FACT PATTERN 4: Shareholders Piercing the Corporate Veil

Question 1

Can SHs be held liable for the acts or debts of the corporation?

Answer 1

Generally no

Question 2

Why are SH generally not liable for acts or debts of the corporation?

Answer 2

Shareholders have limited liability.

Question 3

Under what circumstance can SHs be personally liable for what the corporation did?

Answer 3

if the court “pierces the corporate veil” (PCV)

Question 4

In what kind of corporations will piercing the corporate veil happen?

Answer 4

Closely held corporations only

Question 5

What is the PVC standard?

Answer 5

courts may PCV to avoid fraud or unfairness.

Question 6

To PCV and hold shareholders personally liable what elements must be satisfied?

Answer 6

1. They must have abused the privilege of incorporating and

2. Fairness must require holding them liable.

Question 7

X and Y are the shareholders of C Corp. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. C Corp fails to pay its bills. Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y?
Do the full analysis.

Answer 7

start with the general rule (shareholders are not liable for corporate obligations).
Then PCV standard. (1. They must have abused the privilege of incorporating and 2. Fairness must require holding them liable.)
Here a court MIGHT PCV if X’s failure to respect the separate corporate entity harmed creditors. Make the argument (never sure how a court will rule, though).
(1) Did a shareholder abuse the corporation?
Yes, X treated the corporations assets like they were his own.
(2) Would it be unfair for X to have limited liability?
Probably because the creditors are not getting paid.

Then add: If PCV, only X would be liable. Y has done nothing wrong.

Question 8

S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco’s trucks melts down. Can V sue S?

Answer 8

General rule (shareholders are not liable for corporate obligations); then PCV standard.

Here a court MIGHT PCV because the corporation was undercapitalized
when formed. Why?

Shareholders failed to invest enough to cover the company’s reasonably foreseeable liabilities.

Question 9

What should you always include in a tort case against a corporation?

Answer 9

Courts may be more willing to PCV for a tort victim than for a contract claimant.