One of the most frustrating scenarios for judgment creditors is winning a substantial judgment against a corporation or LLC only to discover the entity has no assets while its owners live comfortably and continue operating profitable businesses. Limited liability protection is a cornerstone of business law, but it is not absolute. Under certain circumstances, New York courts will pierce the corporate veil and hold individual owners personally liable for corporate obligations. Understanding when and how veil piercing applies can open doors to collection that would otherwise remain permanently closed.
Understanding Limited Liability and Its Limits
Corporations and limited liability companies are separate legal entities distinct from their owners. This separation shields shareholders and members from personal liability for business debts in most situations. A creditor with a judgment against ABC Corp generally cannot collect from the personal assets of ABC’s shareholders, even if those individuals completely control the company.
However, this protection exists to facilitate legitimate business activity, not to perpetrate fraud or injustice. When business owners abuse the corporate form by using it as a mere shell to shield personal assets while conducting business for their own benefit, courts will disregard the separate entity and impose personal liability on the individuals behind the corporation.
The Two-Prong Test for Piercing the Veil
New York courts apply a rigorous two-part test before piercing the corporate veil. First, the party seeking to pierce must show that the owners exercised complete domination and control over the corporation with respect to the transaction at issue. Second, the party must demonstrate that this domination was used to commit fraud or wrong against the creditor that resulted in injury.
Complete domination means more than just majority ownership or ordinary management authority. It requires showing that the corporation had no independent existence and was merely an instrumentality or alter ego of its owners. The fraud or wrong prong does not require proof of actual fraudulent intent in all cases. Courts have found the necessary wrongdoing when corporations are undercapitalized, when corporate formalities are ignored, or when corporate assets are siphoned off for personal use.
Factors Courts Consider in Veil Piercing Cases
Courts examine numerous factors when deciding whether to pierce the corporate veil. No single factor is determinative, but the presence of multiple red flags creates a compelling case for disregarding the corporate entity. Common factors include inadequate capitalization at the time of formation, failure to observe corporate formalities such as holding meetings or maintaining separate records, and commingling of corporate and personal funds.
Other significant factors include use of corporate assets for personal purposes, diversion of corporate funds to insiders, failure to maintain arm’s length relationships in dealings between the corporation and its owners, and representations by owners that they would be personally responsible for corporate obligations. Courts also consider whether the corporation paid dividends or maintained adequate liability insurance and whether corporate records were falsified or concealed.
The absence of corporate formalities is particularly important in closely held corporations. When owners fail to hold annual meetings, keep minutes, issue stock certificates, or maintain separate bank accounts, this suggests the corporation is not being treated as a genuine separate entity. Similarly, when the same individuals serve as officers, directors, and shareholders without clear delineation of roles, this indicates excessive domination and control.
Evidence Needed to Support Your Claim
Successfully piercing the corporate veil requires substantial factual evidence demonstrating both domination and wrongdoing. Begin by obtaining the corporation’s formation documents, bylaws, stock ledgers, and meeting minutes through discovery. The absence of these records or their incomplete nature supports your claim that formalities were ignored.
Examine bank statements and financial records to identify commingling of funds and transfers between the corporation and its owners. Look for instances where corporate accounts paid personal expenses like mortgages, credit cards, vacations, or other costs unrelated to business operations. Document situations where owners withdrew funds without proper authorization, loans, or dividend procedures.
Interview former employees, vendors, and business associates who can testify about how the business actually operated. Often these witnesses can provide evidence that the corporation was merely a façade and that the owners made all decisions and treated the business as their personal property. Testimony about owners representing they would personally guarantee obligations or that the corporation was just them doing business can be particularly valuable.
Procedural Considerations in Veil Piercing Actions
Veil piercing claims can be brought in the original lawsuit if you sue both the corporation and its owners, or they can be pursued through a separate action after obtaining a judgment against the corporation. The separate action approach is common in collection contexts where the creditor initially sued only the corporate entity and later discovered the corporation lacks assets to satisfy the judgment.
When bringing a post-judgment veil piercing action, you are essentially starting new litigation against the individual owners. This requires filing a complaint, serving the individuals, and proving all elements of your claim through discovery and trial. Experienced Warner & Scheuerman attorneys understand that these cases can be complex and expensive, so evaluating whether the potential recovery justifies the investment is critical.
Strategic Considerations and Alternatives
Before pursuing veil piercing, consider alternative collection strategies that might be less expensive or more certain. If owners personally guaranteed corporate obligations, enforcing the guarantee is simpler than piercing the veil. If corporate assets were fraudulently transferred to owners, pursuing fraudulent conveyance claims might be more straightforward than proving complete domination and control.
Veil piercing works best when the corporate abuse is egregious and well-documented. Cases involving clear commingling, systematic siphoning of corporate funds, or corporations that existed only on paper present strong veil piercing claims. Conversely, corporations that maintained some formalities and had legitimate business purposes are harder to pierce even if undercapitalized or thinly managed.
