In business litigation cases, it is important to evaluate the possibility of “piercing the corporate veil,” whether from the perspective of plaintiff/creditor or defendant/debtor. While a corporate debtor might be uncollectable due to its lack of financial resources, the story does not always end with the corporation’s own balance sheet. When a plaintiff/creditor can prove the requirements to pierce the corporate veil, a prudent corporate defendant/debtor and its principals might be more amenable to making substantial efforts to resolve the case rather than taking their chances on an adverse judgment.
As a general principle, corporations are legal entities that function with limited liability. Corporations are regarded as such because the corporate obligations remain those of the corporate entity, meaning that the corporation’s owners, officers, and shareholders are not held personally liable for corporate debt. However, in certain situations courts allow a creditor to “pierce the corporate veil” and hold corporate owners personally liable for corporate debts.
In Florida, “piercing the corporate veil” is governed by Florida Supreme Court case Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984), which holds “the corporate veil may not be pierced absent a showing of improper conduct.” This is not the most detailed description, especially in the legal realm where attorneys are accustomed to applying a particular set of facts to specific multi-factor tests. In a more recent case, Florida’s Third District Court of Appeal formulated a three factor test in Gasparini v. Pordomingo, 972 So.2d 1053 (Fla. 3d DCA 2008). Under the Gasparini case, to pierce the corporate veil and hold a shareholder liable for a corporate liability, a creditor must prove the following:
(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.
The corporate form can also be pierced under certain circumstances when a creditor seeks to hold a parent corporation liable for the obligation of a subsidiary. For example, Ocala Breeders’ Sales Co. v. Hialeah, Inc., 735 So. 2d 542 (Fla. 3d DCA 1999), identified the following factors to help determine when the subsidiary is merely an instrumentality of the parent corporation, including whether: (1) the same person controlled both the parent and subsidiary; (2) they operated out of the same facilities as the parent; (3) the subsidiary’s contracts were performed by employees of the parent; (4) the subsidiary was never capitalized; and (5) the subsidiary shared bank accounts and financial obligations with the parent. All of these factors were established, and the court found that the subsidiary was merely an instrumentality of the parent corporation. Ocala Breeders’ also clarified what is meant by the term “improper conduct”: “[T]o pierce the corporate veil under Florida law, it must be shown not only that the wholly-owned subsidiary is a mere instrumentality of the parent corporation but also that the subsidiary was organized or used by the parent to mislead creditors or to perpetrate a fraud upon them.” The court held that a parent corporation defrauded the plaintiff when its subsidiary entered into a contract requiring it to make certain capital improvements. The subsidiary did not have the ability to fulfill the contract since it was never capitalized. In that scenario, the court found it appropriate to bypass the personal liability protection afforded to the corporate officers based on an organized effort to perpetrate a fraud on corporate creditors.
Whether representing the plaintiff/creditor or the defendant/debtor, in business litigation it is often prudent to evaluate the possibility of piercing the corporate veil.
Peter T. Mavrick represents business owners in business litigation. Mr. Mavrick has successfully represented many businesses in negotiations, in response to threatened legal action, and in court. This article is intended for information purposes only and is not legal advice. This article is not a substitute for legal advice tailored to a particular client’s situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: firstname.lastname@example.org.