Edvard Munch, The Scream (1893)
(depicting effect of Mt. Krakatoa eruption in 1883)
Module V – Corporate Externalities
Chapter 11
Piercing the Corporate Veil
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
• PCV factors
• PCV in tort cases
– Close vs. public corporation
– Fail to observe formalities
– Commingling personal and
business
– Inadequate capitalization
– Active participation
• Why limited liability?
– Investment
– Diversification
– Public trading markets
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
– Enterprise liability
– Corporate shareholders
• PCV in contract cases
– Abuse of form
– Assumption of risk
• PCV in corporate groups
– “Normal” parent-sub
relationship
– Corporate confusion
• Compare to UFTA
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What is limited liability?
• Mandatory rule?
• Default rule?
– Majoritarian
– Tailored
– Penalty
NC Bus Corp Act § 55-6-22.
Liability of shareholders.
(a) A purchaser from a
corporation of its own shares is
not liable to the corporation or its
creditors with respect to the shares
except to pay the consideration for
which the shares were authorized
to be issued or specified in
the subscription agreement.
(b) Unless otherwise provided in
the articles of incorporation, a
shareholder of a corporation is not
personally liable for the acts or
debts of the corporation except that
he may become personally liable
by reason of his own acts
or conduct.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 3
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Is limited liability inherent?
• Early corporation
Owners
– shareholders = partners
– calls on Shs (2x-5X)
• Mid-19th Century innovation
– LL - selected businesses
– some retain Sh call regime
– banks through Depression
Entity
• Late 20th Century expansion
– LL all bus orgs
– except professional
"supervisors” (some states)
Corporations:
A Contemporary Approach
Outside
creditors
Chapter 11
Piercing the Corporate Veil
Slide 4
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Why limited liability?
Consider risks of investing
in a pharmaceutical
company. Value of limited
liability …
• Encourage investment?
• Permit diversification?
• Reduce monitoring cost?
• No need monitor co-Shs?
• Uniform share valuation?
• Permit public stock mkt?
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 5
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Diversification
Inv. X
Inv. Y
Inv. Z
Portfolio
XYZ
Weak
15%
2%
-5%
4%
Strong
5%
18%
25%
16%
Expected
10%
10%
10%
10%
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 6
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Should limited liability
have exceptions?
Pros
• Encourage investment
• Foster diversification
• Encourage mgmt risktaking
• Facilitate stock markets
Corporations:
A Contemporary Approach
Cons
• Discourage extension of
credit
• Insider opportunism
• Externalization of risks
• Sh irresponsibility
Chapter 11
Piercing the Corporate Veil
Slide 7
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Piercing in tort cases …
verbigeration (vuhr-bij-uh-RAY-shun) noun
Obsessive repetition of meaningless words and phrases.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 8
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Walkovsky v. Carlton
(N.Y. Court of Appeals 1966)
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 9
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Theories of liability
PCV (Individual)
liability
Corp 1
•2 cabs
•2 mdls
Seon
•2 cabs
•2 mdls
Carlton
Corp 3
•2 cabs
•2 mdls
Walkovsky
(tort creditor)
Corporations:
A Contemporary Approach
........
Corp 10
.•2 cabs
•2 mdls
Garage
Inc.
Enterprise
liability
Chapter 11
Piercing the Corporate Veil
Slide 10
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Walkovsky v. Carlton
(N.Y. Court of Appeals 1966)
Enterprise liability
Individual liability
“… these corporations are alleged
to be operating as a single
entity, unit and enterprise. …
It is one thing to assert that a
corporation is a fragment of a
larger corporate combine which
actually conducts the business
…
"It is not enough to allege the
defendant dominated and
controlled a fragmented
corporate entity. The corporate
form may not be disregarded
merely because the assets of the
corporation, together with
mandatory insurance coverage,
are insufficient to sure the
plaintiff recovery. Taxi owner
operators are entitled to form
such corporations.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 11
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Majority
“The responsibility for
imposing condition on
incorporation has been
committed to the
Legislature, [which does
not] require taxi
corporations [to] carry
automobile liability
insurance over and
above that mandated by
the Vehicle and Traffic
Law.
Corporations:
A Contemporary Approach
Dissent
The attempt to do corporate business without
providing any sufficient basis of
financial responsibility to creditors is
an abuse of the separate entity and will
be ineffectual to exempt the shareholders
from corporate debts. Ballantine.
It certainly could not have intended to shield
those individuals who
New York State
organized corporations,
with Legislature
the specific
intent of avoiding responsibility to the
public, where the operation of the
corporate enterprise yielded profits sufficient
to purchase additional insurance.
Chapter 11
Piercing the Corporate Veil
Slide 12
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Individual liability
"There were no allegation that
Carlton was actually doing
business in his individual
capacities or shuttling personal
funds in and out of the
corporation without regard to
formality.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
What happens on
remand?
