Collections Blog Post 6: Piercing the Corporate Veil

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When a corporate Defendant that has no assets or property against which a judgment can be enforced (i.e., they’re “broke”), that Defendant is generally considered to be “judgment-proof.”  But in certain instances, Judgment Creditors can “pierce the corporate veil” to hold individual owners/officers of a business liable for debts/claims against the business.  To “pierce the corporate veil,” the Judgment Creditor must show that the corporate entity is just a “mere instrumentality” or “alter ego” of another person or entity, such as the principal owner or officer.

North Carolina Courts typically conduct a very fact-based inquiry into whether the corporation is operated as a “mere instrumentality” or “alter ego” of another entity.  East Market Square v. TyCorp. Pizza, Inc., 175 N.C. App. 628 (2006); DeWitt Truck Brokers, Inc., v. W. Ray Flemming Fruit Company, 540 F.2d 681, 684 (4th Cir. 1976); Hammond v. Williams, 215 N.C. 657, 659 (1939).  North Carolina case law lays out three broad considerations to help determine whether the corporate veil should be pierced:

(1)   Control.

(2)   Control used to commit a fraud or wrong “to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff’s legal rights”; and

(3)   This control and breach of duty proximately caused the injury.

Id. 

As to the first consideration (Control), Courts examine whether the secondary entity had such control over the finances, operations, and business practices of the first entity that the first entity “had no mind, will, or existence of its own.”  Glenn v. Wagner, 313 N.C. 450, 455 (1985).  Common indicators of this type of control include, non-exhaustively: (i) inadequate capitalization of the corporation; (ii) non-compliance with corporate formalities; (iii) complete domination or control of the corporation so that it has no independent identity; and (iv) excessive fragmentation of a single enterprise into separate corporations.  See id.

As to the second consideration (Control Used to Commit Fraud or Wrong), North Carolina Courts have applied a broad scope.  “When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.” Henderson v. Security Mortgage, 273 N.C. 253, 260-61, 160 S.E.2d 39, 44-45 (1968).  Prior North Carolina Courts have held that even mere breach of a contractual obligation can satisfy this requirement.  See East Market Street, 175 N.C.App. at 638.

Lastly, as to the third consideration (Proximate Cause), North Carolina Courts have held that the wrong does not necessarily have to rise out of the same behavior that the leads the Court to find domination and control.  See Glenn, 313 N.C. at 456.  Courts focus on equity and “placing the burden of loss” on the responsible party.  East Market, 175 N.C. App. at 640.

If the Plaintiff has information that the corporation is insolvent, and there is a possible basis for “piercing the corporate veil,” then the Plaintiff can bring a veil-piercing cause of action in the original lawsuit, naming the owner/principal stockholder as a Defendant. Alternatively, evidence supporting veil-piercing claims may also be developed in post-judgment discovery/Supplemental Proceedings.

Piercing the corporate veil is a vital component of any skilled business litigator's arsenal. If you need legal assistance getting paid what you’re owed, please feel free to contact The Law Offices of Peter Isakoff anytime, day or night, at (336) 863-8348 (Main) or (336) 864-9115 (Español).

DISCLAIMER: The information in this article is provided for informational purposes only. It is not offered as and does not constitute legal advice. The accuracy of the information may change pending changes in applicable law. If you have questions about a specific matter, you should contact a lawyer. The use of this article or any information provided in it does not establish any lawyer/client relationship.