Most business people know that operating through a corporation or limited liability company (LLC) offers valuable legal protection. If a business is sued, only corporate assets can be used to satisfy a judgment and the owner’s personal property is usually beyond the plaintiff’s reach.
However, in certain circumstances, courts may disregard the legal protection afforded to a corporation or LLC and permit a plaintiff to directly sue the business owner. Such an action is referred to as “piercing the corporate veil.”
To accomplish this in Massachusetts, at least three factors must be present.
Confusion and Ambiguity
First, the owner is using his business entity or entities in a manner that creates confusion or ambiguity.
Corporate formalities also may be disregarded “when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting. My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619
Second, the confusion and ambiguity are used for wrongful purposes such as fraud. According to the Massachusetts Appeals Court:
There is present in the cases which have looked through the corporate form an element of dubious manipulation and contrivance [and] finagling .” Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 736 (1991). See United States v. Bestfoods, supra at 62 (veil piercing appropriate when, “inter alia, the corporate form would otherwise be used to accomplish certain wrongful purposes, most notably fraud, on the shareholder’s behalf”); 1 W.M. Fletcher, Cyclopedia of Corporations, supra at § 43, at 296 (“although corporations are related, there can be no piercing of the corporate veil without a showing of improper conduct”). See Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 736 (1991).
Absence of Business Structure
Finally, to pierce the corporate veil, a plaintiff must show that the corporation at issue failed to operate within a legitimate business structure.
Ultimately, the decision to disregard settled expectations accompanying corporate form requires a determination that the parent corporation directed and controlled the subsidiary, and used it for an improper purpose, based on evaluative consideration of twelve factors:
“(1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporation’s funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud” (emphasis added). Attorney Gen. v M.C.K., Inc., supra at 555 n.19, citing Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 15-16 (1st Cir. 1985) (categorizing My Bread Baking Co. factors).
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