Maryland Business Litigation Lawyer Blog
Delaware law permits a court to pierce the corporate veil of a company and hold its owners personally liable “where there is fraud or where [the corporation] is in fact a mere instrumentality or alter ego of its owner.” See, e.g., Geyer v. Ingersoll Publ’ns Co., 621 A.2d 784, 793 (Del.Ch.1992). In order to state a claim for piercing the corporate veil under the “alter ego” theory, a party must show (1) that the corporation and its principals sought to be held liable operated as a single economic entity, and (2) that an overall element of injustice or unfairness is present. See, e.g., Trevino v. Merscorp, Inc., 583 F.Supp.2d 521, 528 (D. Del. 2008) (applying Delaware law). The fraud or injustice that must be demonstrated in order to pierce the corporate veil must be found in the principal’s use of the corporate form. See Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 267 (1989); Blair v. Infineon Technologies AG, 720 F. Supp. 2d 462, 473 (D. Del. 2010).
Moreover, Delaware courts have noted that the alter ego theory only comes into play in piercing the corporate veil “when one seeks to hold liable an individual owner who controls the [company].” See In re Opus E., L.L.C., 480 B.R. 561, 570 (D. Del. 2012) (quoting Eastern Minerals & Chems. Co. v. Mahan, 225 F.3d 330, 333 n. 7 (3d Cir.2000)). The degree of control required to pierce the veil is “exclusive domination and control … to the point that [the person sought to be held liable] no longer ha[s] legal or independent significance of [their] own.” See Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (citing Hart Holding Co. v. Drexel Burnham Lambert, Inc., 1992 WL 127567 (Del. Ch. May 28, 1992)). In other words, a corporate principal may be held liable where they controlled the corporation and used it to commit acts that sought to “defeat the ends of justice, to perpetuate fraud, to accomplish a crime, or to otherwise evade the law.” See Trevino, 583 F. Supp. 2d at 529 (quoting Bd. of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 171 (3d Cir. 2002)).
In conducting my review of Delaware law, there were no cases directly on point in which personal liability was imposed on some corporate principals but not others. Generally, where veil piercing was permitted and liability was imposed, those being held personally liable were considered to be in control of the corporation when committing the improper acts through it. See In re Mission of Care, Inc., 164 B.R. 877, 880 (D. Del. 1994) (imposing liability on multiple corporate principals who were all considered to be in control of the corporation and such control was used improperly to engage in conduct that “mudd[ied] and disregard the legal, financial, and operational distinctions between [themselves and the corporate entity]”); U.S. v. Golden Acres, Inc., 702 F. Supp. 1097, 1112 (1988) (holding multiple principals liable where one “singlehandedly controlled the corporation [in committing the wrongful acts]” and the other “approved [the former’s] actions in operating the corporation [in that manner]”); see also Blair, 720 F. Supp. 2d at 472 (finding plaintiff alleged sufficient facts to support an alter ego theory in order to defeat a motion for summary judgment by alleging that the various corporate principals sought to be held liable exercised significant control over the corporation’s operations, finances and decision making).
Accordingly, where only one corporate principal committed the acts through their individual use of the corporate entity which would permit the corporate veil to be pierced, another “innocent” principal may not be held liable if they did not similarly use the corporation to commit such acts or approve of another principal’s use of the corporation in such a manner.