Related Articles: Business Law/Litigation
Piercing the Corporation: The Veil Becomes a Wall
As a result of a recent decision by the 4th U.S Circuit Court
of Appeals, the "veil" of immunity protecting the officers of
a corporation from individual liability has become a "wall."
Proving Fraudulent Intent
In Perpetual Real Estate v. Michaelson Properties, the
Court held that, in order to hold the officers or directors
of a corporation personally liable for acts of that corporation,
a plaintiff will have to prove actual legal wrong on the part
of the officers or directors. This standard provides tremendous
protection to officers and directors of corporations by dramatically
increasing the burden of proof placed on the plaintiff.
By requiring evidence of actual legal wrong, the Court has placed
an imposing barrier in front of every unpaid creditor. "Fraudulent
intent" has always been something extraordinarily difficult
to prove, since it requires a psychological probe into the mind
of the defendant. In corporate fraud cases the actual wrong
standard is particularly burdensome, since the only evidence
of any such intent is likely to be in the form of letters and
similar correspondence, all of which will be tucked away in
the files of the defendant corporation-if the evidence exists
at all.
Traditional Standards
Despite the seemingly far-reaching implications of the Court's
ruling, the traditional evidence required to "pierce a corporation"
will still figure prominently in any suit seeking to hold corporate
officers or directors personally liable for corporate acts.
In addition to evidence of actual intent, the plaintiff will
generally need to prove that the corporation was really just
an alter ego of the directors, and had no independent financial
existence apart from the directors. In this vein, successful
cases prove that:
- The
directors and officers have co-mingled corporate funds/assets
with their own personal assets, or diverted the corporation's
assets for purely personal use or
- The corporation was so undercapitalized that it was clearly
incapable of operating as a successful business and was, thus,
merely a "nominal" corporation, consisting only of business
cards and stationery.
Perhaps the most successful means of piercing a corporation
is based upon the corporation's failure to maintain the "formalities"
required by law. Most importantly, that it failed to file various
documents with the State Corporation Commission. At the very
least, its Articles of Incorporation must have been accepted
by the State and a charter number issued.
Now more than ever, creditors should investigate corporations
to whom they extend credit and insist on personal guarantees
or collateral security. Corporate borrowers should maintain
their corporate formalities, not commingle funds, and avoid
even the appearance of fraud.
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