“Veil Piercing” and Personal Injury
You may have heard the phrase “pierce the corporate veil”. This refers to the protection from liability that a corporate structure provides for its owners. It also refers to the law that allows a plaintiff to go after the corporation’s owners personal assets in certain circumstances. Largely, veil piercing is governed by corporate law, not personal injury law. But, as we will discuss in this blog, the implications of both are related. As our Delray Beach personal injury lawyers at the Law Offices of Aronberg, Aronberg & Green know, piercing the corporate veil can be incredibly difficult. After all, if it were easy to do, individuals or groups of individuals would see little value in forming corporate or other entities which limit liability.
First, though, what is a corporate veil? The phrase “corporate veil” refers to the fact that an entity’s status (i.e., as a corporate or a limited liability company), can limit the exposure of the owners engaged in the enterprise to solely the assets of the corporation or LLC. For instance, if millionaire John Smith opens a pizza shop, and creates Smith’s Pizza Inc. to conduct the pizza business, John Smith himself is generally shielded from liability from incidents having to do with the pizza business. For instance, if Jane trips in the pizza shop and injures herself, she can, in theory, only successfully sue Smith’s Pizza Inc., and not John Smith himself, for the injuries.
But as our personal injury lawyers know, and as the phrase “piercing the corporate veil” implies, the protective shield created by an entity’s status can be pierced. This “piercing” allows a plaintiff to penetrate the protective status and go after the individuals behind the entity. There are a number of factors which courts consider important in determining whether or not to pierce a corporate veil.
One factor which courts consider is whether or not the corporate entity’s funds are commingled with the funds of the individual owner(s). For instance, if funds collected on behalf of the corporation and funds belonging to the individual are kept in the same accounts and used for the same purposes, it is possible that a court would find that corporate veil can be pierced. As our personal injury lawyers know, this means that when there is not a clear separation of a corporation’s funds and the personal funds of the individual(s) behind the corporation, the funds may be deemed to be “commingled.”
Another factor courts often consider is whether or not the entity whose corporate veil is in question is adequately capitalized. As our Delray Beach personal injury lawyers know, if a corporate entity is undercapitalized, i.e. underfunded, the inference may be that it was not designed to survive on its own. Therefore its corporate entity is in some ways a sham. Courts are split on this issue. Some courts, like Truckweld Equipment Co. v. Olson, hold that thin capitalization is not necessarily indicative of fraudulent intent. Others, like Slottow Fidelity Federal Bank v. American Casualty Co., have held that clear inadequate under funding can alone be the basis for holding the parent corporation liable for acts of its corporate subsidiary.
Note that LLC veils can also be pierced, and the considerations are also the same for piercing LLCs as they are for piercing corporations. That said, LLCs are intended to be more flexible than corporations, and so the determinations as to whether or not to pierce an LLC veil are made on a more case-by-case basis. Piercing the corporate veil.
So what does all of this mean for personal injury plaintiffs? In short, because of the information set forth above, a victim in a personal injury case should not necessarily be discouraged by discovering that the defendant in their case is a corporation or an LLC. As we have discussed, an individual who would otherwise be personally liable for damages often won’t be protected by a corporate or LLC entity when it can be proven that the corporation or LLC is being used simply as a liability shield, without the intention of the individual to have the corporation or LLC exist as a separate, viable, distinct entity.