Piercing the Corporate Veil in Connecticut
| Publication year | 2021 |
| Pages | 251 |
83 CBJ 251. PIERCING THE CORPORATE VEIL IN CONNECTICUT
Volume 83, No. 3, Pg. 251
SEPTEMBER 2009
From practical origins more than 4,000 years ago, the veil gradually became the most meaningful article of clothing. Badge of prestige, symbol of modesty, signifier of oppression, it has had many meanings to different cultures across the globe.
In the law, the veil is a standard metaphor for limited liability protection. In that sense, all you need to know is how and when the corporate veil may be pierced in Connecticut courts-knowledge that could mean the difference between declining a case and taking it and obtaining a recovery for your client.
A Connecticut court "may disregard the fiction of a separate legal entity to pierce the shield of immunity afforded by the corporate structure in a situation in which the corporate entity is so controlled and dominated that justice requires liability to be imposed on the real actor."(fn1) Put otherwise, when a corporation "is so manipulated by an individual or another corporate entity as to become a mere puppet or tool for the manipulator, justice may require disregard [of] the corporate fiction."(fn2)
The concept, which is equitable in nature,(fn3) may be used equally with respect to corporations and limited liability companies,(fn4) and in a variety of contexts. Corporate veil piercing is not an independent cause of action.(fn5) It is parasitic. The most common causes of action asserted with a theory of veil piercing are tort(fn6) and contract.(fn7) The doctrine is often invoked in a subsequent action to enforce a judgment.(fn8)
The typical veil-piercing case involves a creditor suing an individual who has used the corporate entity as an instrument of fraud.(fn9) The plaintiff seeks to pierce the protection afforded by the corporate shield and hold the shareholder liable. In the "reverse pierce" situation, the plaintiff argues the opposite: that the assets of the corporate entity should be made available to pay the personal debts of an owner.(fn10)
Both types were recently applied in McCarthy v. state Five Industrial Park, Inc.(fn11) After a bench trial, the McCarthySuperior Court held the wife of a business owner liable for a judgment previously entered against her husband and his businesses. First, the court reverse pierced the veil of State Five-a business to which the original judgment did not apply-on the grounds that it was the alter ego of the husband, who had used it to hide assets from satisfaction of the judgment.(fn12) The court then veil pierced to hold his wife liable because State Five was also her alter ego and she had assisted her husband in hiding assets.(fn13)
Though the facts in McCarthy were complex, and the piercing-reverse piercing combination unusual, the result is not extraordinary. It is a reminder that the "guiding concept behind ... veil piercing cases is the need for the court to avoid an over-rigid preoccupation with questions of structure . and apply the preexisting and overarching principle that liability is imposed to reach an equitable result."(fn14) Though there are no hard and fast rules for determining when the corporate shield should be disregarded, a key factor is the degree of control or influence exercised over the entity. The common thread in Connecticut's case law is an intolerance of shell games.
A. The Instrumentality and Identity Rules
Connecticut law endorses two tests to determine whether to pierce the corporate veil: the identity rule and the instrumentality rule. An entity may be disregarded if the elements of either are satisfied.(fn15) Most of the time, if one test is met, both are-"they are simply slightly different roads to the same destination."(fn16) Whether to pierce is a fact question for which plaintiff bears the burden of proof according to the preponderance of the evidence standard.(fn17)
1. Instrumentality Rule
Courts will disregard the fiction of a separate legal entity when a corporation is a mere instrumentality or agent of another corporation or individual. The instrumentality test has three specific elements of proof:
(1) Control, not merely majority or complete stock control, but complete domination, not only of the finances but of policy and business in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
(2) that such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of the plaintiff's legal rights; and
(3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.(fn18)
In assessing whether an entity is dominated or controlled, courts have looked for the presence of a number of factors. In Connecticut Light and Power Co. v. Westview Carlton Group, LLC,(fn19) for example, the Appellate Court affirmed veil piercing according to the instrumentality rule where the lower court had found an absence of corporate formalities, inadequate capitalization, funds deposited in and withdrawn from the corporation for personal purposes, overlapping ownership,officers, directors, and personnel, and common office space, address, and phones. The trial court had also considered the amount of business discretion by the dominated corporation, whether the corporations dealt with each other at arm's length, whether the corporations were treated as independent profit centers, the payment or guarantee of debts of the dominated corporation, and whether the corporation had property that was used by the others as if their own.(fn20) The Appellate Court went on to note additional factors justifying veil piercing, noting that the LLC lacked an agent of service as required by Connecticut law, filed no annual reports as required, lacked any of the documentation required of a limited liability corporation, failed to maintain property records for the property in question, failed to file tax returns, was undercapitalized, and that when the property in question was sold, the real actor received the net proceeds of the sale.(fn21)
Similarly, in Saphir, the corporation did not keep minutes of directors meetings, had no records of annual elections, and had never filed a business tax return. Other officers existed solely to accommodate the individual defendant, and he exclusively directed the corporation's affairs and funds. He also held the only proprietary interest in the corporation.(fn22)
In Tomasso, the individual defendants, the president and secretary-treasurer of a paving company (Armor) had guaranteed a line of credit on which the company had defaulted, and were sued as guarantors. The president and secretary-treasurer were figureheads, serving under duress with little real authority of their own. They feared that if they did not do as the man behind the business (Lemieux) instructed them, that he would shut...
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