#11135 - Piercing The Corporate Veil - Corporations

Piercing the Corporate Veil

1. Generally speaking, "a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation." Kinney Shoe Corp. v. Polan - pg. 284

2. Nevertheless, the courts may disregard the corporate form or pierce the corporate veil whenever necessary "to prevent fraud or to achieve equity." Walkovszky v. Carlton - pg. 266

3. As such, piercing the corporate veil is an equitable remedy that the court can impose in order to avoid injustice.

   1. Tort

      1. TEST (Radaszewski v. Telecom Corp. - pp. 272-73)

         • (1) Complete Domination

         • (2) Fraud or Wrong

           • Under Missouri Law, undercapitalizing a subsidiary is a proxy for this prong of the test

             • In the tort context, case law shows that a court will decline to pierce the corporate veil UNLESS it is shown that the defendant is both (1) undercapitalized AND (2) has failed to carry insurance that is either in compliance with statutory requirements or would be considered financially responsible under the circumstances. See, e.g., Walkovszky v. Carlton (declining to pierce the corporate veil as to individual shareholder where corporation was undercapitalized but carried statutorily required liability insurance); Radaszewski v. Telecom Corp. (declining to pierce the corporate veil as to parent company where company was undercapitalized but had insurance that was considered financially responsible under the applicable federal regulations); Gardemal v. Westin Hotel Co. (declining to pierce the corporate veil as to parent company where there was insufficient evidence to show that the subsidiary was either undercapitalized or uninsured)

         • (3) Proximate Cause

   2. Contract

      1. TEST (See Freeman v. Complex Computing Co., Inc. - pg. 280)

         • (1) Complete Domination

           • FACTORS

             • (1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the entities are at arms length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of the corporation's debts by the dominating entity, and (10) intermingling of property between the entities. Freeman v. Complex Computing Co., Inc. - pg. 281

         • (2) Fraud or Wrong

           • In the contract context, with respect to piercing the corporate veil as to parent companies, case law suggests that undercapitalization in and of itself may be enough to satisfy this prong of the test. See, e.g., OTR Assoc. v. IBC Serv., Inc. (piercing the corporate veil as to parent company where complete domination and undercapitalization shown, notwithstanding the impeccable observance of corporate formalities)

           • However, with respect to piercing the corporate veil as to individual shareholders, case law suggests there might be a higher burden such that both (1) undercapitalization and (2) a failure to observe corporate formalities may be required. See, e.g., Freeman v. Complex Computing Co., Inc. (finding complete domination and remanding the case with respect to fraud or wrong, but on remand piercing the corporate veil as to individual shareholder where...