Chapter III, B. Veil-Piercing

• Jurisdiction: United States

B. Veil-Piercing

Of the corporate-form doctrines mentioned above, substantive consolidation is seemingly most often compared to the doctrine of piercing the corporate veil. Under that doctrine, "[i]n the interests of justice, in an 'appropriate case,' a party wronged by actions taken by an owner shielded by the veil of a corporate shell may exercise its equitable right to pierce that screen and 'skewer' the corporate owner."¹⁰² In other words, the veil-piercing doctrine allows a creditor to disregard the separateness of an entity and its equityholders, causing the equityholders to share in the liabilities of the entity.

The doctrine of piercing the corporate veil is exceptionally complicated, primarily because it has been applied and explained in such a variety of ways. Judge Benjamin Cardozo once described the doctrine as "enveloped in the mists of metaphor."¹⁰³ Indeed, entire treatises have been written on the subject.¹⁰⁴ A deep dive into the intricacies of the doctrine are not necessary for our purposes here, but it is helpful to briefly review the basics of the doctrine, outside of the substantive consolidation context, to better understand how it helped give rise to substantive consolidation, and why it is still often referred to in connection with a substantive consolidation analysis.

As explained above, a hallmark of American corporate law — and other business organization law as well — is the rule that separateness of a business organization and its equityholders will be respected. However, when a company is determined to have used the corporate form illegitimately as a means for its own illegitimate ends, that separateness can be disregarded. As described by Judge Cardozo:

We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy." All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice.¹⁰⁵

In practice, it is extremely difficult to pierce the corporate veil. While piercing the corporate veil is a state law remedy that varies from state, the sentiment expressed by the Delaware Supreme Court is generally applicable:

There is, of course, no doubt that upon a proper showing, corporate entities as between parent and subsidiary may be disregarded and the ultimate party in interest, the parent, be regarded in law and fact as the sole party in a particular transaction.

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