Though standards vary across jurisdictions, parties seeking to pierce the corporate veil must generally show that owners dominated the entity to such an extent that it had no independent existence and that the corporate form was used fraudulently or for an improper purpose causing harm. Winston & Strawn attorneys Jeffrey Huelskamp and Bethany Ao analyze key veil-piercing cases, from co-working lease defaults to environmental disasters involving tire fires, demonstrating how courts examine factors including inadequate capitalization, failure to observe corporate formalities, commingling of funds and whether the corporation was merely a façade for dominant stockholders.
During an expert deposition in a Chicago lease dispute, this exchange occurred:
Q: You are a law professor, right?
A: Yes.
Q: Do you remember you were my law professor at UChicago?
A: I do not remember that. I apologize.
The professor can certainly be forgiven given the vast number of students he taught corporate law, including this unmemorable author. The topic of discussion was the corporate veil-piercing doctrine, which is notoriously unpredictable and the source of much disagreement in the legal community.
Our client was a landlord who sued a co-working space tenant for failure to pay rent. And the case was also brought against the tenant’s parent company under an alter-ego theory — that is, alleging the parent company (that did not sign the lease) should be liable for the debt of the defunct subsidiary tenant (that did sign) such that the corporate veil should be pierced.
Corporate veil-piercing doctrine
The law treats entities as separate and distinct from their shareholders, related entities and affiliates. Generally, the debt or obligations of an entity cannot be imputed to others. This separation, commonly referred to as the “corporate veil,” allows entities to internalize both the benefits and burdens of corporate actions, such as signing contracts, suing (and being sued) and complying with the law. The protections offered by the corporate veil (very rightly) encourage and cordon off risk. That is, the only skin in the game is the entity’s assets.
Due to its vital role in corporate America, the corporate veil is very difficult to pierce. Though standards vary across jurisdictions, a party seeking to pierce the corporate veil must generally show that “the owners, through their domination [of the corporate entity], abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the plaintiff such that a court in equity will intervene.” Plaintiffs often try to meet this standard by demonstrating that:
- The owners or shareholders controlled the entity to such an extent that the corporation had no independent existence, and they were merely alter egos of the corporation.
- The corporate form was used fraudulently or for an improper purpose.
- Such improper or fraudulent use of the corporation caused harm to the plaintiff.
- The corporate entity must be disregarded to prevent an injustice.
If this standard is met, assets other than the entity’s (such as personal assets) can satisfy a judgment. It is thus critically important to follow corporate formalities and not abuse the corporate form.
Case study: Stockbridge v. Industrious
In Stockbridge 600 West Jackson, LLC v. Industrious National Management Co. LLC, the Illinois appellate court held that corporate veil-piercing was appropriate.
In 2018, Industrious National Management Company, a co-working space provider (like WeWork), approached Stockbridge 600 West Jackson about renting space in a Chicago office building. After Industrious National produced documents and articles touting its financial strength, Stockbridge agreed to a lease, which Industrious National’s single-member subsidiary LLC executed.
In 2020, shortly after the Covid-19 virus first surfaced, Industrious Jackson defaulted on the lease. As was later discovered in the underlying litigation, Industrious National had already decided to end its lease due to underperformance and used Covid-19 as its partial cover story. Industrious National told Stockbridge it would exit the location and not pay future rent, despite years of future rent obligations. Unbeknown to Stockbridge, Industrious National planned to move its co-working members to its other co-working spaces miles away. In its efforts to quietly move its members to the new location, Industrious National went so far as to instruct movers to “wear plain clothing” and “be discreet” in executing their plan.
In late 2020, after resolution attempts failed, Stockbridge sued Industrious Jackson (the tenant that signed the lease) and Industrious National (the parent company) for breach of the lease and fraudulent transfer of assets. Among other claims, the complaint alleged that Industrious Jackson failed to observe corporate formalities and was merely an alter ego of its only LLC member, Industrious National. Industrious National denied any responsibility under the lease, saying it was not a party to the lease, and suggested that Industrious Jackson effectively had no assets.
Following a week-long bench trial, the court held the corporate veil should be pierced and assigned liability to Industrious National, the parent company, finding:
- Industrious Jackson was a “mere instrumentality” of Industrious National.
- Industrious Jackson was used to commit a wrong or fraud.
- Stockbridge suffered an unjust injury.
The Illinois appellate court affirmed.
As to the first “mere instrumentality” factor, the court examined “(1) whether the corporation [was] undercapitalized, (2) whether separate books [were] kept, (3) whether there [were] separate finances for the corporation, (4) whether the corporation [was] used for fraud or illegality, (5) whether corporate formalities [had] been followed, and (6) whether the corporation [was] a sham.”