Slide 13
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What if corporate shareholder?
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 14
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Radaszewski v. Telecom Corp.
(8th Cir. 1992)
Telecom
wholly-owned
subsidiary
Contrux
inadequate
insurance
Radaszewski
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 15
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Alter Ego Doctrine
"Under Missouri law, a plaintiff
needs to show ... (1) complete
combination ... of policy and
business practice in respect to
the transaction attacked .... (2)
such control must have been
used by the defendant to
commit fraud or wrong .... and
(3) the aforesaid control and
breach of duty must
proximately cause the injury ....
“
Corporations:
A Contemporary Approach
Is buying cheap
insurance “wrong”?
By the way, what law
applies in a piercing case
– did the tort victim choose
the law where the
tortfeasor is incorporated?
Chapter 11
Piercing the Corporate Veil
Slide 16
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Does the PCV “test” matter …
Walkovsky (taxi cab)
Radasjewski (parent co.)
General test
“prevent fraud / achieve equity”
Alter ego
(1) control
(2) used to commit wrong,
(3) proximate cause
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 17
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Piercing in Contract Cases …
What are PCV factors?
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 18
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Complex Computing
Co.
Straw
SH
Horton Street Assoc.
Glazier
Albert
Option to buy
Runs business
Gets consulting K
Full control
No formalities
Personal
assurances
C3
Sales rep
agreement
Freeman
Corporations:
A Contemporary Approach
Horton
Street
Note
Theberges
Chapter 11
Piercing the Corporate Veil
Slide 19
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Complex Computing Co.
Horton Street Assoc.
Glazier, with the help of some
buddies, incorporates C3 to
acquire a computer license from
Columbia Univ.
• Glazier, though designated a
"scientific adviser" of C3, holds an
option to buy all the C3 stock and
actually runs C3
• C3 signs up Freeman as sales rep
under an agreement that promises
commissions and a hefty
severance package
• To sell out to Thomson, Glazier
has C3 can Freeman / Glazier is
then paid handsomely in the sale
and Freeman gets nothing
• Freeman holds unfulfilled
contractual promises and sues –
– C3, which is a shell
– Glazier on a PCV theory
Albert incorporates Horton Street
to buy rental properties from the
Worden Group in a heavily
leveraged acquisition
• Albert assumes full control of
HS, though does not maintain
separate books or follow
corporate formalities
• HS assumes a promissory note
that Worden Group had given
Theberges / Albert says he will
"stand behind" HS
• after economic reversals, HS
liquidates 2 properties to
discharge part of Theberges'
mortgage, but defaults on note
• Theberges hold an unpaid note
and sue –
– HS, which is insolvent
– Albert on a PCV theory.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 20
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Count the piercing factors …
Factor
Wisdom
C3 / HS
CHC
Y/Y
Public 0% / CHC 40.5%
Corp SH
N/N
Corp 37.2% / indiv 43.1%
Tort
N/N
Tort 31.0% / K 42.0%
4 – sole shareholder
Y
Y/Y
1 Sh 49.6% / 3+ Shs 35.0%
5 – dominate/control
Y
Y/Y
Found 34% - PCV 57.0%
6 – fail formalities
Y
Y/Y
Found 10% - PCV 66.9%
7 – inadequate capital
Y
N/Y
Found 8% - PCV 73.3%
8 – confusion/commingle
Y
Y/Y
Found 16% - PCV 84.2%
9 – misrepresentation
Y
N/N
Found 11% - PCV 91.6%
10 – personal guarantees
Y
N/Y
N/A
1 – Public vs. CHC
2 – corp vs. indiv
3 – tort vs. K
TOTAL
Corporations:
A Contemporary Approach
Thompson (1600 cases thru 1985)
5-5 / 7-3
Chapter 11
Piercing the Corporate Veil
Slide 21
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Distinguish the cases …
Complex Computing Co.
Horton Street Assoc.
“evidence of wrongdoing”
“oral promises … sharp business
practices”
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 22
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Piercing in Corporate Groups …
How different from “individual” cases?
What is framework?
What are factors?
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 23
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Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 24
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Gardemal v. Westin Hotel Co
(5th Cir 1999)
OTR Associates v IBC Services
(NJ App 2002)
The concierge at a Westin hotel in
Mexico suggested that John
Gardemal go snorkeling at Lover's
Beach. He did and died. The beach
was notoriously unsafe.
A shopping mall leased space to a
Blimpie subsidiary, whose
franchisee failed to pay rent and
was kicked out.
Westin-Mexico is the Westin sub
that managed the hotel. Is the
parent liable for tort of its sub?
The mall then sued the parent, Intl
Blimpie Corp, to collect rent
arrearages owed by the sub. Is the
parent liable?
No piercing!
