95 Ill. App. 3d 461, 50 Ill. Dec. 934, 938, 420 N.E.2d 251, 255 (1981)) (other citations omitted). See also Main Bank of Chicago v.…
Business Associations RelationshipsLiability rules related to business associations · Piercing the veilNEXTGENFoundational