ADW Draft 2/13/12
AP edits 2/19/12
Chapter 11: Piercing the Corporate Veil
Primary Sources Used in this Chapter
Walkovszky v. Carlton
Radaszewski v. Telecom Corp.
Freeman v. Complex Computing Co.
Thebarge v. Darbro, Inc.
Gardemal v. Westin Hotel Co.
OTR Associates v. IBC Services, Inc.
NC Bus Corp Act §55-6-22(b)
Uniform Fraudulent Transfer Act, §§4, 7
Concepts for this Chapter
 Piercing the corporate veil (PCV)factors
o
Close v. public corporation
o
Failure to observe formalities
o
Commingling of personal and business
o
Inadequate capitalization
o
Active participation
 Reasons for limited liability for shareholders and other corporate participants
o
Investment
o
Diversification
o
Public trading markets
 Cases in three main PCV categories
o
Contract cases
 Abuse of form
 Assumption of risk
o
Tort cases
 Enterprise liability
 Corporate shareholders
o
Corporate Groups cases
 “Normal” parent-subsidiary relationship
 Corporate confusion
 PCV as a subset of creditor protection
o
Compare to fraudulent conveyance law
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Introduction
This module of the book (Chapters 11, 12 and 13) deals with corporate externalities: the shifting
of costs created by the corporate to persons outside the corporation. Recall that a key attraction
of the corporation for shareholders is that, if things go wrong, their losses are limited to their
investment in the corporation. Outside creditors or plaintiffs cannot look beyond the assets of
the corporation for payment of their claims.
Piercing the corporate veil (PCV), however, is the exception to that rule. In some cases, courts
may allow creditors to disregard the corporate form and recover directly from the shareholders.
Shareholders lose their limited liability. There is no set rule for when courts may pierce the
corporate veil. There are, however, certain factors that are frequently present in such cases.
Question: What is the connection between the last chapter (capital structure) and this one?
Answer: Capital structure is a way to understand whether the corporation has enough
money to pay its debts. Because of limited liability, if the corporation does not have
enough money, creditors bear any additional losses unless the court chooses to pierce the
corporate veil.
A.
Piercing Scorecard
Question: What is PCV?
Answer: If the corporation does not have enough money to satisfy plaintiffs/creditors’,
courts sometimes allow plaintiffs/creditors to disregard the corporate entity and recover
directly from shareholders
Question: Why allow PCV?
Answer: PCV is an equitable doctrine created by courts to prevent fraud and achieve
justice.
Question: How does a court make the decision to PCV?
Answer: It is fact-dependent and there is no single rule. The factors commonly
considered by courts when considering PCV are:



Corporation is closely-held
o Shareholder-managers
o Individual may dominate
Insiders deceived creditors
o Protect third parties
Insiders failed to observe corporate formalities
o Indifference about corporation’s obligations to third parties
o Respect the form, or lost the benefits
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


Insiders commingled business and personal assets
o Commingling is like fraud
o Respect the corporate form
Insiders did not adequately capitalize the business
o Externalizes the risks
o Also look at insurance
Defendant actively participated in the business
o Control and fairness
The courts are looking to answer the question, “has the corporation been used as a way to
specifically externalize risks”?
The Breakout Box on p. 301 summarizes the results of Professor Robert Thompson’s study of
PCV cases. In his 1991 article, “Piercing the Corporate Veil: An Empirical Study”, Professor
Thompson explained:
Piercing the corporate veil is the most litigated issue in corporate law and yet it
remains among the least understood. As a general principle, corporations are
recognized as legal entities separate from their shareholders, officers, and
directors. Corporate obligations remain the liability of the entity and not of the
shareholders, directors, or officers who own and/or act for the entity. “Piercing
the corporate veil” refers to the judicially imposed exception to this principle by
which courts disregard the separateness of the corporation and hold a shareholder
responsible for the corporation's action as if it were the shareholder's own. The
boundaries of this exception are usually stated in broad terms that offer little
guidance to judges or litigants in subsequent cases. In 1926, Benjamin Cardozo
described this corner of the law as “enveloped in the mists of metaphor,” and
courts and commentators have been even less kind in subsequent years. Legal
writers have described judicial decisions to pierce the veil as “irreconcilable and
not entirely comprehensible,” “defying any attempt at rational explanation,” and
occurring “freakishly.”
Robert Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell
L. Rev. 1036 (1991) (citations omitted)
Professor Thompson found that piercing was almost never employed in public corporations, and
that courts pierced most often (in order) when they found misrepresentation, commingling of
assets, inadequate capitalization and failure to observe corporate formalities.
B.
Piercing Policy
PCV shifts costs back from creditors to shareholders by removing the protection afforded by
limited liability.
Question: What is meant by limited liability?
3
Answer: Limited liability in corporations law means that shareholders cannot lose more
money than they put into the company.
State statues give no standards for PCV. They do, however, often articulate the principle of
shareholder limited liability. For example, the North Carolina statute provides:
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.
NC Bus Corp Act §55-6-22(b)
Question: Is limited liability a mandatory or the default rule?
Answer: Default rule. You can contract around limited liability.
1.
Rationales for Limited Liability
Question: Is limited liability inherent in business organizations?
Answer: No. In early corporations, shareholders were essentially partners and were
frequently called upon to contribute additional capital. Limited liability was a midnineteenth century innovation, and even then did not catch on immediately. Limited
liability was significantly expanded in the late 20th century, with entities such as LLCs
and LLPs becoming widely used.
Corporate limited liability may be a “gift,” which can be taken away if abused.
Question: Why allow limited liability?
Answer: Rationales for limited liability include:
 Encourages investment (shareholders get upside, and downside is limited; even
shareholders who are judgment proof can invest)
 Fosters diversification (shareholders know where the floor is - how much they
will be liable)
 Encourages management risk taking (without it, shareholders with unlimited
liability would constantly second guess management decisions)
 Facilitates stock markets (everyone is trading the same financial instrument otherwise it would not be possible to value or transfer share)
Question:
What are some arguments against limited liability?
Answer: Some downsides to limited liability might be:
 Discourages extension of credit
 Enables insider opportunism
 Externalizes risks
4

