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Corporate Veil Litigation
Mark Cohen began his civilian legal career in Nebraska where he represented creditors who had financed the purchase of farm equipment. Surprised by the number of times his clients encountered insolvent corporations and LLC’s, he developed an interest in the doctrine of piercing the corporate veil - an equitable remedy that allows creditors to hold entity owners responsible for the entity's debts. Years later, after returning to Colorado, he wrote a 114-page article on the topic that was published in the prestigious American Jurisprudence Proof of Facts series. See, Grounds for Disregarding the Corporate Entity and Piercing the Corporate Veil, 45 Am. Jur. POF3d 1. He followed this up with another article as the co-author (with Sierra Swearingen) of Cause of Action to Establish Liability of Corporate Director or Officer for Corporation’s Wrongful Conduct, 36 COA2d 441 (2008). Mr. Cohen has expertise in representing both plaintiffs and defendants in corporate veil litigation. He also prepared A Brief History of Piercing the Corporate Veil for presentation to the Boulder County Bar Association. He has taught continuing legal education seminars on this topic for numerous CLE providers. He has successfully defended corporate directors, officers and shareholders when a creditor attempted to hold them personally liable for corporate debts.
A fundamental principle of American law is that a corporation is an entity distinct from its shareholders. Consequently, a shareholder's liability for the corporation's obligations is normally limited to the amount invested by the shareholder.
Although the limited liability offered by incorporation has promoted economic growth, there are times when adherence to the doctrine would cause an unjust result. In such cases, courts may invoke the equitable remedy of piercing the corporate veil to disregard the separateness of the corporation and hold the shareholders (or officers or directors) responsible for the acts or obligations of the corporation.
The apparent simplicity of this principle belies the problem of determining when to pierce the corporate veil in actual practice. Regrettably, this area of law has been particularly susceptible to unhelpful rhetorical devices. In piercing the corporate veil courts frequently employ terms such as "alter ego," "instrumentality," and "sham," but these are of little help; such labels serve as shorthand for a conclusion, but provide no guidance as to what factors were considered in reaching that conclusion. The entire area of law is, as Justice Cardozo once observed, "enveloped in mists of metaphors."
Corporate veil disputes arise most often when a creditor is unable to collect a debt owed by a corporation and then attempts to hold the corporation’s shareholders or officers personally liable for the debt, but corporate veil issues can arise in many other contexts as well. A lawyer attempting to collect a debt owed by a corporation or similar entity must be thoroughly familiar with the law that governs piercing the corporate veil.
Court decisions in corporate veil cases tend be fact specific, but there are things corporate leaders can do to minimize the risk that a court might pierce the corporate veil. As part of our preventive approach we question our corporate clients about these matters and help develop policies that will minimize the risk of a successful veil piercing action. When corporate veil litigation is unavoidable, our expertise in this area serves us well whether we represent a corporation or a litigant seeking to pierce the corporate veil.
There is always a risk inherent in doing business with a corporation. Use of abbreviations such as "Inc." and "Corp." constitute a warning to potential creditors that the shareholders do not accept unlimited personal liability. The risk may be small if the corporation is financially sound, but not all corporations prosper. This is one reason why creditors often require that one or more shareholders personally guaranty corporate debts.
For an attorney considering a request to pierce the veil of a corporation it is important to understand that when a litigant has a cause of action or judgment against a corporation, piercing the corporate veil may not be the only remedy available. Concepts such as defective incorporation, agency, civil conspiracy, estoppel, fraud, fraudulent transfer, the denuding theory, the trust fund doctrine, unjust enrichment, and breach of fiduciary duty may provide alternative grounds for imposing liability on the shareholders, officers, or directors of the corporation.