February 24, 2010
A Veil Piercing Epidemic in the High Plains?From 1999 until 2007, the North Dakota Supreme Court did not hear single case seeking to “pierce the veil” of a limited liability entity. This is especially significant because there is not an intermediate court of appeals in the state; litigants in the state appeal directly to the state's Supreme Court. Thus, it’s not as though the Court simply declined to hear any cases on the issue.
Since 2007, however, there has been a (relative) rash of veil piercing cases. The North Dakota Supreme Court has issued four decisions on the issue, piercing the veil in all four cases. Coughlin Const. Co., Inc. v. Nu-Tec Industries, Inc., 755 N.W.2d 867 (N.D. 2008) (piercing the veil of a corporation); Red River Wings, Inc. v. Hoot, Inc., 751 N.W.2d 206 N.D. 2008) (piercing the veil of a limited liability partnership); Intercept Corp. v. Calima Financial, LLC, 741 N.W.2d 209 (N.D. 2007) (piercing the veil of a limited liability company); Axtmann v. Chillemi, 740 N.W.2d 838 (N.D. 2007) (piercing the veil of a corporation).
I have to wonder if this simply a fluke or is there a discernable trend in these kinds of cases (both in their existence and outcomes)? One might expect a surge in veil piercing cases when the economy is poor, but the state of North Dakota has managed to escape most of the ill effects of the nation’s financial crisis. In fact, only North Dakota and Wyoming posted budget surpluses last year. Then again, I arrived in North Dakota and began teaching Business Associations in 2007, so perhaps I was the catalyst. But that can’t be it, either, as the Axtmann and Intercept Corp. cases (at a minimum) would already have been well underway.
Regardless, this could be interesting. I plan to take a look at other states to see if this is a trend around the country or simply a blip on the North Dakota radar. In the meantime, I welcome any thoughts or comments.
February 24, 2010 | Permalink
The first three cases are ho-hum cases legally in terms of piercing doctrine. Coughlin is a classic case of someone who comingles personal and corporate assets to the point where they are indistinguishable. Red River Wings is a case about the fiduciary duty that majority owners owe directly to minority owners rather than being a true piercing case. Intercept involves massive fraud committed personally by the business owner, thus falls within the notion that limited liability does not apply to torts committed personally by a defendant while in the course of carrying out corporate duties; thus, it is more of a direct liability case as well.
Axtmann is the true hard core piercing case (and drew a dissent as to that part of the ruling). The sole grounds for piercing are undercapitalization and unfairness. There isn't direct liability as far as I can tell, and there don't appear to be fraudulent transfers, formalities were observed, the owners didn't commit torts personally, and the business wasn't even undercapitalized at the time of its inception -- their fault is merely failing to put in new capital as the scale of the business made debts foreseeable going forward. The fact that there was even a corporate veil there at all appears to be as much accidental as planned from an asset protection basis.
Axtmann may reflect the larger farm country distrust of doing business in the corporate form. Note that many Great Plains states, at least until very recently, prohibited corporate ownership of farm land entirely. The other cases may be biased towards these concerns as well. And, in the absence of something like the housing bust seen in California, there isn't much tugging at the heart strings of judges in North Dakota to have mercy on debtors who don't pay.
Also notably, typically for North Dakota, all of the cases involve closely held entities. There aren't nearly the volume of big business corporate level cases that there are in a Delaware, for example, to inform the judge's moral intuition. Everyone held liable was at least actively involved in the conduct of the business.
The larger trend that these case may reflect, and it is a national one rather than a local one, is increasingly recognition that while merely owning shares in a company is not a liability worthy activity and carries essentially no duties, that there are a host of reasons why someone should be held personally liable as a result of their personal, active conduct of a business even in a limited liability entity form. It isn't investor liability we are seeing a resurgence of, so much as it is the rise of personal managerial liability.
Along the same lines, are the cases that hold that lawyers have a duty as a matter of professional ethics to pay third party non-lawyer litigation services expenses, even if those obligations sound purely in contract, are incurred in the name of a limited liability entity, and a solely for the benefit of the client. Courts increasingly think that the act of engaging these litigation services providers in a case where the lawyer is counsel of record and like many parties in litigation has shakey finances creates a personal duty.
Posted by: ohwilleke | Feb 25, 2010 3:15:32 PM