Allows shareholder irresponsibility
Question: Does limited liability pit shareholders against creditors?
Answer: Yes, to some extent. Assume a corporation does something wrong, and has to
pay. It pays out all its money and assets. It is broke and its remaining creditors are out of
luck. The shareholders lose their investment, but no more than that. The creditors bear
the remaining costs. If the court pierces the corporate veil, it takes away limited liability
and holds the shareholders liable. It shifts costs back to the shareholders.
Question: Should the availability of PCV remedies vary based on whether it is a closely-held or
a public corporation?
Answer: Maybe. Small businesses are more likely to be dominated by an individual
shareholder. On the other hand, fostering small business and entrepreneurship is the
reason for limited liability in the first place.
Question: Should the availability of PCV remedies vary based on whether it is an individual or a
corporate shareholder?
Answer: Maybe. The question is really whether we need to protect corporate
shareholders with limited liability. Should we go with a theory of “enterprise liability” in
which the whole firm is liable for something done by a constituent business? Would this
avoid thinly capitalized subsidiaries? Or would this discourage efficient integration?
Question: Should the corporation be used as a way to externalize risks?
Answer: Maybe. Maybe not. Some arguments against it (and in favor or more piercing)
are that strong protections for limited liability allows practices such as
 Undercapitalizing corporations
 Obscuring where the money has gone (mingling and siphoning of assets)
 Using the business entirely by a sole shareholder
2.
Alternative Exceptions to Limited Liability
Piercing is part of creditor protection law. If the court pierces, the creditor’s expectations will be
protected by law beyond what may be in the contract.
Question: What might be used instead of PCV?
Answer: Fraudulent conveyance and equitable subordination are two alternatives to
PCV.
Fraudulent conveyance comes from the bankruptcy context, and allows the court to set
aside a transfer by an insolvent, or nearly insolvent, corporation to its shareholders if the
transfer undermines creditor claims.
5
Equitable subordination, also from the bankruptcy context, allows subordination of
some creditors’ (particularly insiders) claims when they have behaved badly.
Bonus Hypothetical:
Wanda takes out loans to go to medical school. She graduates and begins a lucrative medical
practice. Wanda is oppressed by her heavy student loans.
So, Wanda assigns all of her income to her spouse, Howard. He agress to be attentive, do the
housework, and to ba a doctor’s perfect spouse.
Wanda’s lenders sue her. She says she has nothing, because she has conveyed all of her income
stream to Howard. The lenders say that this is bad. However, they have no contractual
protection that prevented Wanda from doing this.
Question: Can Wanda do this?
Answer: Probably not. The creditors must argue that the assignment of income was done
with the intent of avoiding paying the bank. That it was fraudulent because it was
without “due consideration” - the husband gave only devotion so there was a transfer of
real value out of one entity into another without valuable consideration – so the
assignment can be voided.
The Uniform Fraudulent Transfer Act (the 1984 revision to the Uniform Fraudulent
Conveyance Act) protects creditors from two types of transfers:


