Some Shall Pass: Corporate Veil-piercing in Alabama in the Wake of Hill v. Fairfield Nursing and Rehabilitation Center, Llc
| Publication year | 2014 |
| Pages | 0237 |
| Citation | Vol. 75 No. 4 Pg. 0237 |
This article updates the January 2010 Alabama Lawyer article by Will Hill Tankersley and Kelly Brennan, "Piercing the Corporate Veil: When Is Too Much Fiction a Bad Thing?"1 As that article explained, the corporate veil is difficult to pierce. However, the Alabama Supreme Court has recently provided new guidance regarding the kinds of facts necessary to advance a veil piercing theory past summary judgment. Hill v. Fairfield Nursing and Rehabilitation Center, LLC 2 is the Alabama Supreme Court's most recent pronouncement regarding the interplay between "control" and veil-piercing. In Hill, the Alabama Supreme Court made it clear that it joins the emerging national consensus that the veil-piercing analysis also involves considering the type of plaintiff who is seeking to pierce the veil. Involuntary creditors (for example, plaintiffs in tort cases) need not prove "excessive control," misrepresentation as to the corporate structure or some proximate relationship between the misuse of the corporate structure and the plaintiff's injury. In dicta, the court, likewise, seemed to suggest that even properly organized and capitalized corporate entities could have their corporate veils pierced if the plaintiff can show "excessive control," misuse of that control and that the misuse was the proximate cause of plaintiff's injury.
This article discusses the relevant facts of Hill that led the Alabama Supreme Court to hold that Hill had presented sufficient evidence to survive summary judgment on her attempt to pierce Fairfield Nursing and Rehabilitation Center, LLC's corporate veil. This article also highlights Justice Murdock's special concurrence in that case, in which he clarifies the proper application of the court's jurisprudence regarding "excessive control" as a basis for disregarding the corporate form. Justice Murdock's concurrence in Hill not only holds the line as to the veil piercing standards for "involuntary" creditors (such as plaintiffs in tort cases) but also gives specific examples of what a voluntary creditor must show to pierce the veil of a properly documented and capitalized corporate entity.
Piercing the Corporate Veil in Alabama
Basic Principles
Corporations are designed to control risk. At its most basic level, "[a] corporation is a form of business association, having the rights, relations, and characteristic attributes of a legal entity distinct from that of the persons who compose it or act for it in exercising its functions."3 As a separate legal entity, "[t]he rights and liabilities of a corporation are distinct from those of its members, and thus, the shareholders of a corporation are ordinarily not liable for the corporation's obligations, liabilities, or debts."4 Alabama courts have recognized that "limited liability is one of the principal purposes for which the law has created the corpora-tion."5 While "the corporate form is not lightly disregarded,"6 shareholder limited liability is not sacrosanct. Indeed, "the corporate veil may be pierced in an appropriate case to impose personal liability" upon shareholders for corporate debts.7
Although Alabama courts are generally reluctant to pierce the corporate veil because "limited liability is one of the principal purposes for which the law has created the corporation,"8 they will disregard the corporate form in certain "extraordinary" circum-stances.9 In determining whether to disregard the corporate form, the courts are to consider "substance over form" and will pierce the veil "when the corporate form is being used to evade personal responsibility."10 The determination of whether to pierce the corporate veil is a highly fact-intensive inquiry "'to be determined on a case-by-case basis.'"11 Generally, under Alabama law, courts will disregard the corporate form and pierce the corporate veil: "1) where the corporation is inadequately capitalized; 2) where the corporation is conceived or operated for a fraudulent purpose; or 3) where the corporation is operated as an instrumentality or alter ego of an individual or entity with corporate control."12
Piercing the veil is an exercise of the courts' equitable powers.13 Accordingly, courts have "significant discretion in applying the factors."14 Moreover, the "doctrine is not a claim."15 Instead, "[i]t merely furnishes a means for a complainant to reach a second corporation or individual upon a cause of action that otherwise would have existed only against the first corporation."16 Therefore, whether the corporate form should be disregarded is "properly decided by a judge after a jury has resolved the accompanying legal issues."17
Undercapitalization
