February 25, 2011
My previous post on piercing the corporate veil has received some attention here and here.
Steve Bainbridge argues that veil piercing should be eliminated. See his full paper on this subject here.
I’m sympathetic to this view, especially with respect to the claims of consensual creditors. But I think that claimants who have not chosen to deal with the corporation (many tort claimants) raise different issues. Contractual self-protection is not an option for those people, and the argument for having them bear the cost of limited liability is weak. In that context, if the company is undercapitalized, piercing makes sense to me. Even in the contractual setting, veil-piercing might be justifiable where there have been post-contract withdrawals of funds from the corporation, but most of those situations could be covered by fraudulent conveyance laws.
The problem is that veil-piercing is not limited to cases where plaintiffs can’t protect themselves against unwanted corporate externalities. Absent a rational, consistent theory of when to pierce the veil, the doctrine may do more harm than good and Bainbridge’s argument makes sense.
Jeff Lipshaw admits that veil-piercing cases are “idiosyncratic”, but says they involve “some outrageous conduct that makes the decision, in retrospect, not particularly surprising.” Lipshaw seems to think that we shouldn’t expect deductive rationality from the cases.
I’m afraid I can’t accept either Lipshaw’s factual premise or his conclusion. I have seen a number of decisions piercing the corporate veil that, to me, seem surprising—or where I think a decision not to pierce would make just as much, if not more sense, as a matter of policy. And if the results in the veil-piercing cases are uncertain, unpredictable, and can’t be explained by the courts ex post on the basis of any coherent principles, then I don’t know what it is, but it isn’t my vision of the rule of law.
February 25, 2011 | Permalink