Transfers with the intent to defraud creditors
o For which a creditor must show intentional fraud; and
Transfers that constructively defraud creditors
o Which can be shown if the debtor makes a transfer while insolvent or near
insolvency if the transfer lacks fair consideration
o Requires a specific finding of a fraudulent transaction
Uniform Fraudulent Transfer Act
§ 4. Transfers Fraudulent as 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
(2)
without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
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(i)
(ii)
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
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
§ 7. Remedies of Creditors
(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
(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.
http://www.law.upenn.edu/bll/archives/ulc/fnact99/1980s/ufta84.pdf
Question: When is equitable subordination used?
Answer: Equitable subordination applies only in federal bankruptcy proceedings. It is
used to push some creditors’ claims to the back of the line, often allowing outside
creditors to receive payment before insiders. To invoke equitable subordination, there
must be a showing of fraudulent conduct, mismanagement or inadequate capitalization.
Equitable subordination is limited, of course. It does not increase the size of the pie
available to creditors, and it does not hold shareholders personally liable for corporate
obligations.
C.
Piercing in Tort Cases
Walkovszky v. Carlton (18 N.Y.2d 414, 276 N.Y.S. 2d 585, 223 N.E. 2d 6 (1966))
Facts: Walkovszky (the plaintiff) was run down by a negligently operated cab owned by
the Seon Cab Corporation. Carlton (the defendant) was a stockholder of Sean and of nine
other cab corporations. Each cab corporation had two cabs registered in its name, and the
minimum automobile liability insurance required by New York law ($10,000). All of the
cab corporations were alleged to be “operated as a single entity, unit and enterprise” –
with common financing, supplies, repairs, employees and garaging. Walkovszky sued all
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ten cab companies and their shareholders (as well as the cab driver, Marchese), alleging
that none of the corporations “had a separate existence of their own.” Carlton moved to
dismiss the complaint for failure to state a cause of action.
Issue: Could Walkovszky sue the individual shareholders?
Holding: No. No piercing. Walkovszky lost.
Reasoning: Judge Fuld acknowledged the possibility of piercing the corporate veil in the
tort context ”to prevent fraud or to achieve equity”:

“The law permits incorporation of a business for the very purpose of enabling its
proprietors to escape personal liability, but, manifestly, the privilege is not
without its limits.”
However, the court distinguished “enterprise liability” from “individual liability”

“[I]t is one thing to assert that a corporation is a fragment of a larger corporate
combine which actually conducts the business. It is quite another to claim that the
corporation is a “dummy” for its individual stockholders who are in reality
carrying on the business in their personal capacities for purely personal rather
than corporate ends.
The court found that there was no allegation that Carlton was actually doing business in
his individual capacity, or shuttling personal funds in and out of the corporation without
regard to formality.

“The individual is charged with having ‘organized, managed, dominated and
controlled’ a fragmented corporate entity but there are no allegations that he was
conducting business in his individual capacity.”

“The corporate form may not be disregarded merely because the assets of the
corporation, together with the mandatory insurance coverage of the vehicle which
struck the plaintiff, are insufficient to assure him the recovery sought.”
In the court’s opinion, Walkovszky did not show a need to PCV. It was not illegal to
carry only the minimum insurance. If that was inadequate, the legislature should fix it.

