Piercing the Corporate Veil
Plaintiffs frequently seek to pierce the corporate veil of companies against whom judgments may be or have been obtained in an attempt to extend liability to the defendants’ principals. Is piercing the corporate veil a viable cause of action separate from the underlying claims that seek to impose liability on the defendant entity? When can a piercing the corporate veil claim be asserted? The Michigan Court of Appeals recently answered those important questions in Gallagher v Persha, 2016 Mich. App. LEXIS 1116 (June 9, 2016).
This case arose out of a residential purchase agreement which the defendant corporation allegedly breached by not paying off the plaintiffs’ mortgages. The plaintiffs filed suit in 2012, alleging that the defendant corporation had breached the parties’ agreement. They also sued the defendant corporation’s president and sole shareholder for breach of fiduciary duty, which claim was dismissed as being time barred by the statute of limitations. The plaintiffs then amended the complaint, adding fraud claims against both defendants and a claim entitled “piercing the corporate veil.” The plaintiffs obtained a judgment against the defendant corporation and the parties then stipulated to dismissal of the fraud and piercing the corporate veil claims against the individual defendant.
In 2014, the plaintiffs filed a complaint against the individual defendant, which included a claim for piercing the corporate veil of the corporate defendant against which they had obtained a judgment in the prior case. The trial court dismissed the claim with prejudice because it was no longer supported by an underlying cause of action. When the plaintiffs sought to reopen the prior case to allow them to pierce the defendant corporation’s corporate veil and hold the individual defendant individually responsible for the judgment against the corporation, the trial court refused to do so on the ground that “there is no independent cause of action for a claim for piercing the corporate veil.”
On appeal, the Court of Appeals cited Wells v Firestone Tire and Rubber Co., 421 Mich. 641, 650-651 (1984), and noted that “Michigan law respects the corporate form, and our courts will usually recognize and enforce separate corporate entities.” However, the Court recognized that “when the requisite evidence establishes that the corporate form has been abused, the corporate form will be pierced so that creditors (and sometimes others) can seek payment of a corporate debt (like the judgment in this case) from a responsible corporate shareholder.” In answer to the first question posed above, the Court held that “piercing the veil of a corporate entity is an equitable remedy sparingly invoked to cure certain injustices that would otherwise go unredressed in situations ‘where the corporate entity has been used to avoid legal obligations.’ * * * It is therefore a remedy, and not a separate cause of action …” (Citation omitted.)
The Court then reached the nub of the issue in the case, stating that “this case is not controlled by that principle, for what is at issue here is how may a judgment-plaintiff procedurally pursue the piercing remedy once it is established that the corporate entity cannot pay the judgment and there is some evidence or reason to believe that the corporate form has been abused to avoid legal obligations.” It then posed the following question, which corresponds to our second question: “[M]ust the remedy be plead as part of the original case, or forever be barred? Or, can a new case be filed to enforce the outstanding judgment against responsible shareholders if the facts allow piercing of the corporate veil even if no separate cause of action is plead?”
Finding little guidance in Michigan law, the Court reviewed decisions from other state courts and decided to reverse the trial court on its dismissal of the second case, holding that
“plaintiffs were entitled to bring a new action in an attempt to enforce the prior Kasper [the corporate defendant] judgment against Persha [its president and sole shareholder]. While we continue to recognize that piercing the corporate veil is merely a remedy to be applied in certain limited circumstances, the concern that there be a separate cause of action to support this type of equitable relief does not arise when, as in this case, there already exists a judgment based on one or more causes of action. * * * In other words, a party certainly needs to successfully pursue a cause of action before it can pursue a remedy …”
The Court also made clear that a finding of no individual liability against a corporate principal does not bar a plaintiff from subsequently bringing a piercing the corporate veil claim against the individual. “A corporate veil is pierced and liability imposed upon an individual shareholder or officer not because the shareholder or officer was necessarily liable under the cause of action resulted in the judgment against the corporation. * * * Instead, liability is imposed because the fact finder has concluded that the individual so misused the corporation that it was unable to pay on the outstanding judgment and an injustice would occur if the corporate form was not ignored.”
The bottom line is that a claim against a corporate principal seeking to pierce the corporate veil can be brought either in the original action (if facts are known that support such a claim) or in a separate cause of action to impose personal liability after a judgment has been obtained.