Chapter III, A. Corporate Separateness Generally

• Jurisdiction: United States

A. Corporate Separateness Generally

As the Supreme Court aptly stated in Dole Food Co. v. Patrickson, "[a] basic tenet of American corporate law is that the corporation and its shareholders are distinct entities."⁹⁵ In other words, corporations and other business entities exist to create a separation between the entity and its owners. An extension of that logic applies to the creation of subsidiary entities. Corporations and other business entities form additional entities to create a separation between the affairs, assets and liabilities of the distinct entities. This separateness limits the liability of the business entities' respective shareholders, who are "insulated from personal liability for the debts and obligations of the corporation."⁹⁶ A "general rule" is that "a corporation will be looked upon as a [separate] legal entity ... but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defeat crime, the law will regard the corporation as an association of persons." ⁹⁷

A main reason for maintaining corporate separateness is to "encourage the efficient operation of a free enterprise system."⁹⁸ Allowing entities to maintain separateness provides "a convenient and efficient form for transacting business," and "[t]he limited liability rule serves to diversify investor risks and to subsidize the corporate entities by allocating risks to tort creditors of insolvent corporations."⁹⁹

While the corporate form is designed to facilitate business transactions and encourage an efficient marketplace, the concept can be abused. A corporate entity is a legal fiction, and "it has long been within the power of equity to pierce such fictions, whether through the enforcement of an equitable right, the issuance of an exclusively equitable remedy, or both.¹⁰⁰ Accordingly, corporate law offers certain mechanisms whereby the corporate entity may be disregarded, including the piercing-the-corporate-veil, alter-ego and instrumentality doctrines, which may be employed when "equity and justice so require."¹⁰¹

Substantive consolidation is often referred to as having evolved from the equitable rights and remedies that allow for the disregard of the corporate form. As described previously, substantive consolidation is an equitable remedy that also allows a court to disregard the corporate form. The court may ignore the technical distinctions between multiple entities and combine their assets in the interest of equity. Although...