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Yes, Virginia … You Can Pierce Your Own Corporation’s Veil

Question: Can a 50% shareholder pierce her own corporation’s veil to impose liability upon the only other shareholder for an unsatisfied judgment in her favor against their corporation?

Answer: Yes.

The Tennessee Court of Appeals, in Carlene Guye Judd and Carlton Guye, Case No. M2017-0179-COA-R3-CV, decided July 17, 2018, reviewed the internecine battles of the sibling litigants and determined that, given the wrongful conduct of the “dominant” 50% shareholder, equity allowed his sister to pierce the veil of their closely held corporation to impose a judgment against him for the unsatisfied amount of a judgment that his sister held against the corporation. The appellate court affirmed the trial court in this apparent case of first impression in Tennessee.

The trial court was persuaded by Mississippi and New Jersey case law to the effect that

[i]f a controlling stockholder uses a closed corporation as his personal business conduit, he may be held responsible for the debts of his “alter ego,” particularly when substantial stock ownership, combined with other factors, clearly supports a disregard of the corporate fiction on grounds of fundamental equity and fairness.

Walensky v. Jonathan Royce Int’l, Inc., 624 A.2d at 617. (N.J. Super. 1993).

However, the trial court was faced with a 50/50 shareholder split, with no “majority” or “controlling” shareholder. The trial court found that, where there is a “dominant shareholder verses a shareholder who suffered as a result of that dominant shareholder’s actions, the same reasoning and analysis applies . . . .”

The presumptive treatment of a corporation separate from its shareholders, directors and officers is maintained. But, in determining whether to pierce the corporate veil, the court may consider whether the entity had been used to work a fraud or injustice in violation of public policy. The court may also consider the following:

whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities.

No one factor is outcome determinative, nor must all be present. The equities must “substantially favor” equitable veil piercing and its separateness disregarded only with “great caution and not precipitately.”

The Court of Appeals reviewed the pertinent facts, as found by the trial court, and affirmed application of the equitable doctrine of veil piercing to redress the wrongs against the non-dominant, 50% shareholder.

William R. O'Bryan, Jr.

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