One of the key issues with a private business is that the company and the individual often appear to be the same thing. However, in the eyes of the law a corporation is a very different entity from the person who owns it.
That separation is known in the legal world as the "Corporate Veil" and while it often offers protection for both sides, especially when it comes to issues of assets and liability, sometimes it's used as an unfair shield, forcing plaintiffs to find a way through, or, as we like to say, Pierce the Corporate Veil.
When the corporate veil is pierced, the court looks through the corporation to find either a related corporation or an individual liable for the wrongdoing of the corporation. It happens that a few unreturned bread racks are a the heart of this issue. Back in the 60s, Cumberland Farms worked out a deal with My Bread Baking Company to sell bread in Cumberland Farms' stores. When the contract was up, Cumberland Farms didn't return some racks, resulting a 1968 decision called My Bread Baking Co. v. Cumberland Farms, Inc., which states that it is appropriate to pierce the corporate veil:
(a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the inter-corporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting. In such circumstances, in imposing liability upon one or more of a group of ‘closely identified’ corporations, a court ‘need not consider with nicety which of them’ ought to be held liable for the act of one corporation ‘for which the plaintiff deserves payment.’
The next question is why would a plaintiff try to pierce the corporate veil of a company? The answer nearly always has to do with the defendant company's inability to pay a judgment. If the plaintiff actually wants the money owed, they'll have to look for the resources. If your company is getting sued, clearly you do not want to be found liable for the company's acts or omissions.
So, how do you avoid your company's veil from being pierced? What steps can you take to minimize your individual liability?
To answer that we look to the 1991 case of Evans v. Multicon Construction Corp., which sets out 12 factors the court should consider when the trying to pierce the corporate veil.
- common ownership
- pervasive control
- confused intermingling of business activity assets or management
- thin capitalization
- disregard of corporate formalities
- lack of corporate records
- no dividend payments
- insolvency at the time of the transaction at issue
- draining of corporate assets
- shareholders using the corporation for transactions
- non-functional officers and directors
- using the corporation to promote fraud
That is a long list -- what does it mean really though? What are the practical steps that you need to take?
We'll touch on that in our next post
