February 26, 2010
Sticking with the Veil-Piercing ThemeYesterday the United States Court of Appeals for the Eighth Circuit, in an ERISA action, issued an opinion that mirrors my response to at least a few exam questions on veil-piecing each year: finish your analysis.
The court made clear that, contrary to the lower court’s analysis, piercing the veil is, in fact, still a two-part test. To pierce the corporate veil in this context, a court must determine: “(1) whether a corporation was controlled by another to the extent it had independence in form only, and (2) whether the corporation was used as a subterfuge to defeat public convenience, justify wrong, or perpetrate a fraud.”
The defendants in the case, among other things, commingled funds (almost always a no-no) and generally disregarded corporate formalities in a way that justified the determination that the corporation lacked independence. However, the court reversed and remanded for a trial on the second issue: “whether the corporation was used as a subterfuge to defeat public convenience, justify wrong, or perpetrate a fraud.”
The Eighth Circuit noted that the district court, as well as the plaintiffs, provided little explanation about why the same facts that established the first prong of the veil-piercing test also satisfied the second prong. Given a lack of evidence and “the lack of explanation on the second prong of the test,” the court found “trialworthy issues” warranting remand.
The lesson: Even when it seems obvious, you need to finish the job. And it’s better sooner rather than later.
February 26, 2010 | Permalink