When the Veil is Pierced: TN Supreme Court Clarifies Elements for Piercing the Corporate Veil
In Youree v. Recovery House of East Tennessee, LLC, the TN Supreme Court clarified the tests for piercing a corporate veil and holding a person or entity liable for the obligations of a corporate entity. The plaintiff had obtained a judgment against a corporation, and filed another suit alleging that a second corporation was liable for the judgment due to its overlapping ownership and close affiliation with the first.
The trial court applied the Allen factors (Federal Deposit Insurance Corp. v. Allen, 584 F. Supp. 386 (E.D. Tenn. 1984)) to determine whether the plaintiff could pierce the corporate veil. Those factors are:
(1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the non-issuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arm’s-length relationships among related entities.
On appeal, the TN Supreme Court held that the Allen factors apply only when evaluating whether a shareholder is liable for a corporation’s obligations. In assessing whether a closely affiliated corporation should be liable, the court should apply the Continental Bankers (Continental Bankers Life Insurance Co. of the South v. Bank of Alamo, 578 S.W.2d 625 (Tenn. 1979)) elements:
(1) The parent corporation, at the time of the transaction complained of, exercises complete dominion over its subsidiary, not only of finances, but also of policy and business practice in respect to the transaction under attack, so that the corporate entity, as to that transaction, had no separate mind, will, or existence of its own; (2) Such control must have been used to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of a third parties’ rights; and, (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
Because the plaintiff had not established the Continental Bankers elements, the judgment was set aside and remanded to the lower courts for further proceedings.
If a Complaint seeks to pierce the corporate veil against your insured, Midkiff, Muncie & Ross, PC has the knowledge and experience to push back against those allegations to protect the individual. Please contact Daniel I. Hall with any questions regarding Tennessee claims.