McBride Law Blog

LLC Law Update: Piercing the Corporate Veil (Post 2)

McBride Law Blog

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New York.

According to a 2010 study of a dataset of 2908 cases from 1658 to 2006, New York courts allow veil piercing in about 49.81% of cases and is among the most prominent producers of veil piercing cases.[1]

In Agai v. Diontech Consulting, Inc.,[2] a recent case, a creditor sought to pierce the veil of a corporation, arguing that the principals operated the consulting business without corporate formalities for their own unjust enrichment and to avoid the judgments obtained by the creditor.  The court explained that, as a general rule, a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.[3]  The concept of piercing the corporate veil is an exception to this general rule, allowing the imposition of personal liability on owners for the obligations of their corporation in certain circumstances.[4]  The court listed factors to be considered in determining whether to pierce the corporate veil, including failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use.[5]  Additionally, “the corporate veil will be pierced even absent fraud, when a corporation has been so dominated by an individual and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego.”[6]

That said, the court found that the principals of the corporation failed to observe any corporate formalities, keeping no books and records, and produced no evidence of the corporation’s separate existence, such as board meeting minutes, pay stubs, or bank statements.[7]  Moreover, the principals used corporate accounts for personal expenses without paying back and continued receiving salaries from the insolvent corporation, even though other laborers and contractors remained unpaid.[8]  Accordingly, the court concluded that the corporation was a sham entity that diverted funds for the principals’ own personal gains, which warranted piercing the corporate veil.[9]

Agai is a classic veil piercing case that held the owners of the corporation liable for the corporation’s debt.  The success of the plaintiff in this case, however, should not be interpreted as New York courts’ willingness to pierce the veil across the board, as recent cases seem to suggest that it is getting tougher to do so.[10]

Our next post will look at veil piercing under Wyoming law.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258, shawn.mcbride@mcbrideattorneys.com, or www.mcbrideattorneys.com.

[1] Peter Oh, Veil Piercing, Tex. Law Rev. (Vo. 89:81, 2010), at 115, 119.

[2] 2013 NY Slip Op. 51345(U) (Sup. Ct. Richmond Cty. Aug. 19, 2013).

[3] Id. at 1 (internal quotations omitted).

[4] Id. (internal quotations omitted).

[5] Id. at 2 (internal quotations omitted).

[6] Id.

[7] Id.

[8] Id. at 3.

[9] Id.

[10] See Law360, Top NY Court Affirms High Bar for Piercing Corporate Veil, http://www.law360.com/articles/397410/top-ny-court-affirms-high-bar-for-piercing-corporate-veil (last visited Mar. 27, 2015).

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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