“[I]f the insurance coverage required by statute ‘is inadequate for the protection of
the public, the remedy lies not with the courts but with the Legislature’”
Dissent: Judge Keating disagreed, arguing that Carlton was the principal shareholder and
organizer, and that Carlton intentionally undercapitalized all of the corporations and
continuously drained their income.
“The attempt to do corporate business without providing any sufficient basis of financial
8
responsibility to creditors is an abuse of the separate entity and will be ineffectual to
exempt the shareholders from corporate debts.”
The dissent argued that the shareholders should not be exempt from the corporate debts,
and that the court had the power to do this without waiting for legislative action. In fact,
Judge Keating argued, PCV here would help the legislature by stopping a practice that
circumvented legislative policy (of ensuring some recovery for “innocent victims of
motor vehicle accidents”),
Question: What did Walkovszky want?
Answer: He wanted two things. First, he wanted the court to combine all the corporate
assets of the different cab companies under an "enterprise theory" to satisfy his judgment.
Second, he wanted the court to pierce the corporate veil and go after the individual
shareholder (i.e. Carlton) because his multiple corporate structure was an unlawful
attempt “to defraud members of the general public” who were likely to be run down by
cabs operated by Carlton's corporations. The defendant appealed on the second theory.
Question: What were the assets of each corporation?
Answer: Two cabs and two medallions. All the cash was taken out of each corporation,
so that the remaining assets were insufficient to provide a recovery.
Question: What about the medallions?
Answer: Medallions are valuable, but they are judgment proof.
Question: What does the court mean by “dummy”?
Answer: a corporation that is formed for the individual stockholders, who are really
carrying out business in their personal capacity and using the corporate form for limited
liability.
Question: What happens on remand
Answer: Walkovszky amends his complaint to allege that Carlton conducted business in
his individual capacity. The trial court denies Carlton’s motion to dismiss, and that
denial was affirmed on appeal. Facing trial, Carlton settled the case.
Radaszewski v. Telecom Corp. 981 F2d 305 (8th Cir. 1992), cert. denied 508 U.S. 908 (1993)
Facts: Konrad Radaszewski (the plaintiff) was seriously injured in a motorcycle accident
when he was struck by a truck driven by an employee of Contrux, Inc. Construx’s
insurance carrier became insolvent two years after the accident. Radaszewski sought to
implead Telecom corp., the parent corporation of Contrux. Radaszewski argued that
9
Contrux was undercapitalized by Telecom Corp. Contrux had purchased insurance from
a wholly owned subsidiary of Telecom Corp.
Issue: Whether, under Missouri law, Radaszewski could “pierce the corporate veil,” and
hold Telecom liable for the conduct of its subsidiary, Contrux, and Contrux’s driver?
Holding: No.
Reasoning: Contrux was not undercapitalized and Telecom Corp could not be held liable
for the actions of Contrux’s employee.
 “In general, someone injured by the conduct of a corporation or one it is
employees can look only to the assets of the employee or of the employer
corporation for recovery. The shareholders of the corporation, including, if there
is one, its parent corporation, are not responsible.”
However, the court noted that a plaintiff may pierce the corporate veil in some
circumstances.
Citing Collet v. American National Stores, Inc., 708 S.W.2d 271, 284 (Mo. App. 1986),
the court found that under Missouri law, a plaintiff needed to show three things in order
to pierce the corporate veil:
1) Control, not mere majority or complete stock control, but complete
domination, not only of finances, but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; and
2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetrate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal rights; and
3) The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
This is also known as the alter ego doctrine. Yep, that's right.
To satisfy the second element of the formula, Radaszewski argued that Contrux was
undercapitalized. The District Court held that Contrux was undercapitalized in an
accounting sense and rejected Telecom’s argument that it did not matter because Contrux
had $1,000,000 in basic liability coverage, plus $10,000,000 in excess coverage, to pay
