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A fundamental tenet of corporate law is that corporations exist to limit liability of their shareholders, thereby encouraging investment and free enterprise.  Sometimes, however, the corporate form is used as an instrument of fraud or other improper purpose.  In such situations, parties sometimes seek to “pierce the corporate veil,” going behind the curtain of the corporate form and holding third-parties, such as shareholders, directors, and officers, liable for actions done in the name of the corporation.  Peter Mavrick is a Miami business litigation attorney, and represents clients in business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Florida’s Fourth District Court of Appeal in Seminole Boatyard, Inc. v. Christoph, 715 So.2d 987 (Fla. 4th DCA 1998), held that, to pierce the corporate veil, a plaintiff must prove the following three elements by a preponderance of the evidence:

(1) the shareholder dominated  and controlled the corporation to such an extent that the corporation’s independent existence was in fact non-existent, and the shareholders were in fact alter egos of the corporation;

(2) the corporate form must have been used fraudulently or for an improper purpose; and

(3) the fraudulent or improper use of the corporate form caused injury to the claimant.

Under Florida law, mere ownership of a corporation by a handful of shareholders is an insufficient reason to pierce the corporate veil and hold shareholders individually liable for a corporate employee’s errors.  For example, in Advertects, Inc. v. Sawyer Indus., 84 So.2d 21 (Fla. 1955), the Supreme Court of Florida held that “[t]he mere fact that one or two individuals own and control the stock structure of a corporation does not lead inevitably to the conclusion that the corporate entity is a fraud or that it is necessarily the alter ego of its stockholders to the extent that the debts of the corporation should be imposed upon them personally.”  Even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation’s separate identity was lawfully maintained.

In many cases, the most critical factor to pierce the corporate veil is whether the corporation was used for an improper purpose.  “A critical issue in the determination of whether the corporate veil will be pierced for the imposition of personal liability is whether the corporate entity is organized or operated for an improper or fraudulent purpose.”  Kanov v. Bitz, 660 So.2d 1165 (Fla. 3d DCA 1995).  The plaintiff must show that the corporation was formed, or at least employed, for an unlawful purpose.  This would include situations where the corporation is used as a smokescreen to mislead or defraud creditors, to hide assets, to evade the requirements of a statute, or some related betrayal of trust.  Important precedent from the Supreme Court of Florida in Aztec Motel, Inc. v. State ex rel. Faircloth, 251 So2d 849 (Fla. 1971), held that “courts will look through the screen of corporate entity to individuals who compose it in cases in which the corporation is a mere device or sham to accomplish some ulterior purpose, or is a mere instrumentality or agent of another corporation or individual owning all or most of its stock, or where the purpose is to evade some statute or to accomplish some fraud or illegal purpose.”  In this regard, Ocala Breeders’ Sales Company v. Hialeah, Inc., 735 So.2d 542 (Fla. 3d DCA 1999), affirmed the decision of the trial Judge piercing the corporate veil, stating in pertinent part: “The Defendant, Southeast Capital Investment Corporation, is a wholly-owned subsidiary of Southeast Capital Corporation, both of which are … controlled by Ian Irwin as President.  The Court finds that the subsidiary is an alter-ego of its parent corporation and that the requisite unjust purpose or conduct under Dania Jai-Alai, Inc. v. Sykes, 450 So.2d 1114, 1121 (Fla. 1984), has been shown.  The subsidiary entered into a real estate contract requiring the payment of $2,100,000.00 in cash at closing without the present ability to perform.  This was done for the benefit of its parent corporation at the expense and detriment of the Plaintiff.”  Similarly, Munder v. Circle One Condo, Inc., 596 So.2d 144 (Fla. 4th DCA 1992), explained that directors, officers, and stockholders may lose their insulation from liability for corporate acts if they engage in fraud, self-dealing, unjust enrichment, or betrayal of trust.

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

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