The law in Tennessee on “piercing the corporate veil” has not substantially changed since our last blog on the subject.
The Tennessee Court of Appeals has recently, and cogently, restated and reconfirmed the state law requirements for “piercing the corporate veil,” and, importantly in this age of use of limited liability companies to conduct business but avoid personal liability for the owners, “piercing the LLC veil.” In Underwood v. Miller d/b/a Nashville Design Center, LLC, No. M2019-00269-COA-R3-CV, 2020 WL 730881, decided February 13, 2020, the Court reaffirmed the requirements for imposing liability on the corporation’s shareholders or on LLC’s members.
The Court applied the so-called Allen factors:
- Whether the was a failure to collect paid-in capital;
- Was the corporation grossly undercapitalized;
- Was there a non-issuance of stock certificates;
- Was the stock owned by only one (1) person;
- Did the owners use the same office or location;
- Did the owners employ the same employees;
- Was the corporation used as an instrumentality or business conduit for an individual or another corporation;
- Was there a diversion of business assets to a stockholder or other entity to the detriment of creditors;
- Was the corporation used as a subterfuge in illegal transactions;
- Was the corporation formed to transfer other persons or entities’ liability to it; and
- Was there a failure to maintain arms-length relationships among the related entities?
Id. (citing Federal Deposit Insurance Corporation v. Allen, 584 F.Supp. 386, 397 (E.D. Tenn. 1984)); see also Rogers v. Louisville Land Co., 367 S.W.3d 196 (Tenn. 2012).
No single factor is dispositive, but the equities must “substantially favor” the party seeking the “veil piercing” relief – the veil should be disregarded “with great caution and no precipitately.” Rogers, 367 S.W.3d at 215.
Notwithstanding Allen factors Nos. 7-11, the Court specifically noted that even if the Allen factors were sufficient to find for a veil piercing, Tennessee law also and still requires a “showing of fraud or injustice.”
On the undisputed facts in the record, the Court affirmed the trial court’s grant of summary judgment to the parties opposing the veil piercing relief. Even though the corporate owner had paid herself $200,000 in proceeds from the corporation’s liquidation of assets, the owner’s status as a legitimate creditor of the liquidated corporation justified the retention of the funds; this factor, standing alone, did not justify piercing the corporate veil.