Trial testimony revealed that Industrious Jackson failed to follow corporate formalities. For instance, Industrious Jackson did not have its own employees or officers, did not conduct meetings and did not negotiate its own contracts. Testimony also suggested that “funds flowed freely” between Industrious National and Industrious Jackson. According to the court, “Industrious National … made the decisions which directly led to this litigation, including the decisions to not use available funds to pay rent to Stockbridge Jackson, to create and implement the plan to transfer members to other locations … and to ultimately close the … location.”
Second, the court addressed whether it was established “that Industrious National engaged in deliberate wrongful conduct that either was designed to or did produce injury to Stockbridge Jackson.” Trial testimony supported a finding of “obfuscation or deception vis-à-vis Stockbridge Jackson.” The court found Industrious National had falsely suggested that it would be the tenant on the lease because it provided Stockbridge with its own profit/loss statements and balance sheets, as well as news articles hailing its financial strength. When Stockbridge offered concessions to keep Industrious Jackson as a tenant, Industrious Jackson did not negotiate in good faith and instead used delay tactics to continue using the space without paying rent.
And though Industrious National had enough funds to pay rent in April 2020, the company decided that Industrious Jackson would not make the payment. Instead, Industrious National helped move that location’s members, Industrious Jackson’s primary source of revenue, to one of its other seven co-working locations in Chicago, effectively depriving Industrious Jackson of the ability to pay rent. These facts supported the court’s finding that Industrious National exercised its control over Industrious Jackson “in such a manner as to wrong” Stockbridge.
Lastly, the court determined that Industrious National’s deliberate wrongful actions via Industrious Jackson caused Stockbridge to suffer significant loss. The court noted that Industrious National’s president acknowledged in his testimony that “[Industrious Jackson’s members] were paying rent, Stockbridge was paying its mortgage on the building, and the only one not paying was Industrious Jackson during that time.”
As with most veil-piercing cases, the court focused on whether the parent, Industrious National, had instructed its subsidiary to act in a way that was dishonest and intentionally harmed Stockbridge. The court found that because it had, the corporate veil was pierced.
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Read moreDetailsOther key veil-piercing cases
Below is a summary of other key veil-piercing cases for illustration purposes.
EPLET v. DTE Pontiac North
Courts often focus on ownership and control in veil-piercing cases, which can be particularly challenging when multiple entities are involved. Courts often try to answer the question of which entity is ultimately responsible for the harmful actions.
For instance, EPLET, LLC v. DTE Pontiac North, LLC was a breach-of-contract case arising from General Motors’s bankruptcy. There, GM leased land to DTE Energy Pontiac North (DTEPN). DTEPN agreed to maintain the plant according to specific criteria and to resolve any environmental issues. DTEPN’s parent company, DTE Energy, guaranteed that DTEPN would meet these responsibilities, or DTE Energy itself would step in to fulfill the obligations. But when the lease expired, GM discovered that DTEPN had allowed the plant to fall into disrepair, leading to contamination of the property. GM sued both DTEPN and DTE Energy for breach of contract.
The Sixth Circuit held that DTE Energy should be liable for DTEPN’s alleged wrongs because the decision “to cease maintenance and allow the operational and overall condition of the Leased Premises to deteriorate” was actually made by DTE Energy. This lack of maintenance harmed the grounds, ultimately leading to the contractual breaches, according to the court. Because DTE Energy “exercised its control over DTEPN in a way that wronged [the GM trust],” corporate veil-piercing was appropriate.
People v. V&M Industries
Courts also turn to the presence of corporate formalities to determine whether an entity was a “shell” for its shareholders, members or owners.
In People v. V&M Industries, the state of Illinois sued V&M Industries after over 40,000 tires caught fire on the company’s property and caused significant environmental damage. The Illinois appellate court pierced the corporate veil and held the owner of V&M Industries personally responsible.
In 1981, an individual (Leirer) purchased property in Illinois and incorporated V&M Industries for the sole purpose of renting the property out. One of V&M Industries’ tenants brought tires onto the property to start a tire-shredding operation with Leirer. The agreement eventually fell apart, and the tenant abandoned the tires on the property.
The Illinois Environmental Protection Agency negotiated a tire-removal agreement with Leirer. During the negotiations, Leirer signed all the documents as an authorized representative of V&M Industries and consulted no other corporate officers about the agreement. A corporate meeting never took place on this issue. Leirer never complied with the agreement, and in 1994 the tires on the property caught fire.
The Illinois agency sued Leirer for injunctive relief and civil penalties, arguing that Leirer’s dealings demonstrated that V&M Industries was not separate and distinct from him, and the court agreed.
