Piercing the Corporate Veil (i.e. reaching past the corporation to a Shareholder’s personal assets) is a phrase most Shareholders are concerned about. Careful Shareholders will take great pains to maintain the legal formalities required to protect their personal assets. However the ability to “pierce” goes beyond a corporation’s shareholders. Illinois courts have recognized that it is possible to disregard the corporate entity and find directors or officers personally liable for corporate obligations in certain situations.
Prior to 2014, there were no Illinois cases involving the corporate veil being pierced to hold an individual liable that was not a shareholder, director of officer of that corporation.
That changed in April of 2014, the Illinois Appellate Court for the First District, in Buckley v. Abuzir. In Buckley, the plaintiff’s sought to pierce the veil of an individual who was not a shareholder, director or officer of the corporation but who made all business decisions and exercised control over the corporation to such a degree that separate personalities of the corporation and defendant did not exist. The Buckley court, in allowing the piercing, concluded that to refrain from piercing the corporate veil in this situation would defeat the purpose of the equitable nature of the remedy since “[t]here are many ways to organize a sham corporation” to avoid holding title or stocks while still effectuating control.
The Buckley court went into great detail surrounding the elements involved when trying to pierce the corporate veil. The first prong, unity-of-interest, could be satisfied through sufficient factual allegations of “(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s length relationship among the related entities; and (11) whether in fact, the corporate is a mere façade for the operation of dominant stockholders.” To satisfy the second prong of the test the Buckley court advised parties to plead sufficient factual allegations explaining why “[a]dherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, and/or promote inequitable consequences;’’ and how the defendant ‘perpetrated an injustice’; or what ‘injuries’” existed.
Interestingly the Buckley court noted that Illinois courts pierce the corporate veil in approximately 42% to 52% of cases, much higher than the general believed and contrary to various Illinois opinions that state the court’s reluctance to pierce the corporate veil.
For more information regarding protecting your personal assets against piercing contests, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
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