While undercapitalization is a basis upon which courts may pierce the corporate veil, the Alabama Supreme Court has been careful to explain that "[t]he fact that a corporation is under-capitalized is not alone sufficient to establish personal liability."18 Instead, where undercapitalization has been the primary basis upon which the courts have based their decisions to disregard the corporate form, there has also generally been "other evidence of abuse of the corporate entity besides the inadequate capital of the corporation to sustain the court's decisions."19
Furthermore, the nature of the plaintiff's interactions with the defendant-corporation bears on the inquiry. For example, whether the plaintiff is a voluntary or an involuntary creditor is a significant factor the courts consider when determining whether a corporation's undercapitalization is a sufficient justification for disregarding the corporate form. Indeed, as the Alabama Supreme Court has noted:
Voluntary creditors of corporations are held to a higher standard because they "are generally able to inspect the financial structure of a corporation and discover potential risks of loss before any transaction takes place. Consequently, courts are less sympathetic with voluntary creditors who, having had the opportunity of inspection, nevertheless elected to transact with an undercapitalized corporation."20
In such cases, the voluntary creditor can be said to have acted at his own peril.
On the other hand, "the involuntary creditor is most often a tort victim who is unable to collect a judgment from a corporation with which he has not chosen to deal."21 Indeed, "[i]nvolun-tary creditors, such as tort victims, cannot choose the perpetrator of their misfortune."22 The tort by its very nature is non-consensual and the "involuntary creditor [must] take[] his corporate debtor as he finds it."23 Therefore, in tort cases involving involuntary creditors "[t]he equities in favor of subjecting shareholders to liability are stronger."24
Fraudulent Conception or Operation
Although "[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 conse-quences,"25 "where the corporate device is used to hinder or evade an outstanding creditor claim, a court will almost always disregard the corporate entity and impose shareholder liability."26 "To establish a fraudulent purpose . . . a plaintiff must show more than just a shareholder's desire to avoid personal liability for the business' debts."27 Instead, "a plaintiff must show fraud in asserting the corporate existence"28 or that "the corporation is conceived or operated for a fraudulent purpose."29 "For example, a conveyance by a shareholder to a corporation for the purpose of removing personal assets from the reach of existing creditor claims generally constitutes justification for ignoring the existence of separate entities."30 Likewise, "if a shareholder has drained company assets from a corporation for the purpose of creating a creditor-proof corporation, courts will disregard the limited liability privilege and allow creditors to reach the shareholders directly."31
Instrumentality or Alter Ego
The Alabama Supreme Court has also explained that a "parent corporation [that] so controls the operation of the subsidiary corporation as to make it a mere adjunct, instrumentality, or alter ego of the parent corporation" may, under certain circumstances, be held liable for the debts of the subsidiary.32 However, "[t]he mere fact that an individual or another corporation owns all or a majority of the stock of a corporation does not, of itself, destroy the separate corporate entity."33 Instead, the Alabama Supreme Court has announced a three-part test that applies when a party seeks to pierce the corporate veil based solely upon "excessive" shareholder control:
(1) The dominant party must have complete control and domination of the subservient corporation's finances, policy and business practices so that at the time of the attacked transaction the subservient corporation had no separate mind, will or existence of its own;
(2) The control must have been misused by the dominant party. Although fraud or the violation of a statutory or other positive legal duty is misuse of control, when it is necessary to prevent injustice or inequitable circumstances, misuse of control will be presumed; and
(3) The misuse of this control must proximately cause the harm or unjust loss complained of.34
In Duff v. Southern Railway Co.35 , the Alabama Supreme Court identified the following (non-exhaustive) list of factors that may satisfy the control element above:
(a) The parent corporation owns all or most of the capital stock of the subsidiary;...
(b) The parent and subsidiary corporations have common directors or officers;
(c) The parent corporation finances the subsidiary;
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
(e) The subsidiary has grossly inadequate
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