judgments, which was sufficient to satisfy federal financial responsibility requirements of
interstate carriers. Undercapitalization is undercapitalization, it reasoned, regardless of
insurance. The District Court held that the federal regulation did not speak to what
constituted a properly capitalized motor carrier company. Rather, the regulation spoke to
what constituted an appropriate level of financial responsibility
The Eighth Circuit disagreed, stating that the whole purpose of asking whether a
subsidiary was “properly capitalized,” was precisely to determine its “financial
responsibility.” If the subsidiary was financially responsible, the policy behind the second
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part of the Collet test was met. Insurance could meet this policy just as well, perhaps even
better, than a healthy balance sheet. Thus, it was beyond dispute that Contrux had
insurance and that it was considered financially responsible under the applicable federal
regulations. There was no evidence that Telecom or Contrux knew that the insurance
company was going to become insolvent, and no reason anyone would buy insurance
from a company that he thought would become insolvent.
The court found that the doctrine of limited liability was intended precisely to protect a
parent corporation whose subsidiary goes broke. That was the whole purpose of the
doctrine, and it ould largely be destroyed if a parent corporation could be held liable
simply on the basis of errors in business judgment. The court ruled that something more
had to be shown, and that the record was devoid of facts to show that “something more.”
Dissent: Senior Circuit Judge Heaney disagreed. He argued that Contrux was a “shell
corporation” established by Telecom to permit it to operate as a nonunion carrier. Judge
Heaney argued that by not piercing, the court left an “innocent victim” to bear the costs
of his injuries without the opportunity to prove that Contrux was intentionally
undercapitalized.
Question: What is a “wholly owned subsidiary”?
Answer: A company whose common stock is 100% owned by another company (the
“parent company”).
Question: Was Contrux undercapitalized?
Answer: Maybe. It in fact failed to maintain an adequate financial cushion. Most of the
money contributed to its operation by the parent (Telecom) was in the form of loans, not
equity.
Question: Is undercapitalization unlawful?
Answer: Maybe. But in PCV cases it is more important to decide if the
undercapitalization of a subsidiary means that the parent company is either deliberately or
recklessly creating a business that will not be able to pay its bills or satisfy judgments
against it.
Question: What was wrong with Construx’s insurance?
Answer: The insurance agency was another wholly owned subsidiary of Telecom.
Regardless, the excess carrier became insolvent two years after the accident and went into
receivership.
Question: The Radasjewski court used a three-part test for piercing the corporate veil,
sometimes called the "alter ego" test. How is the alter ego test different from the "prevent fraud
and achieve equity" test used in Walkkovsky?
11
Answer: The result is the same. The alter ego test simply breaks down the analysis, still
focusing on whether the defendant committed "fraud or wrong."
Points for Discussion p. 314
2. Formalities in the Tort Setting
Question: Why should the internal operations of a corporation (regular meetings, minutes,
resolutions etc.) be relevant to liability for torts? Why would formalities matter to tort victims
who never interacted with the corporation before the unfortunate event?
Answer: Some argue that if corporate formalities are flouted, corporate owners should
not be allowed to rely on limited liability. A kind of quid pro quo.
Question: What would the imposition of “enterprise liability” have accomplished in
Walkovszky?
Answer: Not much. The other corporations that formed the single economic unit were
also drained of income. The pool of assets available to creditors would not have been
any larger. That is why Walkovszky needed to allege “individual liability.”
Question: Can we reconcile these two cases?
Answer: The two cases are the same in that both involved:

involuntary tort claimants

operating companies that had carried the minimum insurance required by
law

a wholly owned subsidiary dominated by a parent

a conclusion (over a strong dissent) that piercing was not appropriate
However, the two cases differ in several key ways:

the Radaszewski parent is a corporation (other shareholders would be
liable)

