Opinion ID: 3011706
Heading Depth: 3
Heading Rank: 1

Heading: Traditional Veil-Pier cing Theories

Text: The corporate form was created to allow shareholders to invest without incurring personal liability for the acts of the corporation. These principles are equally applicable when the shareholder is, in fact, another corporation, and hence, mere ownership of a subsidiary does not justify the imposition of liability on the parent. See United States v. Bestfoods, 524 U.S. 51, 69 (1998); American Bell Inc. v. Federation of Tel. Workers of Pa., 736 F.2d 879, 887 (3d Cir. 1984). Nor will liability be imposed on the par ent corporation merely because directors of the parent corporation also serve as directors of the subsidiary. See Bestfoods, 524 U.S. at 69. However, under both state and federal common law, abuse of the corporate for m will allow courts to employ the tool of equity known as veil-piercing, i.e., disregard of the corporate entity to impose liability on the corporation's shareholders. Publicker Indus., Inc. v. 14 Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979). Courts have held veil-piercing to be appr opriate when the court must prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime, Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967), or when the parent so dominated the subsidiary that it had no separate existence, New Jersey Dep't of Envtl. Pr ot. v. Ventron Corp., 468 A.2d 150, 164 (N.J. 1983). The Third Circuit alter ego test is fairly typical of the genre.2 It requires that the court look to the following factors: gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate recor ds, and whether the corporation is merely a facade for the operations of the dominant stockholder. See American Bell , 736 F.2d at 886. Other (similar) formulations are set forth in the margin.3 _________________________________________________________________ 2. Although the tests employed to determine when circumstances justifying veil-piercing exist are variously referred to as the alter ego, instrumentality, or identity doctrines, the formulations are generally similar, and courts rarely distinguish them. See Phillip I. Blumberg, The Law of Corporate Groups: Substantive Law S 6.01, at 111 (1987). The most important differences across jurisdictions seem to reside largely in two aspects of these different for mulations: first, whether an element of fraudulent intent, inequitable conduct, or injustice is explicitly required, see id. S 6.02, at 115, and second, a general sense that federal courts are more likely to pierce the veil in order to effectuate federal policy, lest state corporate laws be permitted to frustrate federal objectives, see Anderson v. Abbott, 321 U.S. 349, 365 (1944); United Elec., Radio & Mach. Workers of Am. v. 163 Pleasant St. Corp., 960 F.2d 1080, 1092 (1st Cir. 1992). 3. For comparison, the Massachusetts version r equires consideration of common ownership, pervasive control, inter mingling of activity and assets, undercapitalization, lack of corporate formalities, absence of records, nonpayment of dividends, insolvency at the time of the relevant transaction, siphoning of corporate assets by shar eholders, nonfunctioning officers and directors, use of the corporation for the transactions of dominant shareholders, and use of the corporation for fraud. See Evans v. Multicon Constr. Corp., 574 N.E.2d 395, 398 (Mass. App. Ct. 1991). The Illinois version considers the failure to maintain records and formalities, commingling of funds, undercapitalization, and one corporation treating the assets of the other as its own. See Van Dorn Co. v. Future Chem. & Oil Corp., 753 F .2d 565, 570 (7th Cir. 1985). 15 The test, whether or not a particular version r equires an element of fraudulent intent, see supra note 2, is demonstrably an inquiry into whether the debtor corporation is little more than a legal fiction. Such a burden is notoriously difficult for plaintif fs to meet. For instance, courts have refused to pierce the veil even when subsidiary corporations use the trade name of the parent, accept administrative support from the par ent, and have a significant economic relationship with the parent. See, e.g., Jackson v. General Elec. Co., 514 P.2d 1170 (Alaska 1973). Thus, in order to succeed on an alter ego theory of liability, plaintiffs must essentially demonstrate that in all aspects of the business, the two corporations actually functioned as a single entity and should be treated as such. See RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 545 (9th Cir. 1985) (veil-piercing is appropriate whenthe personalities of the corporation and individual are no longer separate); Akzona Inc. v. E.I. Du Pont De Nemours & Co., 607 F. Supp. 227, 237 (D. Del. 1984) (a subsidiary is an alter ego or instrumentality of the parent when the separate corporate identities . . . are a fiction and . . . the subsidiary is, in fact, being operated as a department of the parent).