Also known as: vergens ad inopiam · verging on poverty · insolvency
Written by attorneys · grounded in primary & secondary sources — see below
A principle authorizing courts to disregard the corporate form when a dominant shareholder treats the entity as a mere instrumentality. The principle applies upon a showing of inadequate capitalization, commingling of funds, failure to observe formalities, and use of the entity to shield personal assets, resulting in injustice to creditors.
Vivian Velez formed Voss Shipping with one thousand dollars and deposited client payments into her personal account used for mortgage and vacations. She transferred remaining funds to her brokerage account before the company collapsed, leaving shippers unpaid. A court applying the totality test disregards the LLC because the undercapitalization, commingling, and facade for personal operations satisfy the factors for veil piercing.
Victor Vargas formed a trucking LLC with minimal capital and used it to lease vehicles he personally owned. He commingled customer receipts with his personal checking account and ignored all annual filings. When creditors sued after the LLC failed, the court pierced the veil under the maxim because the entity served only as a shield for Victor's personal assets.
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Valerie Voss incorporated a consulting firm with one hundred dollars and paid her personal expenses directly from the corporate account. She never held meetings or kept minutes while using the firm to contract with clients. After the firm became insolvent, a court disregarded the corporate form under the maxim because the entity was merely Valerie's alter ego.
Vincent Vale formed a real-estate LLC capitalized at five hundred dollars and immediately loaned the funds back to himself. He deposited all rental income into his personal account and never observed any formalities. Creditors obtained a judgment piercing the veil under the maxim because the LLC functioned solely as a device to avoid personal liability.
Vera Vance started a design LLC with scant capital and used it to purchase inventory that she immediately transferred to her home. She paid personal bills from the LLC account and kept no corporate records. When suppliers remained unpaid after insolvency, the court applied the maxim and held Vera personally liable because the entity was an instrumentality.
Vernon Vale organized a delivery LLC with one thousand dollars and siphoned every receipt into his brokerage account. He never maintained separate books or observed statutory formalities. After the LLC collapsed leaving creditors unpaid, the court disregarded the form under the maxim because inadequate capitalization and commingling showed the entity was a mere facade.
Courts apply a totality of the circumstances test. Relevant factors include inadequate capitalization, failure to observe corporate formalities, insolvency of the corporation, siphoning of funds by the dominant shareholder, absence of corporate records, and whether the corporation functioned merely as a facade for the dominant stockholder.
Supporting sources
No. State law provides that failure to observe formalities relating to the exercise of powers or management is not a ground for imposing liability on a member. Courts require additional factors such as undercapitalization or commingling that demonstrate the entity was a mere instrumentality.
Supporting sources
Undercapitalization alone is insufficient absent a showing that the entity was used to defraud creditors. Courts look for evidence that the shell was formed with scant resources and used to shield personal assets, combined with other factors such as commingling and insolvency.
Supporting sources
…a close surveillance of the industry with a view toward preventing unsound practices that might impair liquidity or lead to insolvency does not make federal banking regulation all-pervasive, although it does minimize the hazards of intense competition. Indeed, that there are so many direct public controls over unsound…