Radaszewski is really asking for PCV to get at enterprise liability
Should we protect the corporate owner in the same way as the individual owner?
Question: What is the argument for enterprise liability?
Answer: Enterprise liability against corporations that are operated as a single economic
unit expands the assets available to corporate creditors, without imposing liability on
corporate shareholders. In some instances, this may be enough to satisfy liabilities to
creditors. Note, however, that in Walkovszky the assets of the other corporations were
heavily mortgaged or otherwise judgment-proof. Although Walkovszky sought liability
from two sources (the ten taxicab corporation and he corporate garage under common
12
ownership, and Carlton individually) the case was only appealed on the issue of Carlton’s
liability.
D.
Piercing in Contract Cases
Unlike tort creditors, contract creditors are voluntary, and have an opportunity to bargain in
advance with a corporation for a risk premium, shareholder guarantees or restrictions on
distributions. Nevertheless, courts pierce frequently in contract cases, often when there is a
misrepresentation on the part of the corporation.
Freeman v. Complex Computing Co. 119 F.3d 1044 (2d Cir. 1997)
Facts: While he was in graduate school, Jason Glazier developed computer software with
potential commercial value and negotiated with Columbia University to obtain a license
for the software. Columbia did not want to license the software to a corporation of which
Glazier was an officer, director or shareholder, but was willing to license the software to
a corporation that retained Glazier as an independent contractor.
Complex Computing Co., Inc. (C3) was incorporated with friends of Glazier in control of
the corporation. Several months later another corporation, Glazier, Inc., of which Glazier
was the sole shareholder, entered into an agreement with C3 (the consulting agreement).
Under the consulting agreement, C3 retained Glazier as an independent contractor to
develop and market Glazier’s software Glazier was the sole signatory on C3’s bank
account, and was given a written option to purchase all of C3’s stock for $2,000.
Nine months later in September of 1993, C3 entered into an agreement with Daniel
Freeman under which Freeman agreed to sell and license C3’s computer software
products for a 5-year term. In exchange, C3 agreed to pay Freeman commissions on the
revenue received by C3 over a ten-year period. The agreement between C3 and Freeman
also included provisions relating to Freeman’s compensation if C3 terminated the
agreement prior to its expiration.
In August 1994, C3 and Thomson Investment Software (Thomson) entered into a
licensing agreement that granted Thomson exclusive sales and marketing rights. Freeman
contends that the licensing agreement resulted from efforts made by him. Two months
later, C3 gave Freeman a notice of termination of its agreement with him. In January
1995, Thomson hired Glazier as Vice President/Director of Research and Development,
and Thomson and C3 entered into an asset purchase agreement. The Thomson agreement
included a list of C3 agreements assumed by Thomson, but expressly excluded C3’
agreement with Freeman.
Freeman filed suit against C3 for breaching the agreement, and sought recovery beyond
the limited liability of C3 due to Glazier’s domination over all aspects of the corporation.
The district court found that C3 and Glazier should be compelled to arbitrate their dispute
with Freeman under the C3-Freeman agreement. The district court ruled that Glazier was
subject to the arbitration clause of the agreement because he “did not merely dominate
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and control C3- to all intents and purposes , he was C3” and because he held the “sole
economic interest of any significance” of C3.
(1) Is Glazier considered an “equitable owner” of C3, since he is not a
shareholder, officer, director, or employee of C3?
Issues:
( 2) Can the corporate veil be pierced absent a factual finding that Glazier
used his control over C3 to wrong Freeman?
Holding
(1) Yes. Glazier was in control of C3
(2) No. Control alone does not justify piercing the corporate veil. All
three elements (below) must be satisfied before the corporate veil may be
pierced.
Reasoning:

Under NY law for veil-piercing purposes, the doctrine of equitable ownership
applied. A non-shareholder may be the equitable owner of a corporation where
the non-shareholder “exercises considerable authority over the corporation to the
point of completely disregarding the corporate form and acting as though its
assets are his alone to manage and distribute.”

