Piercing the Corporate Veil

posted by Michael Fortney  |  Dec 21, 2011 4:02 PM in Business Litigation

Piercing the Corporate Veil

The principle that shareholders, officers, and directors of a corporation are generally not liable for the debts of the corporation is ingrained in Ohio law.  Dombroski v. Wellpoint, Inc. The corporate form is useful primarily because it creates a division between shareholders and their business concerns: "[The corporate form] has been introduced for the convenience of the company in making contracts, in acquiring property for corporate purposes, in suing and being sued, and to preserve the limited liability of the stockholders, by distinguishing between the corporate debts and property of the company, and of the stockholders in their capacity as individuals."  Id.

However, this general rule is not absolute.  In some cases, the corporate veil that protects the individual shareholders can be pierced, and individual liability can be imposed for corporate misdeeds and debts.  The elements that must be shown in order to pierce the corporate veil are (1) that the person against whom individual liability is sought to be imposed must have controlled the corporation so completely that the corporation had no separate mind, will, or existence of its own; (2) control over the corporation was exercised in such a manner as to commit fraud or an illegal act against the person seeking to impose individual liability; and (3) injury or unjust loss to the person seeking to impose individual liability resulted. Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., Inc.   Piercing the corporate veil in this manner remains a "rare exception," to be applied only "in the case of fraud or certain other exceptional circumstances."  Dombroski, supra.

The fact that a corporation has only one shareholder arguably satisfies the first criteria that a corporation has no separate mind, will, or existence of its own.  This one factor alone is not sufficient to establish personal liability and the courts examine a number of other elements in assessing whether the first prong has been satisfied.  Lind Stoneworks, Ltd. v. Top Surface, Inc.  Ohio courts consider several factors, such as: (a) grossly inadequate capitalization; (b) failure to observe corporate formalities; (c) insolvency of the debtor corporation at the time the debt was incurred; (d) diversion of funds or other property for personal use; and (e) the absence of corporate records. 

In order to meet the second prong of the Belvedere test, the plaintiff must demonstrate that the defendant shareholder “exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.”  Dombroski, supra.  A corporation's breach of contract, standing alone, is insufficient.  The Ohio Supreme Court has emphasized that only "extreme shareholder misconduct" evidencing specific egregious acts satisfies prong two of the Belvedere test.  Id.

The last prong of the Belvedere test requires the plaintiff to have suffered a direct injury or unjust lost as a result of the unlawful conduct.  This last requirement serves to limit the scope of potential claimants seeking to recover for perceived corporate misdeeds.




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