Particularly in commercial litigation and collections lawsuits in Texas, situations often arise when an attempt is made to “pierce the corporate veil”. As attorneys who represent businesses on both sides of commercial disputes, we have had to offensively use corporate fiction arguments and defend against them. We have sued corporate personnel in an individual capacity, sued corporate entities, and defended against claims of corporate veil.
“Piercing the corporate veil” is a legal term that means that the owners of a corporation lose the limited liability that having a corporation provides them, thus the piercing of the veil. When this happens, personal assets can be used to satisfy business debts and liabilities, not just corporate assets. The result is that individuals start getting named in lawsuits, in addition to the corporate entities they are affiliated with. However, this concept doesn’t apply just to corporations. Any business organization that provides limited liability to its owners is at risk of an offensive piercing of the corporate veil if the owners don’t take important to assure this protection from liability remains in place.
In order to impose liability upon a parent corporation for the obligations of a subsidiary corporation, important factors that Texas courts will consider include:
(1) common stock ownership between parent corporation and subsidiary;
(2) common directors and officers between parent and subsidiary;
(w) common business departments between parent and
(3) the parent’s incorporation of the subsidiary;
(4) consolidated financial statements and tax returns filed by
parent and subsidiary;
(5) the parent’s financing of the subsidiary;
(6) undercapitalization of the subsidiary;
(7) parent’s payment of salaries and other expenses of subsidiary;
(8) whether parent is subsidiary’s sole source of business;
(9) parent’s use of subsidiary’s property as its own;
(10) the combination of corporations’ daily operations;
(11) lack of corporate formalities by the subsidiary;
(12) whether directors and officers of subsidiary are acting
independently or in the best interests of the parent; and
(13) whether the parent’s employee, officer or director was connected
to the subsidiary’s action that was the basis of the suit.
The history of Texas law in this area is of commercial litigation is exemplified by the 5th Circuit case of Rimade Ltd. v. Hubbard Enterprises, 388 F.3d 138 (5th Cir. 2004), and the pivotal Texas Supreme Court case of Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986). The Rimade court stated, “Under Texas law, there are three broad categories in which a court may pierce the corporate veil: (1) the corporation is the alter ego of its owners and/or shareholders; (2) the corporation is used for illegal purposes; and (3) the corporation is used a sham to perpetrate a fraud.” 388 F.3d at 143.
After the Rimade decision was handed down, the Texas legislature enacted section 101.114 of the Texas Business Organizations Code, which had the effect of limiting corporate piercing by codifying the law in this area of law. That seminal section reads as follows:
§ 101.114. Liability for Obligation
Except as and to the extent the company agreement specifically provides otherwise, a member or manager is not liable for a debt, obligation, or liability of a limited liability company, including a debt, obligation, or liability under a judgment, decree, or order of a court.
Section 21.223 of the Texas Business Organizations Code further clarifies and limits the exposure of shareholders and members:
§ 21.223. Limitation of Liability for Obligations
(a) A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate of such a holder, owner, or subscriber of the corporation, may not be held liable to the corporation or its obligees with respect to:
(1) the shares, other than the obligation to pay to the corporation the full amount of consideration, fixed in compliance with sections 21.157-21.162, for which the shares were or are to be issued;
(2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory; or
(3) any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality, including the failure to:
(A) comply with this code or the articles of incorporation or bylaws of the corporation; or
(B) observe any requirement prescribed by this code or the articles of incorporation or bylaws of the corporation for acts to be taken by the corporation or its directors or shareholders.
(b) Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.
The fact that a defendant must “perpetrate an actual fraud …primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate?” has had the effect of greatly limiting the success of corporate veil piercing arguments. Actual fraud committed primarily for the “direct personal benefit” of the shareholder or member is arguably required for piercing in Texas, as pertains to contract-related claims.
In the case of In re JNC Aviation, LLC, 376 B.R. 500, 527 (Bankr. N.D. Tex. 2007), aff’d, 418 B.R. 898 (Bankr. N.D. Tex.2009), the court stated that to “to determine if the members of an LLC are liable under the asserted veil-piercing theories, the Court must analyze both the question of whether the facts satisfy any of the asserted veil-piercing strands and the question of whether any of the members caused the LLC to be used for the purpose of perpetrating and did perpetrate an actual fraud on the plaintiff primarily for the direct personal benefit of the considered defendant.”
Therefore, merely alleging “alter ego” is by itself probably insufficient as a matter of law, when the courts are talking in terms of actual fraud. Texas courts recognize the “strict restrictions on a contract claimant’s ability to pierce the corporate veil.” Ocram, Inc. v. Bartosh, No. 01-11-00793-CV2012, WL 4740859, at *2-3 (Tex. App.–Houston [1st Dist.] 2012, no pet.).
While piercing may have lost some traction in Texas commercial disputes, nonetheless, it is always important for owners to undertake necessary formalities and document their business actions. Be sure to provide for adequate business capitalization and don’t comingle personal and business assets. Also, any contracts, leases and legal documents an owner signs should always be in the company name.
Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas collections attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.