- Can the Corporate Veil be Pierced Against a Former Shareholder?
- November 14, 2016 | Author: Kevin J. Walsh
- Law Firm: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. - Boston Office
A recent opinion issued by the United States District Court for the Northern District of Illinois reminds us that corporate veil-piercing liability is not exclusive to shareholders. Anyone who is in control of and misuses the corporate structure can be found liable for the obligations of the corporation. The facts of this case, however, did not support personal liability for veil-piecing.
In Seamans v. Hoffman, et al., the court was asked to find a former owner (Tauriac) of a debt collection agency personally liable for a violation of the Fair Debt Collection Practice Act (FDCPA). Tauriac had recently sold the business but remained in control of the business bank account in order to reconcile and appropriately allocate between the pre- and post-sale receivables—the pre-sale receivables were owed to Tauriac per the terms of the sale transaction.
During this reconciliation period, the company attempted to collect a debt from an individual who had gone through a bankruptcy proceeding in which the debt was discharged. The individual, alleging violations of the FDCPA, sued and obtained a default judgment against the company and Tauriac. Tauriac got the default judgment overturned and pursued the merits of her defense.
As an initial matter, the court recognized that under normal circumstances, “officers and shareholders of a debt collection [company] generally cannot be held liable for violations of the FDCPA.” An exception exists, however, if there is a basis to pierce the corporate veil. Thus, if an individual exerts sufficient control and dominance over the entity and misuses the corporate structure, personal liability may be found.
Here, apart from the control Tauriac had over the business bank account pursuant to the terms of the sale agreement, she did not exhibit any other indicia of control or dominance over the corporation: she did not manage employees, she did not manage collection efforts, she did not interact, post-sale, with the company (other than with respect to the bank account), there was no evidence that she comingled her assets with those of the company, or otherwise used corporate assets to pay her expenses. In short, she did not disregard the corporate entity to use it as a mere instrumentality for personal gain. Absent these indicia of control or evidence of personal use, there can be no personal liability for corporate obligations under a veil-piercing theory.
The take-away from this case is that there could be situations where a non-shareholder is held liable under a veil-piercing theory, if control, dominance and misuse are present.