Veil Piercing

This term is a metaphor for the liability protection offered by an incorporated business entity, such as a Corporation or Limited Liability Company (LLC).

“Piercing” the corporate veil is an equitable remedy created by the courts and now in some states codified in state statutes, which allows creditors of a liability limiting entity (Corp or LLC) to satisfy their claims against not only the entity’s assets, but also the personal assets of the owner(s) of the entity.

Factors for Piercing: 

Alter Ego
Commingling of funds
Failure to observe procedures and formalities

Dominion/Control
Where the member has all or substantially all control over the LLC.  Not enough of an issue to allow piercing by itself especially if proscribed procedures and formalities are followed.

Undercapitalization
Was there enough cash or other assets available to meet the company’s obligations?  Did the company consistently operate at a loss (before depreciation or other non cash expenses)?  Did the owner contribute personal funds repeatedly without properly documenting them for example as loans with a stated interest rate?

Fraudulent Conveyance
Typical fact pattern is where a debtor makes transfers (either by gift or “excessive” payment to a particular person or favored creditor) of some or all of his/her/its assets, usually to a party related to or controlled by the debtor, leaving themselves with insufficient assets from which to pay the attacking creditor.

Corporation Context:  If a judgment is obtained against a corporation, then the typical worst-case scenario is that only the assets of the corporation may be used to satisfy the judgment. 

Often times if a creditor is successful in obtaining a judgment against a corporation then a payment settlement can often be reached as it may result in a better arrangement for both parties.  For the creditor can still collect something equal to or greater than what liquidation of the corporations assets would yield.

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