When a corporation or an LLC causes injury to a party, sometimes the company’s assets are not enough to pay the judgment against the company. When that happens, the injured party often tries to get the owners of the company to pay the judgment by piercing the corporate veil.
The “corporate veil” is sacrosanct. It is why we go through all this trouble to form LLCs and corporations and LLPs and LPs. Courts don’t take the request lightly and don’t pierce the veil often, but it does happen.
Ohio courts use a three-part test to determine whether an injured party may pierce the corporate veil. The current test for a corporation can be found in the case BELVEDERE CONDO. v. R.E. ROARK:
Thus, the corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong. 67 Ohio St.3d 274 (1993).
So our three Belvedere elements are as follows:
- The owner’s control over the corporation was so complete that it had no separate existence of its own (as we say, the corporation is the owner’s “alter-ego”)
- The owners exercised control in such a manner as to commit fraud or another illegal act
- Injury resulted from the control and the fraud
Thus, the original Belevedere test was quite restrictive: the corporation had to be an alter-ego of the owner(s) and the owners had to cause the corporation to commit (a) fraud or (b) an illegal act. This test was quite narrow, and as we will see later, it was revised and expanded a bit.
More Recent Changes – Dombroski v. Wellpoint
In 2008, the Ohio Supreme Court reexamined the Belvedere test in light of many lower Ohio courts’ arbitrary reinterpretations in other cases. Lower courts were allowing plaintiffs to pierce the corporate veil for “unjust” or “inequitable” activities, instead of the strict fraud/illegal act requirement laid down by Belvedere.
In view of the reality that shareholders could seriously misuse the corporate form and evade personal liability under the second prong as presently worded, we find it necessary to modify the second prong of the Belvedere test to allow for piercing in the event that egregious wrongs are committed by shareholders.... Courts should apply this limited expansion cautiously toward the goal of piercing the corporate veil only in instances of extreme shareholder misconduct. (Emphasis mine). Dombroski v. Wellpoint, 119 Ohio St. 3d 506, 513 (Ohio 2008).
So now we have three factors for our second prong of the Belvedere test: (a) fraud, (b) illegal acts, and (c) egregious wrongs. In addition, the “egregious wrongs” must have resulted from “extreme shareholder misconduct.”
It appears that the Ohio Supreme Court has set the bar pretty high on piercing the corporate veil. Small business owners can breathe a sigh of relief knowing that as long as they don’t commit “extreme misconduct,” they probably don’t run the risk of getting their corporate veil pierced.
Justice Paul Pfeifer, writing a dissenting opinion in Dombroski, injects some levity into the conversation:
The majority believes that it expands on the Belvedere element of a "fraud or an illegal act" by including the redundancy "or a similarly unlawful act." Thus, not only may an "illegal act" satisfy the second element of the Belvedere test, but so will an act that is similarly unlawful to an illegal act. The new language seems to be pulled from the air. Is there a notable distinction between an "unlawful" and an "illegal" act? Not that the majority identifies. The words appear to be two ways of saying the same thing. Potato, potahto, illegal, unlawful, let's call the whole thing off.
He then brings to light what this decision really does for us business owners:
Today, the majority adds words but no distinctions, and by whitewashing Belvedere's reliance on Bucyrus-Erie, places Ohio within the most restrictive jurisdictions for proving a case for piercing of the corporate veil.