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Corporate Veil not Good Protection for Fraud

Posted by Attorney Stephen Hance | Oct 19, 2015 | 0 Comments

Lawyers are all typically familiar with the concept of the “corporate veil.” The corporate veil refers to the separation between a person who owns stock in a corporation and the corporation itself. With a corporate entity, ordinarily the person who owns stock in the company is not personally liable for the debts of the company. Like anything though, there are exceptions, and from time to time, creditors and other people try to get at shareholders directly. Such actions seek to “pierce the corporate veil.”

In Minnesota, like most states, a court may pierce the corporate veil as a remedy when there is fraud or when the shareholder is the “alter ego” of the corporation. Without going into all of the elements of a fraud claim or regarding the “alter ego” theory, courts apply the remedy to avoid injustice.

It is very uncommon for courts to approve piercing the corporate veil absent exceptional circumstances but the factors are nevertheless seemingly fairly subjective. The Supreme Court in Minnesota outlined the factors to consider for the alter ego theory as follows:

insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records and existence of corporation as merely a façade for individual dealings

A number of these factors must exist to prove the alter ego theory.

 There are some obvious no-nos that come to mind for corporate offices such as co-mingling personal and corporate funds; or taking distributions when the corporation otherwise has insolvency issues; or defrauding customers out of their money. Otherwise, the considerations can be subjective and more nuanced.

It is always a good idea to talk to a lawyer if you operate a small business and you want to minimize the potential risk from creditors or outside claimants. Similarly, only an experienced lawyer can help you properly evaluate whether veil piercing might be an option for you in the collection of debts or claims.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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