71 The Alabama Lawyer 58 (2010). Piercing the Corporate Veil: When is Too Much Fiction a Bad Thing?.

• Author: By Will Hill Tankersley and Kelly Brennan

Alabama Lawyer

2010.

71 The Alabama Lawyer 58 (2010).

Piercing the Corporate Veil: When is Too Much Fiction a Bad Thing?

Piercing the Corporate Veil: When is Too Much Fiction a Bad Thing?By Will Hill Tankersley and Kelly BrennanGeneral Rule: Uphold the Corporate Identity

The corporate identity is a useful fiction. Indeed, some would argue that it is a vital fiction in the sense that individuals might balk at launching new ventures if it meant their personal assets were readily at risk. In general, the common law has enforced the corporate identity unless it is a sham or alter ego of another. This presumption against piercing the corporate veil can be overcome by showing fraud or other exceptional circumstances. Given the nature of piercing the corporate veil, such "piercing" is generally a fact intensive exercise of a court's equitable powers. The court's power to reach a determination on "piercing" or alter ego issues has particular application not only in reaching assets behind a sham corporation but also can be important in patent infringement venue questions. This article sets forth the general principles for piercing the corporate veil and its application under both Alabama law as well as its application to venue questions under patent law.

Presumption of validity

Alabama law upholds the "the corporate identity . . . unless the individual sought to be charged with the corporation's liability has used the corporate identity as his alter ego." Chenault v. Jamison, 578 So. 2d 1059, 1061 (Ala. 1991) (citing Forester and Jerue, Inc. v. Daniels, 409 So. 2d 830 (Ala. 1982)). Indeed, in Alabama, "the corporate form is not lightly disregarded, since limited liability is one of the principal purposes for which the law has created the corporation." Id. (quotation marks omitted); see also M and M Wholesale Florist, Inc. v. Emmons, 600 So. 2d 998, 999 (Ala. 1992). In virtually every situation where a court is asked to pierce the corporate veil, the court typically observes that such an exercise of judicial power is extraordinary, or is not to be done lightly. See Gilbert v. James Russell Motors, Inc., 812 So. 2d 1269, 1273 (Ala. Civ. App. 2001) ("extraordinary"); Transamerican Properties v. Watkins, 673 So. 2d 422, 425 (Ala. Civ. App. 1993) ("not ... lightly exercised"); M and M Wholesale Florist, Inc. v. Emmons, 600 So. 2d 998, 999 (Ala. 1992) ("corporate form [ ] not lightly disregarded"); First Health, Inc. v. Blanton, 585 So. 2d 1331, 1334 (Ala. 1991) ("not ... lightly exercised"); cf. Ex parte Thorn, 788 So. 2d 140, 143 (Ala. 2000) ("The doctrine of 'piercing the corporate veil' is equitable in nature."). Thus, a presumption is in favor of upholding the corporate veil.

General standards for piercing the veil

The presumption against piercing notwithstanding, courts may disregard the corporate form when (1) the corporation is inadequately capitalized; 2) the corporation is conceived or operated for a fraudulent purpose; (3) the corporation is operated as an instrumentality or alter ego of an individual or entity with corporate control; or (4) the interests of justice and equity so require. See Southern Sash Sales and Supply Co. v. Wiley, 631 So. 2d 968, 970 (Ala. 1994) ("[S]eparate corporate existence will not be recognized where a corporation is so organized and controlled and its business conducted in such a manner as to make it merely an instrumentality of another"); Culp v. Economy Mobile Homes, Inc., 895 So. 2d 857, 859-60 (Ala. 2004)(same); Gilbert, 812 So. 2d at 1273 ("The Alabama Supreme Court has set out the following extraordinary circumstances in which it would be appropriate to pierce the corporate veil: where the corporation is inadequately capitalized; where the corporation is conceived or operated for a fraudulent purpose; or where the corporation is operated as an instrumentality or alter ego of an individual or entity with corporate control."); M and M Wholesale Florist, 600 So. 2d at 999 (same); First Health, 585 So. 2d at 1334 (same); Deupree v. Ruffino, 505 So. 2d 1218 (Ala. 1987) ("A separate corporate existence will not be recognized when a corporation is so organized and controlled and its business so conducted as to make it a mere instrumentality of another or the alter ego of the person owning and controlling it. A corporation and the individual or individuals owning all its stock and assets can be treated as identical, even in the absence of fraud, to prevent injustice or inequitable consequences.").

For example, Alabama law has recognized that a corporate form should be disregarded in certain cases:

A separate corporate existence will not be recognized when a corporation is so organized and controlled and its business so conducted as to make it a mere instrumentality of another or the alter ego of the person owning and controlling it. A corporation and the individual or individuals owning all its stock and assets can be treated as identical, even in the absence of fraud, to prevent injustice or inequitable consequences.Deupree v. Anderson, 505 So. 2d 1218, 1222 (Ala...