Veil pierced!
(“typical parent-sub relationship”)
(“evasion, fraudulently carried out”)
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 25
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PCV as remedy for
“fraudulent conveyance” …
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 26
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Howard
(devoted spouse)
Fraudulent
Conveyance
Assigns
income
Wanda
(medical grad)
Student loans
Bank
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 27
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Uniform Fraudulent Transfer Act
§ 4. Transfers Fraudulent as to
Present/Future Creditors
§ 7. Remedies of Creditors
(a) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether
the creditor’s claim arose before or after the
transfer was made or the obligation was
incurred, if the debtor made the transfer or
incurred the obligation . . . .
(1) with actual intent to hinder, delay, or
defraud creditors
(2) without receiving a reasonably
equivalent value in exchange for the
transfer or obligation, and the debtor:
(i) was engaged or was about to
engage in a business or a
transaction for which the
remaining assets of the debtor
were unreasonably small in
relation to the business or
transaction; or
(ii) intended to incur, or believed or
reasonably should have believed
that he [or she] would incur, debts
beyond his [or her] ability to pay
as they became due .
(a) In an action for relief against a transfer or
obligation under this [Act], a creditor . .
. may obtain:
(1) avoidance of the transfer or
obligation to the extent necessary to
satisfy the creditor’s claim
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
(3) ...
(i) an injunction against further
disposition by the debtor or a
transferee, or both, of the asset
transferred or of other property;
(ii) appointment of a receiver to take
charge of the asset transferred or of
other property of the transferee; or
(iii) any other relief the circumstances
may require.
Slide 28
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Uniform Fraudulent Transfer Act
§ 4. Transfers Fraudulent as to to
Creditors
§ 4. Transfers Fraudulent as to to
Present/Future Creditors
(a) A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether
the creditor’s claim arose before or after the
transfer was made or the obligation was
incurred, if the debtor made the transfer or
incurred the obligation . . . .
(1) with actual intent to hinder, delay, or
defraud creditors or
(2) without receiving a reasonably
equivalent value in exchange for the
transfer or obligation, and the debtor:
(i) was engaged or was about to
engage in a business or a
transaction for which the
remaining assets of the debtor
were unreasonably small in
relation to the business or
transaction; or
(ii) intended to incur, or believed or
reasonably should have believed
that he [or she] would incur, debts
beyond his [or her] ability to pay
as they became due .
Corporations:
A Contemporary Approach
(a) Transfer is fraudulent as to a
creditor if debtor made the
transfer . . . .
(1) with actual intent to hinder
creditors OR
(2) without receiving FMV and
debtor:
Chapter 11
Piercing the Corporate Veil
(i) Was business where
remaining assets were
unreasonably small OR
(ii) should have believed
would be unable to pay
debts as came due.
Slide 29
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Group hypo
How do six cases
we’ve studied come out …
(1) under PCV doctrine
(2) UFTA?
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 30
of 36
Case
Pierce?
UFCA?
Y (“shuffling”)
Y
N (insured)
N
Complex
Computing
Y (profited when
sold business)
Y
Darbro
N (no siphoning)
N
Westin Hotel
N (not undercap)
N
IBC Services
Y (deceive +
undercap)
Y
Walkovsky
Radazjewski
Shareholders
Siphon
Deceive
Corporation
Credit
Creditor
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 31
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PCV ~ UFTA
Case
PCV
UFTA
Walkovsky v.
Carlton
No PCV because setting up corp
structure + min insurance OK under
NY law. Yes PCV for “shuffling”
Yes FT when corps made
payments to Sh, leaving
“unreasonably small assets”
Radazjewski v.
Telecom
No PCV because sub bought lowcost insurance (allowed by law)
No FT because insurance as
required, no $ transfers to parent
Freeman v. C3,
Glazier
Yes PCV because dominant “Sh” left
C3 asset-less after Thomson sale
Yes FT because Thomson
proceeds went only to “Sh”
Theberge v.
Darbro
No PCV because Shs never
withdrew $$, just sharp dealings
No FT because Shs actually
putting in more $$, not out
Gardemal v.
Westin Hotel
No PCV because no indication Mex
sub lacked financial resources
No FT because no commingling
of operations, no transfers
OTR v. IBC
Services
Yes PCV because parent confused
creditor about who obligated
Yes FT because “shell” was
intended to confuse creditor +
insufficient assets
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 32
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The end
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 33
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Reverse piercing …
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Slide 34
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Connolly v. VFW (Colo. 2006)
Connolly
(bankruptcy trustee)
Phillips
How does Connolly
Propose to get Parcel A
Into Phillips’s estate?
51%
Philsax, Inc.
Corporations:
A Contemporary Approach
Chapter 11
Piercing the Corporate Veil
Margaret
49%
Quit claim
Parcel A
Slide 35
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