Generally, the individuals who own and run a company are not liable for the acts of the corporation. Veil piercing is a way around this. Veil piercing typically involves multiple parties and multiple claims and can be a complex and confusing theory of liability. Nonetheless, a few key concepts can assist the decision maker in determining if veil piercing is even an option in litigation as well as assist in determining the risk of exposure to personal liability. The first step is to understand what veil piercing is not. It is a common misconception that veil piercing is a cause of action or claim, such as, breach of contract, fraud, negligence or trespass. Veil piercing is not a claim; instead, it is a tool to expand the number of potential defendants. Generally, under veil piercing, a defendant can be held liable for the acts of another because of the relationship between the two. As such, veil piercing falls under the theory of vicarious liability and is not an independent cause of action.
Veil piercing can be used in contract actions, tort actions or both. It can intersect multiple claims and parties and confuse an unorganized litigator or plaintiff. Accordingly, organization is often the key to understanding and maneuvering a veil piercing claim. If a potential defendant or plaintiff consults with an attorney, and the attorney does not, at least, considered the validity of multiple claims then it is highly probable that the attorney is not familiar with veil piercing. The same can be said of an attorney who fails to consider the liability of multiple parties. As such, the second step in analyzing veil piercing is to organize the potential claims and parties into an understandable format. A chart, diagram, table or hierarchical structure are common at this step and can save clients and litigators money and time in the long run.
A plaintiff who wants to pierce the corporate veil must also consider what it has to prove in court. In order to hold an underlying principal liable, a plaintiff must prove that the corporate form should be disregarded because of at least one of the following: (i) the corporate form was fake and used merely to perpetrate a fraud; (ii) the corporation was organized and operated by someone outside the corporation; (iii) the form was used to evade a legal obligation; (iv) the form was used to achieve or perpetrate a monopoly; (v) the form was used to circumvent a statute; (vi)the form was used to protect against the discovery of a crime or to justify a wrong; or, (vii) the corporation was inadequately capitalized so as to create an injustice. If the suit is based on or relates to a contract, the defendant must have caused the corporation to be used for the purpose of committing the fraud and committed fraud on the plaintiff primarily for the defendant’s direct personal benefit.
It should be noted that, under the Texas Business Organizations Code, if a defendant is a shareholder, subscriber or affiliate of the shareholder or an owner of any beneficial interest in shares or an affiliate of the owner then the plaintiff must prove actual fraud. This requirement often stops veil piercing in its tracks and is a significant hurdle for plaintiffs and defendants. Fraud is difficult to prove because the plaintiff must show that the defendant made a false statement with the intent that the plaintiff act on the false statement. In other words, the defendant meant to mislead the plaintiff. On its face, this seems simple, but it is rare for a plaintiff to have direct evidence of the defendant’s deceit because a defendant is unlikely to admit that they knowingly lied. But, if they did, finding evidence of intent is key for plaintiffs. Alternatively, if the defendant mislead the plaintiff but had no intent to lie, and some harm came to the plaintiff as a result, the defendant should focus on introducing evidence of the lack of intent and if found can use that evidence to create significant hurdles for the plaintiff’s case.
Typically, to prove this requirement, defendants and plaintiffs rely on circumstantial evidence. For example, an individual may be held liable if it uses an inaccurate plat to identify the location of property in order to convince the plaintiff to enter an agreement. See Samson Lone Star Ltd. P’ship v. Hooks, 497 S.W.3d 1, 15 (Tex. App.—Houston [1st Dist.] 2016, pet. denied). In this case, the plaintiff introduced evidence of the falsity of the plat and evidence that the plaintiff was induced into entering the contract by the plat. Moreover, the defendant knew the plat was false but offered it as true. The court found these circumstances sufficient to hold the defendant personally liable. Often, defendants will offer an excuse as to why they provided false information. If the defendant knew the information was false, though, evidence of the defendant’s knowledge could turn the outcome of the case. On the other hand, if the defendant can show that he, in fact, had no idea the information was false then the defendant may have the key to unlocking a solid defense to veil piercing. That is why circumstantial evidence can be crucial and why it takes an organized, skilled and experienced litigator to know what it takes to pierce the corporate veil or maintain the integrity of the veil.
This blog is not legal advice. The lawyers at Hayes, Berry, White & Vanzant would be happy to answer any questions you may have regarding veil piercing. Feel free to contact us here.
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