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Personal injury and piercing the corporate veil
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Personal injury and piercing the corporate veil

One issue that can arise in personal injury claims against corporations is against whom the suit should be filed. In general, the defendant will be the corporation. This is both a legal requirement, as the corporation is considered a separate entity, and a practical one: A corporation will often have more in the way of assets and insurance than its owners. But such is not always the case, and sometimes it is possible and desirable to sue a corporation’s owners as well as or instead of the corporation itself. This process is called piercing the corporate veil.

In most cases someone harmed by a corporation or a corporate employee must sue the corporation, and cannot sue its owners (whether those owners are individual(s) or another corporation). If this liability shield were allowed in every case, however, this could invite fraud: there would be nothing to prevent someone from forming a corporation with virtually no assets, taking any profits out as they came in, and leaving no way for even successful plaintiffs to recover anything. The legal system recognizes this potential problem, and so does allow plaintiffs to go after the corporation’s owners if doing so would prevent fraud.

This is not something the courts take lightly, however, and so the plaintiff seeking to pierce the corporate veil must prove that the corporation is basically a sham, and that there is little to distinguish it from its owners. Factors the courts look at include:

  • Inadequate capitalization (meaning too little money in the corporation’s possession);
  • Noncompliance with corporate formalities (such as not holding shareholders’ or directors’ meetings);
  • Lack of separate corporate identity (so using the owner’s name and the corporation’s interchangeably);
  • Excessive fragmentation;
  • Nonfunctioning officers and directors;
  • Withdrawal of funds by the dominant shareholder; and
  • The absence of corporate records.

Once the court makes a decision that the corporate veil should be pierced, another inquiry arises when it comes to deciding whether an officer or director of the corporation should be held liable personally for his or her actions as an officer of the company. There are three things the plaintiff must prove in order to achieve this liability:

1. Complete control of business practices;

2. Those controls were used to commit fraud or wrong; and

3. The wrong must be the actual cause of the plaintiff’s injury.

It must be emphasized how hesitant courts are to pierce corporate liability. One federal appellate judge described it as “like lightning,” in that it is “rare [and] severe.” Nevertheless, courts are even less willing to allow an individual or corporation to commit fraud by having a sham corporation, with no assets or separate identity to speak of, take the fall for its owners’ misdeeds. But each case will be evaluated based on its own facts, and so having experienced representation on your side is paramount, both to explain your options and to help you attain the best outcome possible.

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