Under New York law, to pierce the corporate veil, a plaintiff must prove 3 things:
1) the owner has exercised such control that the corporation has become a
mere instrumentality of the owner, which is the real actor;
2) such control has been used to commit a fraud or other wrong; and
3) the fraud or wrong results in (was the proximate cause of) an unjust loss or
injury to the plaintiff
Issue (1): Since Glazier “exercised considerable authority over the corporation to the
point of completely disregarding the corporate form and acting as though its assets are his
alone to manage and distribute” he was appropriately viewed as C3’s equitable owner for
veil-piercing purposes. Glazier’s obligations encompassed C3’s entire business. After C3
entered into the agreement with Thomson and all taxes, expenses, and salaries were paid,
C3’s bank account carried only $10,000. Freeman contended that the small balance
remaining in the account rendered C3 unable to fulfill its alleged obligations to him.
Thus, even though the proper corporate form was followed, Glazier was an “equitable
owner” for veil-piercing purposes.
Issue (2): The element of control was not considered to be sufficient in and of itself to
justify piercing the corporate veil. All three elements had to be met in order to pierce the
corporate veil. Thus, while Circuit Judge Miner accepted the district court’s finding that
Glazier controlled C3, it remanded the issue of whether Glazier used this control to
commit a wrong that resulted in an injury to Freeman.
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Concurring (in part) & Dissenting (in part): Senior Circuit Judge Godbold concurred
in affirming the holding that Glazier totally controlled C3, but dissented on the need to
remand to the district court. In his opinion, the record clearly showed that Glazier
committed a fraud or other wrong that resulted in an unjust loss or injury to Freeman and
therefore C3’s corporate veil should have been pierced.
Note from Points for Discussion p. 323: On remand the district court found that Glazier’s
actions constituted fraudulent or other wrongful behavior because they left Freeman a creditor of
an “essentially defunct corporation with virtually no assets”) and ordered Glazier to arbitrate
Freeman’s claim.
Thebarge v. Darbro, Inc.684 A.2d 1298 (Me 1996)
Facts: Thomas and Robert Thebarge sold real estate properties to the Worden Group for
$900,000 in cash and a $180,000 promissory note payable to the Thebarges that was
secured by a second mortgage (the Thebarge mortgage). In the subsequent months, the
Worden Group agreed to sell the properties to Darbro Inc., which was owned by the
Albert and Mitchell Small for $970,000.
Before closing, the Thebarges and the Worden Group were informed that Horton Street
Associates, Inc., a newly formed corporation owned by the Smalls, would instead be the
purchaser. To finance the purchase, Horton Street borrowed $840,000 from a bank
(secured by mortgages on the premises), assumed the existing $180,000 note owed by the
Worden Group to the Thebarges, and also executed a $20,000 note payable to the
Worden Group. The lenders to Horton Street received various guarantees and other
financial protections, but there was no guarantee in regards to the existing $180,000 note.
Shortly after the purchase, the real estate market weakened and Horton Street began to
lose money. The Smalls (personally) and Darbro Inc., loaned approximately $225,000 to
Horton Street. Nevertheless, the financial condition of Horton Street continued to
deteriorate. When negotiations to find a solution were unsuccessful, the Thebarges and
the Worden Group brought an action to recover the outstanding balance on the $180,000
note.
A default judgment against Horton Street was issued. A second action was then initiated
against Darbro and the Smalls personally for the remaining balance on the unpaid note.
The Thebarges and the Worden Group alleged that Horton Street was the alter ego of
Darbro and the Smalls, and that the sale to Horton Street was based on representations
that the Smalls would “stand behind” the note.
The trial court concluded that Darbro and the Smalls were liable to the Worden Group
and the Thebarges for the outstanding balance on the note. This appeal followed.
Issue: Did the Smalls’ conduct justify the piercing corporate veil of Horton Street and
holding them personally liable?
15
Holding: No it did not. The trial court erred. The evidence provided was insufficient to
justify piercing the corporate veil of Horton Street.
Reasoning: Justice Glassman found that a corporation’s legal entity is disregarded with
caution and only when necessary in the interest of justice. Generally, a more stringent
standard is applied in the context of contractual disputes because the party seeking relief
is presumed to have voluntarily and knowingly entered into an agreement with a
corporate entity.
In this case, the Smalls did not act illegally but rather used “sharp business tactics” and
conducted themselves “shrewdly”. The trial court determined that that the Smalls did not
personally guarantee the transaction and that the Thebarges were sophisticated real estate
professionals. The Thebarges failed to obtain any such guarantee from any of the
defendants and instead chose to proceed with the transaction. Justice Glassman declined
to reconstruct the agreement between the parties (thereby giving the plaintiffs a windfall),
ruling that plain meaning of the contract was clear.
Points for Discussion p. 323
Question: Compare the two cases, why did they come out differently?
Answer:
Complex Computing Co. (C3)
Glazier, with the help of some buddies, incorporated C3 to acquire a computer license
from Columbia Univ.
•
Glazier, though designated a "scientific adviser" of C3, held an option to buy all
the C3 stock and actually runs C3
•
C3 signed up Freeman as sales representative under an agreement that promised
commissions and a hefty severance package
•
To sell out to Thomson, Glazier had C3 can Freeman / Glazierwais then paid
handsomely in the sale and Freeman got nothing
•
Freeman held unfulfilled contractual promises and sued –
• C3, which was a shell
• Glazier on a PCV theory
Horton Street Associates (HS)
Albert Small incorporated Horton Street to buy rental properties from the Worden Group
in a heavily leveraged acquisition
•
Albert assumed full control of HS, though he did not maintain separate books or
follow corporate formalities
•
HS assumed a promissory note that Worden Group had given Theberges / Albert
said he would "stand behind" HS
•
After economic reversals, HS liquidated 2 properties to discharge part of
Theberges' mortgage, but defaulted on note
•
The Theberges held an unpaid note and sue –
16
• HS, which was insolvent
• Albert on a PCV theory.
Is there really a distinction between Glazier’s “evidence of wrongdoing” and Albert
Small’s “oral promises . . . sharp business practices”?
Breakout Box p. 324: Consider again Professor Thompson’s piercing factors:
Factor
Public or CHC
Corp. or Indiv. SH
Tort or K
Sole Shareholder
Dominate/Control
Fail Formalities
Inadequate capital
Confusion/commingling
Misrepresentation
Personal Guarantees
Conventional Wisdom:
PCV when
CHC
Corp Sh
(BUT Thompson: Ind)
Tort
(BUT Thompson: K)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
C3
HS
CHC
Indiv.
CHC
Indiv.
K
K
Yes
Yes
Yes
No
Yes
No
No
Yes
Yes
Yes
Yes
Yes
No
Yes
Why do you think that, contrary to conventional wisdom, courts pierced more often in contract
cases (42% of the time) than in tort cases (31% of the time)?
Question: What do you think is the most important piercing factor for courts?
Answer: there is no single factor. Misrepresentation is probably the single most
important, as in “if you lie, we are going after you.” Abuse of the corporate form may be
next – treating the corporation as your own set of assets.
E.
Piercing in Corporate Groups
Question: What is a corporate group?
Answer: When one corporation owns stock in another. For example:

