Chapter 2-13 Suit to Pierce the Corporate Veil

• Jurisdiction: United States

2-13 Suit to Pierce the Corporate Veil

2-13:1 Overview

A suit to pierce the corporate veil is a remedial device available to a plaintiff that has sued a corporation or a limited liability company. When such a plaintiff successfully pierces the veil of a liability-protected entity, he may execute on the assets of the entity's owners. The controversial Supreme Court opinion in Castleberry v. Branscum made it easier for a plaintiff to pierce the veil of a liability-protected entity. This decision prompted a legislative reaction to restrict its reach, resulting in present-day Texas Business Organization Code Section 21.223. However, Section 21.223 has not entirely curtailed Castleberry.

2-13:1.1 Related Causes of Action

Uniform Fraudulent Transfer Act (UFTA), Officer and Director Liability, Derivative Shareholder Suits, Breach of Partnership Duty, Agency Actions

MUST READ CASES & STATUTES

Texas Business Organizations Code Annotated Section 21.223-21.225

Texas Business Organizations Code Annotated Section 101.002(a)

Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986)

SSP Partners v. Gladstrong Inves. (USA) Corp., 275 S.W.3d 444 (Tex. 2008)

2-13:2 Elements

2-13:2.1 Contractual Obligations

(1) A recognized circumstance of injustice, including: (a) when the corporate fiction is used as a means of perpetrating actual fraud; (b) where the corporation is organized and operated as an alter ego; (c) where the corporate fiction is resorted to as a means of evading an existing legal obligation; (d) where the corporate fiction is employed to achieve or perpetrate monopoly; e) where the corporate fiction is used to circumvent a statute; (f) where the corporate fiction is relied upon as a protection of crime or to justify wrong; or (g) inadequate capitalization.³⁹⁷

• A "contractual obligation" includes purely contractual obligations as well as those obligations arising out of or related to a contract.³⁹⁸
• Recognized circumstances of injustice include:

• When the corporate fiction is used as a means of perpetrating actual fraud.³⁹⁹

• "Actual fraud" means "dishonesty of purpose or intent to deceive."⁴⁰⁰

• Where the corporation is organized and operated as an alter ego.⁴⁰¹
• Where the corporate fiction is resorted to as a means of evading an existing legal obligation.⁴⁰²
• Where the corporate fiction is employed to achieve or perpetrate monopoly.⁴⁰³
• Where the corporate fiction is used to circumvent a statute.⁴⁰⁴
• Where the corporate fiction is relied upon as a protection of crime or to justify wrong.⁴⁰⁵
• Inadequate capitalization.⁴⁰⁶

• Failure to follow corporate formalities cannot be used as evidence in support of a veil piercing theory.⁴⁰⁷

(2) That the shareholder "caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the" contract creditor

• The shareholder "caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the" contract creditor.⁴⁰⁸

(3) The fraud was "primarily for the direct personal benefit of the" shareholder

• The fraud was "primarily for the direct personal benefit of the" shareholder.⁴⁰⁹

2-13:2.2 Tort Obligations

(1) A recognized circumstance of injustice, including:

(a) when the corporate fiction is used as a means of perpetrating fraud;
(b) where the corporation is organized and operated as an alter ego;
(c) where the corporate fiction is resorted to as a means of evading an existing legal obligation;
(d) where the corporate fiction is employed to achieve or perpetrate monopoly;
(e) where the corporate fiction is used to circumvent a statute;
(f) where the corporate fiction is relied upon as a protection of crime or to justify wrong; or
(g) inadequate capitalization.⁴¹⁰

Recognized circumstances of injustice include:

• When the corporate fiction is used as a means of perpetrating fraud.⁴¹¹

• "Actual fraud" means "dishonesty of purpose or intent to deceive."⁴¹²
• Constructive fraud, as defined in Castleberry, might be sufficient for a tort plaintiff to pierce the corporate veil.⁴¹³
• Constructive fraud is "the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests."⁴¹⁴

• Where

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