In its decision, the court held “[a] corporate entity will be disregarded if it would otherwise present an obstacle to the protection of private rights or if the corporation is an alter ego or business conduit of the governing or dominant personality.” The factors the court considered included:
- Inadequate capitalization
- Failure to issue stock
- Failure to observe corporate formalities
- Payment of dividends
- Insolvency of the debtor corporation at the time
- Nonfunctioning of other corporate officers or directors
- Absence of corporate records
- Whether the corporation is a mere façade for the operation of dominant stockholders
Because those factors were present, the court held the Illinois Environmental Protection Agency could recover civil penalties from Leirer himself such that the corporate veil was pierced.
Waste Conversion Technologies. v. Warren Recycling
To be sure, cases that involve asset transfers from parent corporations to subsidiaries or vice versa, as in Stockbridge 600 West Jackson, do not always result in a piercing of the corporate veil.
In Waste Conversion Technologies, Inc. v. Warren Recycling, Inc., the Sixth Circuit did not find that the corporate veil had been pierced, calling the doctrine a “blunt instrument.” Instead, the court held that fraudulent conveyance law permits creditors to recover the exact value of the asset transferred, making it a more suitable remedy.
The case involved a breach-of-contract claim between Waste Conversion, a middleman between construction companies and landfills, and Warren Recycling, a landfill operation owned by Anthony DiCenso and Gilbert Reiger. Warren Recycling leased the property for its landfill operation from T&G Enterprises/Waste Transfer, a partnership that was also owned by DiCenso and Reiger.
After Waste Conversion filed its complaint for breach of contract, DiCenso and Reiger began negotiating a deal with an outside buyer to sell the landfill operations, which included permits held by Warren Recycling and the land owned by T&G Enterprises/Waste Transfer. Though the deal fell through, Waste Conversion alleged that DiCenso and Reiger tried to get rid of Warren Recycling’s assets — transferring permits to T&G Enterprises/Waste Transfer for no money in return and paying excessive salaries to themselves and their family members — so that recovery would be impossible.
The Sixth Circuit found that these facts did not favor veil-piercing. Though T&G Enterprises/Waste Transfer shared the same ownership as Warren Recycling, T&G Enterprises/Waste Transfer was a distinct entity. During contract negotiations with Waste Conversion, DiCenso and Reiger did not represent that Warren Recycling and T&G Enterprises/Waste Transfer were the same entity. In fact, the court said, the two entities held different assets and separately observed corporate formalities.
In the same vein, the court found that Waste Conversion could not hold Warren Recycling’s shareholders, DiCenso and Reiger, liable. Under Ohio law, plaintiffs seeking to pierce the corporate veil must demonstrate that “the individual shareholders exercised complete control over the corporation so that the corporation had no separate mind of its own” (an alter-ego test), “the control was exercised to commit fraud” and “injury or unjust loss resulted.”
The court held that Warren Recycling’s corporate form was not “a mere shell for DiCenso and Reiger” because they were paid salaries. Nor was there any evidence that DiCenso and Reiger held out or used Warren Recycling’s funds as their own, that they used the corporate form to commit fraud or that they siphoned corporate funds for personal expenses.
But this refusal to pierce Warren Recycling’s corporate veil did not leave Waste Conversion without recourse. The court noted that there may have been a fraudulent conveyance because assets were transferred to shareholders (high salaries) and T&G Enterprises/Waste Transfer (rent and the permits) without receipt of reasonably equivalent value. The equitable solution to this problem, the court said, would be for Waste Conversion to use the bankruptcy courts and “get in line with all the other creditors.”
Best practices to prevent veil-piercing
To minimize the risk of veil-piercing, businesses should rigorously maintain corporate separateness and adhere to the following best practices:
- Maintain distinct operations. Ensure each entity has separate bank accounts, corporate documents, meeting minutes, office space and decision-making processes.
- Avoid commingling funds. Do not mix funds between entities. Document any inter-entity transactions in writing, at market terms and at arm’s length.
- Adequate capitalization. Each entity should be sufficiently capitalized to meet its obligations independently.
- Independent decision-making. All business decisions should be made by authorized agents of the entity, with clear documentation.
- Proper use of entity name. Use the full legal name of the entity on all contracts and documents and ensure signatures are made on behalf of the correct entity.
- Observe corporate formalities. Hold regular meetings, maintain accurate records and ensure all required filings and formalities are observed.
- Avoid abuse of the corporate form. Understand that courts are more likely to pierce the veil where there is evidence of fraud, unfairness or abuse of the corporate structure.
Jeffrey Huelskamp
Bethany Ao
