Veil-Piercing Unbound

Veil-piercing is an equitable remedy. This simple insight has been lost over time. What started as a means for corporate creditors to reach into the personal assets of a shareholder has devolved into a doctrinal black hole. Courts apply an expansive list of amorphous factors, attenuated from the underlying harm, that engenders under-inclusive, unprincipled, and unpredictable results for entrepreneurs, litigants, and scholars alike.Veil-piercing is misapplied because it is misconceived. The orthodox approach is to view veil-piercing as an exception to limited liability that is justified potentially only when the latter is not, a path that invariably leads to examining scenarios based on different types of creditors/claims, corporations, and shareholders. But the occasion to seek derivative relief from a shareholder arises only when a claim cannot be enforced against a defendant corporation. Veil-piercing is thus a secondary remedy, detached from limited liability and its rationales.To fix veil-piercing, corporate law must look beyond itself. For centuries the law of restitution has featured the constructive trust, an equitable remedy that disgorges misappropriated assets from unjustifiably enriched parties. This Article novelly re-conceives veil-piercing as constructive trust and demonstrates how its application to judgment-proof corporations can yield more coherent and effective results.IntroductionVeil-piercing is an equitable remedy. This simple insight has been lost over time. Since the dawn of modern civilization, corporations have been able to enshroud themselves in a "veil" of limited liability.1 And by the early nineteenth century, courts began to "pierce" this veil to reach into the personal assets of a shareholder.2 Today, veil-piercing has become one of the most litigated issues within corporate law,3 permeating the entire business landscape, from ordinary transactions to environmental disasters.4But from its inception, veil-piercing has been an abysmal failure. There is no uniform test for veil-piercing, which typically requires demonstrating that a corporation was an "alter ego" or "instrumentality," controlled or dominated by a shareholder to perpetuate a fraud, wrong, or injustice that proximately caused loss or injury to a plaintiff.5 To apply this complex test, courts have compiled an expansive list of ex post fact-specific factors, none of which is dispositive, weighted, or necessarily related to the underlying harm.6And then there are the metaphors. Despite Justice Cardozo's venerable caution that "[m]etaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it,"7 veil-piercing has enabled judges to unleash their inner poet. The imagery of a corporate "alter ego" or "instrumentality" has proven too seductive for courts to resist engaging in "jurisprudence by metaphor or epithet,"8 liberally conjuring up a mish-mash of gilded allusions.9All of this has exacted a steep price from entrepreneurs and litigants. Somehow they must navigate their way through an "incoherent"10 and "intellectually disturbing"11 doctrine that more closely resembles a tolerated evil than a preferred good. The task of justifying veil-piercing has been described as "an exercise in futility: an attempt to articulate doctrinal standards for an area all too often characterized by ambiguity, unpredictability, and even a seeming degree of randomness."12 Not surprisingly, this has prompted calls to discard the doctrine altogether.13Veil-piercing is misapplied because it is misconceived. For about a century, veil-piercing has been regarded as an exception to, and thus "inextricably linked with[,] the predicate principle of limited liability. Hence, what one makes of veil piercing depends in the first instance on one's view of limited liability."14 Pursuant to this view, veil-piercing is justified potentially only when limited liability is not. …