By: Patrick F. Estill and Maria Stickrath
Is ownership of the company required before an individual be held liable for a corporation’s debts? The Idaho Supreme Court recently addressed this question as a matter of first impression and joined the majority of states holding that ownership is not required, and Idaho courts can pierce the corporate veil to reach non-shareholders if they have substantial control over the company’s operations.i
Lunneborg sued My Fun Life (his former employer) for severance pay owed under his employment contract. Lunneborg named the sole owner of the company and the owner’s wife as defendants. The Court allowed the plaintiff to reach the wife’s assets, despite her status as a non-shareholder because although generally, corporations are considered separate entities from their shareholders, officers, and directors, “when warranted, courts will pierce the corporate veil and look behind the form of an organization to determine its true character … and will disregard corporate form and consider substance rather than form” and impose personal liability on these generally immune actors.ii Because the owner’s wife exercised “ample control” over the company—including moving money in and out of its accounts – she was subject to recovery by the company’s creditor. The Court cited law from other jurisdictions, including Illinois, Connecticut, and New York, adopting this majority rule allowing piercing to reach non-shareholders.
While most jurisdictions have signed onto this non-shareholder rule, states within the Sixth Circuit are mixed. Kentucky courts have not specifically addressed the question, but the leading corporate veil-piercing case in Kentucky, Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, defines piercing the corporate veil as “a creditor recourse against the shareholders of a corporation.”iii Courts in Michigan and Tennessee are reluctant to pierce the veil to reach shareholders.iv Ohio Court of Appeals, on the other hand subscribes to the majority rule, holding in Premier Therapy, LLC v. Childs, that the piercing doctrine is “less concerned with form and more concerned with the reality” of each defendant’s relationship to the corporation, not whether they are a shareholder, officer, or director.v
Delaware corporate law also follows the majority rule. In Irwin & Leighton, Inc. v. W.M. Anderson Co., the Court of Chancery of Delaware recognized that typically in situations where courts should pierce the corporate veil, the responsible party is a shareholder of the company. But, the Court went on to state that, in some circumstances, the individual exerting the most control and misusing the corporate form is someone other than a shareholder who should still be held liable.vi
Lawyers advising closely-held companies should be aware of the majority rule: ownership is not a prerequisite to be held liable for the company’s debts where veil-piercing is otherwise appropriate; it is merely one factor to be considered. Lunneborg v. My Fun Life (a breach of contract case) suggests that fraud is not a prerequisite either. Courts might consider the “element of control or influence” as the primary consideration. Closely-held corporations should take care to follow corporate formalities; otherwise, non-shareholders exerting considerable control over the business could potentially have their assets reached. Those corporations where family members or close friends have substantial control over operations, but no formal title, may be especially susceptible to non-shareholder veil piercing.
i. Lunneborg v. My Fun Life, 421 P.3d 187 (Idaho 2018).
ii. Id. at 198
iii. Inter-Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152 (Ky. 2012) (emphasis added). In cases of fraud or bad acting, however, various remedies may be available.
iv. See Rymal v. Baergen, 686 N.W.2d 241 (Mich. Ct. App. 2004); Wells v. Firestone Tire and Rubber Co., 364 N.W.2d 670 (Mich. 1984); Edmunds v. Delta Partners, LLC, 403 S.W.3d 812 (Tenn. Ct. App. 2012); Pamperin v. Streamline MFG., Inc., 276 S.W.3d 428 (Tenn. Ct. App. 2008).
v. Premier Therapy, LLC v. Childs, 75 N.E.3d 692, 713 (Ohio Ct. App. 2016).
vi. Irwin & Leighton, Inc. v. W.M. Anderson Co., 532 A.2d 983, 987 (Del. Ch. 1987).