Thailand Law Journal 2013 Fall Issue 1 Volume 16

U.S. Law and Evolution of Piercing the Corporate Veil Doctrine The phrase "piercing the veil" was initially emitted since 1912 by Professor Maurice Wormser³¹ while the doctrine of limited liability began to formalize itself in U.S. long before, with no precise starting date. An enactment of five variant statutes launched by Massachusetts parliament, from 1809 until 1830, legislating liability of shareholders seems to be the first milestone of expansive adoption on limited liability doctrine in United States. The judicial decision in case of Wood v. Dummer³² granted an approval for the principle of limited liability.³³

Reluctance of granting damages award against corporations could be sensed from U.S. judicial decisions in primal age of U.S. corporate law, and for this reason, the removal of corporate veil was scarcely expected³⁴, in accordance with enormity and desirability of corporate being which devoted to financial and economic advantages.³⁵ The remarkable phrase quoted from Chief Justice Marshall even defined the corporation as "an artificial being, invisible, intangible an existing only in contemplation of law."³⁶ Illustratively, according to 18th Century Mill Acts in New England, it prohibited owners of the land adjacent to mills from claiming damages if flood occurred on their properties because of water storage and discharge. Although the primary purpose of statutes focused on compact-sized mills of the colonial era, mill factories that caused flood on wide area of land was later also under enforcement of this statutes³⁷

It is notable that an approach to the problematic issue of individual shareholder is mostly based on tracing through development of decisions that the courts made because there is no uniform binding rules. Moreover, purity of state-law domination was a legal nature of corporate establishment in the United States.³⁸ This excessive variety urged Judge Cardozo to leave a statement of opinion in Berkey v. Third Ave. Railway Co. that "the whole problem of the relations between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor."³⁹ Moreover, Professor Elvin R. Latty from Duke Law School remarked that "what the formula comes down to, once shorn of verbiage about control, instrumentality, agency and corporate entity, is that liability is imposed to reach an equitable result."⁴⁰

Although development of theories has been being acknowledgeable, the summary noted by Judge Sanborn brightened the passage in United States v. Milwaukee Refrigerator Transit Co. and provided descriptive approach to the problem:

"If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general, and until sufficient reason to the contrary appears; but, 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."⁴¹

One of significant issues that should be notified is regarded to difference between piercing the veil and other issues in which owners of a corporate entity shall be personally held liable whatsoever without necessity to apply piercing mechanism. For example, an individual obligation or tortuous acts may be occurred from individual conducts of a shareholder, instead of a corporate entity. He or she may induce a creditor that his or her actions are made individually, not on behalf of the corporation.⁴² Decisions on these cases will be made without applying the rules of piercing the corporate veil because an occurrence of individual liability is caused by the shareholder.

Another theoretical evolution of piercing the veil doctrine was also remarked by Professor Adolf A. Berle of Columbia Law School, as an approach of "enterprise entity theory."⁴³ Professor Berle noticed that when a business was divided into various entities under supervision of the parent corporation, there was an inconsistency between economic reality and the legal organization. Therefore, he commented that the subsidiary's debt is not the only liability which the parent should bear, but the parent should also be liable for "all of the comprised assets available to a creditor of any of the enterprise's corporations."⁴⁴

The cases of New York taxi-cab are another source which can increase the illustrational level. Many cabs were paired and separately incorporated by each of their owners. The purpose is to enjoy the limitation of tortious liability arisen from the use of
one cab and prevent the other "cab entity" from the flak of liability that may spread to them by incorporating in pairs. Therefore, only the lowest amount of third party insurance was the responsibility of the individual cabs, which often could not suffice
obligations incurred.⁴⁵

Rejection on Berle's enterprise entity theory was made by the court in the case of Berkey v. Third Ave. Railway Co.⁴⁶ This case involved a parent corporation which was an owner of many subsidiary companies and controlled the operation of a railway transportation system in Manhattan. The court refrained from favoring the plaintiff, who caught one of the subsidiaries' street cars and suffered from injury by negligence, by refusing to impose shareholder liability. In an alternate taxi-cab case, Walkovszky v. Carlton, a reference to Berle's conception was made by the court. The conclusion was mostly narrated that extension of liability to the enterprise was plausible but not to the individual shareholders. However, it can be evidently sensed from the conclusion of the court that other factors such as undercapitalization and commingling of the corporation's affairs had been focused and magnified more, rather than concentrating only on camouflaged separation of an enterprise by incorporating its own divisions.⁴⁷

There are other theoretical approaches which, instead of focusing on Professor Berle's enterprise entity theory, take more glances at creditor's view point. For example, Professor Wormser maintained that the lawful fictional status of a corporate separation is a privileged existence conferred by a state and it can be used only to reasonably and administratively serve legitimate purposes. Consequently, achievement of justice and prevention of shareholders from circumvent their legal liability should be the purposes of the pierce. Moreover, it is his belief that because of an involvement of the complex relations, statutorization of these piercing rules could not be feasible.⁴⁸

A similar approach to Professor Wormser's can be seen in California. Californian courts have more readiness than other states to disregard the entity. The courts concentrated on an application of a two-prong test, mostly known as the "alter ego" doctrine. The requirements of this test are comprised of: "(1) a unity of interest between the shareholders and their entity so that a separation of them no longer exists and (2) an inequitable result would follow if the acts objected to by the creditors were only treated as those of the corporation."⁴⁹

Another comparable approach is a theory asserted by Professor Powell. He made a suggestion on how to apply a three-prong test, widely known as the "instrumentality rule."⁵⁰ Adoption of this rule initially occurred in Lowendahl v. Baltimore & Ohio R.R.⁵¹ Powell's test depends upon: "(1) control or complete domination of an entity, (2) fraud or wrong committed by the use of this control or domination, and (3) injury or loss suffered by the plaintiff caused by the aforesaid act." The original purpose of development of the test was for parent-subsidiary cases, but enforcement of the test to other cases, which were related to the domination of an entity, were also seen in various jurisdictions.⁵²

31. Douglas C. Michael, To Know a Veil, 26 J. Corp. L. 41, 43 (2000).

32. 30 F. Cas. 435 (C.C.D. Me. 1824).

33. Carsten Alting, Piercing the Corporate Veil in American and German Law-Liability of Individuals and Entities: A Comparative View, 2 Tulsa J. Comp. & Int'L L. 187, 192 (1994-1995).

34. Id.

35. Peter French, supra note 23 at 605.

36. Id.

37. Alting, supra note 33 at 193.

38. French, supra note 35 at 609.

39. Alting supra note 37.

40. Id.

41. Id.

42. Id.

43. Id. at 194.

44. Id.

45. Id.

46. Id.

47. Id.

48. Id. at 195.

49. Id. and see note 28.

50. Id.

51. In this case, "…two insolvent individuals had, prior to the entry of the judgment against them in favor of Lowendahl, transferred substantially all of their assets to a newly-created corporation in exchange for forty-nine percent of its stock. The defendant B&O Railroad was the majority shareholder of such corporation and, when Lowendahl failed to recover against either the individual debtors or against the insolvent transferee corporation, he sued B&O on the theory that the corporate veil of the transferee corporation should be pierced to hold B&O liable..." See http://www.krendl.com/ CM/ Publications/ Piercing-Corporate-Veil.asp.

52. Alting supra note 33 at 195.