Parent: the corporation that owns the stock of another corporation

Subsidiary: the corporation which has another corporation as its owner
o
Partially-owned subsidiary: the parent owns less than 100% of the
subsidiary’s stock
o
Wholly-owned subsidiary: the parent owns 100% of the stock of the
subsidiary

Affiliates: when a parent company owns many subsidiaries, all of those
subsidiaries are affiliates of each other (sibling corporations)
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Question: Can outside creditors pierce through the subsidiary to get to the parent corporation’s
assets?
Answer: This is the question confronted by the next two cases.
Gardemal v. Westin Hotel Co. 186 F.3d 588 (5th Cir. 1999)
Facts: Lisa Gardemal sued Westin Hotel Co. (Westin) and Westin Mexico, under Texas
law, alleging that they were liable for the drowning death of her husband in Cabo San
Lucas, Mexico. In 1995, the Gardemals traveled to Cabo San Lucas, Mexico to attend a
medical seminar held at the Westin Regina Resort (Westin Regina). The Westin Regina
is owned by Desarollos Turisticos Integrales Cabo San Lucas (DTI) and managed by
Westin Mexico. Westin Mexico is a subsidiary of Westin, and is incorporated in Mexico.
The Gardemals decided to go snorkeling with a group of guests during their stay at the
hotel. The concierge at the Westin Regina directed the group to “Lovers Beach” which
was notorious for rough surf and strong undercurrents. The guests, however, were
unaware of the notorious reputation. Five men in the group were swept into the ocean
and thrown against the rocks while climbing the beach’s rocky shore. Two of the men,
including John Gardemal, drowned. Lisa Gardemal brought suit against Westin and
Westin Mexico for wrongful death and survival actions alleging that the concierge’s
negligence in failing to warn the group of the dangers of Lovers Beach resulted in her
husband’s death.
Issue:
(1) Could Westin be held liable on the theory that Westin Mexico
functioned as the alter ego of Westin?
(2) Could Westin be held liable on the theory that it operated the business
in Mexico as a single business enterprise?
Holding:
(1) No. Do not pierce.
(2) No. Do not pierce.
Reasoning:
(1) The alter ego doctrine allows the imposition of liability on a corporation for acts of
another corporation when the subject corporation is organized or operated as a mere tool
or business conduit. Alter ego is demonstrated by evidence showing a blending of
identities, or a blurring of lines between two companies. An important consideration is
whether a corporation is underfunded or undercapitalized.
Circuit Judge DeMoss found that the record revealed nothing more than a typical
corporate relationship between parent and subsidiary. Being closely held in regards to
stock ownership, shared officers, and financing arrangements was not enough to establish
an alter-ego relationship. There was insufficient evidence that Westin dominated Westin
Mexico to the extent that Westin Mexico had surrendered its corporate identity. In fact,
the record showed just the opposite. Furthermore, there was minimal evidence showing
that Westin Mexico was undercapitalized or unable to pay a judgment if needed. This
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fact weighed heavily against Gardemal, since the alter ego doctrine is an equitable
remedy.
(2) The single business enterprise doctrine provides that when corporations are not
operated as separate entities, but integrate their resources to achieve a common business
purpose, each corporation may be held liable for the debts incurred in pursuit of that
business purpose.
Circuit Judge DeMoss found that the facts indicated only a typical relationship between
parent and subsidiary, and not a single business enterprise. There was no evidence that
the operations of the two corporations were so integrated as to result in a blending of the
two companies.
OTR Associates v. IBC Services, Inc. 353 N.J. Super. 48, 801 A.2d 407 (App. Div. 2002)
Facts: OTR owned a shopping mall and leased space to IBC Services., Inc. (IBC), a
wholly-owned subsidiary of International Blimpee Corporation. (Blimpee). IBC Services
entered into a sublease with a Blimpee franchisee, Samyrna Inc., which was owned by
Sam Iskander and his wife. IBC existed solely to hold lease agreements for Blimpee’s
franchisees, shared an address with Blimpee, did not have any employees or office staff,
and let OTR Associates to believe that Blimpee was its tenant
There was a long history of unpaid rent and OTR commenced this action against Blimpie
for approximately $150,000 in unpaid rent. The trial court entered judgment in favor of
OTR and Blimpie appealed.
Issue: Was the trial court was justified in piercing the corporate veil thereby holding a
parent corporation (Blimpie) liable for the debt incurred by its wholly owned subsidiary
(IBC)?
Holding: Yes. Pierce.
Reasoning: In order to pierce the corporate veil it must be found that “the parent so
dominated the subsidiary that it had no separate existence but was merely a conduit for
the parent” and the “parent has abused the privilege of incorporation by using the
subsidiary to perpetrate a fraud or injustice, or otherwise to circumvent the law.”
IBC had no assets, had no business premises of its own, had none of its own employees
or staff and had no income other than the rent payments by the franchisee, which were
made directly to OTR. The court found that Blimpie had complete domination and
control of IBC.
However, control alone was not enough. The court had to decide whether Blimpie
abused the privilege of incorporation by using IBC to commit a fraud or injustice or other
improper purpose. The court answered this affirmatively: OTR testified that they
believed that they were dealing with Blimpie and while IBC never expressly stated that
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they were Blimpie they intentionally and calculatedly led OTR to believe it was Blimpie.
For instance, the men who inquired about leasing the space were both wearing Blimpie
uniforms and letters sent to OTR were on Blimpie stationary headed by the Blimpie logo.
In addition, the lease between OTR and IBC stated that IBC had an address at
International Blimpie Corporation (Blimpie).
The court rejected Blimpee’s argument that because it observed all of the corporate
properties it should be entitled to the benefit of separate corporate identities. “The
separate corporate shell created by Blimpie to avoid liability may have been
mechanistically impeccable, but in every functional and operational sense, the subsidiary
had no separate identity. It was moreover, not intended to shield the parent from
responsibility for its subsidiary’s obligations but rather to shield the parent from its own
obligations. And that is an evasion and an improper purpose, fraudulently conceived and
executed.”
Points for Discussion p. 330
2. Can you distinguish the cases?
Gardemal v. Westin Hotel Co(5th Cir 1999)
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.Westin-Mexico is the
Westin sub that managed the hotel. Is the parent liable for tort of its sub?
No piercing! (“typical parent-sub relationship”)
OTR Associates v IBC Services (NJ App 2002)
A shopping mall leased space to a Blimpie subsidiary, whose franchisee failed to pay rent
and was kicked out. The mall then sued the parent, Intl Blimpie Corp, to collect rent
arrearages owed by the sub. Is the parent liable for the contract of its sub?
Veil pierced! (“evasion, fraudulently carried out”)
3. Is the difference between contract and tort?
Probably not. The results might have been the same if Westin mexico had been sued in contract,
and Blimpee had been sued in tort.
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Summary
The main points of this chapter are

PCV factors include whether
o The corporation is closely-held (decisive)
o The shareholder is another corporation (not decisive)
o The claimant is a tort victim (should be important, but is not)
o The claimant is a contract creditor, who could protect by seeking personal
guarantees or insurance
o There was deception by corporate insiders (decisive)
o There was commingling of assets and business (highly relevant)
o There was failure to follow corporate formalities (a curious factor, but significant)
o There was undercapitalization or under-insurance (significant)

Whether there are alternative methods for creditors to protect their interests in the
corporation
21