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Business Litigation Piercing The Corporate Veil

Since the dawn of capitalism in America entrepreneurs who have taken the risk of starting their own business or who have invested money or other “capital” to start a business with others, have sought to limit their personal liability for actions or debts related to the operation of the business. Accordingly, over the years various federal and state laws and regulations have been passed providing “corporate shield” protection to businesses. The policy behind “corporate shield” laws is that so long as the business maintains the corporate form by filing annual reports with the State, holding shareholder meetings and keeping corporate minutes, the personal assets of the stockholders of the corporation may not be reached to satisfy a money judgment against the corporation.
Only in rare instances may the “corporate veil” be pierced to get at the personal assets of the stockholders. Such circumstances are when the corporation is formed solely as a “mere instrumentality” to mislead creditors or to perpetrate a fraud on them. Let’s say, for example that Company X sues Company Y (a closely-held corporation owned by a father and his two sons) for $50,000.00 in a breach of contract action where Company Y failed to pay for goods sold. The jury finds in favor of Company X and a money judgment for $50,000.00 against Company Y is entered by the Court. Shortly after the entry of judgment, however, Company Y transfers all of its assets to a new company called Company Z and commences doing the same type of business as it was doing under Company Y. It also purposely fails to file its annual corporate report with the Florida Department of Financial Services resulting in Company Y being administratively dissolved.
Company X’s money judgment cannot be satisfied by executing on the assets of Company Y as it has no assets. Company X does, however, have a viable cause of action for “piercing the corporate veil” and obtaining judgments against the father and his two sons in their individual capacities. It’s clear that Company Z was created as a mere sham to avoid the judgment Company X is holding and more than likely it will be proved that father and sons had the intent to defraud Company X (and perhaps other creditors). In such a case Company Z is the “alter ego” of the father and his two sons and the corporate shield doctrine affords them no protection.
Note that piercing the corporate veil is inapplicable to non-shareholder officers and directors of a corporation. There is one reported Florida case, Walton v. Tomax Corp., 632 So. 2d 178 (Fla. 5th DCA 1994), however, where the Court held the non-shareholder wife liable where she was an officer in her husband’s sham corporation since he was the sole shareholder.