You did everything right. You negotiated a good deal. You reduced it to a written agreement so both sides knew their obligations. You held up your end of the bargain and delivered the goods and services you promised on time. But now you’re not getting paid. You call them but get no answer. Your emails bounce back. You drive by their office and you find they’ve gone out of business. Finally, you catch up with one of the principals who cavalierly tells you: “Your contract was with the corporation, not with me.” You drive home wondering how you’re going to pay for your labor and material costs. Don’t give up hope yet.
People create corporations for a variety of reasons. One of those reasons is to permit the owners to limit their liability to the amount of their investment. A corporation is a separate “person” in the eyes of the law. Typically, a shareholder of a corporation or member of a limited liability company is not held liable for the debts of the company. Typically . . . but not always.
A court may permit a creditor to enforce a debt against the shareholders of a corporation in certain circumstances. Courts call this “piercing the veil” of the corporation. This is an equitable remedy that invokes the Court’s powers to do justice to the parties. While each state has its own tests, the principles applied are similar. The Court will look at the facts to determine whether the owners so dominate the corporation as to deem it their “alter ego.” In such instances, courts rule that the domination by the shareholders has destroyed the separate character of the corporation, i.e., that the company was a “mere instrumentality” of the shareholders. In addition, the Court will require evidence that allowing the corporate liability shield to stand would be to promote fraud or injustice.
In considering whether to bring a claim against the owners, you should weigh the evidence you think you can be put before the Court. Successful veil-piercers can point to various actions that show the line between the owners and the corporation has blurred or disappeared, including:
As the debtor company circles the drain, the pressure on the owners may induce them to engage in some of these activities. The mere fact that the company has collapsed and cannot pay your bill does not mean the Court will pierce the veil. If you can demonstrate that justice requires the debt be passed to the shareholders, however, you can pursue your claim against them. The owners, of course, would be allowed to assert any defenses that the company would have been entitled to raise.
If you would like more information about these issues, please contact Scott Thomas. Scott has helped firm clients pursue veil-piercing claims to recover what they are owed. He welcomes the opportunity to help you collect what you are entitled to. Scott’s direct line is 859.578.3862. You can email him at [email protected]. If there is a particular topic you would like to see addressed in a blog, please send Scott an email with your ideas.