Piercing the corporate veil occurs when a court removes a corporation or LLC’s protection from liability and holds its owners or shareholders personally responsible for the company’s debts or wrongs. Courts typically do this when individuals misuse the company structure to commit fraud, avoid legal duties or do other wrongful acts.
However, this legal action is rare and only happens in exceptional circumstances. In real estate litigation, piercing the corporate veil may arise in disputes over property development projects or real estate investment partnerships that show evidence of major corporate misconduct, such as undercapitalization or mixing of personal and business assets.
When do courts decide to pierce the corporate veil?
In New York, the case of Walkovsky v. Carlton is the main example of piercing the corporate veil. The Walkovsky rule requires the person suing to show that the shareholder or director used their control over the corporation to do personal business, rather than corporate work. Basically, the person suing must prove that the individual used the corporation as a stand-in to help their personal interests.
Also, the court must decide that the corporation worked only as a helper of the shareholder or director. This decision is important for showing shared responsibility in veil-piercing cases. The court looks at whether the corporation kept its own identity and purpose, or if it was just a cover for the individual’s personal actions.
What factors do courts consider?
To pierce the corporate veil under these rules, the person suing must present compelling evidence that:
- The shareholder or director completely controlled the company’s actions in the specific transaction under dispute.
- The shareholder or director used this control to cheat or wrong the person suing.
- The person suing suffered an unfair loss or injury because of this control and wrongdoing.
These tough requirements show that courts will only pierce the corporate veil in rare cases where following the corporate form would cause unfair results.
Courts do not make this decision lightly
While piercing the corporate veil is a strong legal tool, it requires substantial evidence of wrongdoing. If you’re involved in a complex real estate dispute involving corporate entities, it’s crucial to consult with attorneys experienced in both corporate and real estate law.