Corporations and LLCs are considered separate legal entities from their corporate personnel, such as owners, executives, and board members. This limits personal liability where the corporation may be held responsible for wrongdoing. But what if one of those protected personnel is personally responsible for the wrongdoing? Can they be held accountable?
Rathbone Group subrogation attorneys and experienced litigators, Rebecca Wright and Steve Alsip, discussed holding bad actors behind corporations accountable for their actions in a subrogation lawsuit on a recent podcast episode of On Subrogation: Is Your Case Sharp Enough to Pierce the Corporate Veil?. Here, we’ll cover the major points and case studies from their discussion that cover corporate and LLC liability, the corporate veil, and how to win a subrogation claim against the man behind the curtain.
Piercing the Corporate Veil: Accountability Across the Board
Corporations are treated as entities that can be held liable for loss separately from the people who own and manage them. This separation serves to protect the owner’s, board members’, officers’, etc., personal assets if the corporation is sued for some reason. A concept that often arises in civil litigation, including the insurance subrogation space, is “piercing the corporate veil”.
Even though there is this legal separation between corporations, LLCs, and their upper management, in egregious circumstances, courts will look beyond this separation to hold someone personally liable. This is most often seen in cases where there is evidence of fraud and/or another extreme and purposeful misuse of the corporate form.
The concept of piercing the corporate veil exists because corporations sometimes weaponize it as a shield for tortious and/or criminal acts. For instance, an owner may move assets between related entities to avoid paying creditors or judgments. Without the ability to hold the owner personally accountable, particularly in subrogation cases where insurers are seeking to recover claims paid out on behalf of insureds, this can leave injured parties and their subrogated carriers without a path to reimbursement.
Essentially, this legal theory allows courts to look behind the curtain and see that The Wizard is not an untouchable deity; he’s just a fraudster who should be held personally responsible for his actions.
But what if the fraudster in a subrogation claim is the insured? Read our article: Special Investigation Unit Claims & Subrogating Against Your Insured for how to navigate contentious SIU claims.
Sharpening Your Subrogation Case: Alter Ego & Fraud
Two primary legal concepts underlie most veil-piercing cases: Alter Ego and Fraud or Improper Purpose:
Alter Ego
This occurs when there is no separation between the corporation and its owners. Corporate formalities are disregarded, and the business is essentially treated as an extension of the individual, including comingled finances. In this case, the courts consider the corporation the “alter ego” of the owner, who cannot hide behind its separate legal status to avoid liability.
Fraud or Improper Purpose
Courts may choose to pierce the veil when a corporation is used to perpetrate fraud, avoid legal obligations, or otherwise cheat the system. This could include anything from moving assets to escape creditor claims to falsifying financial records to mislead a third party. Courts often want both concepts to be present to award a subrogation judgment against the fraudulent party.
What it Takes to Pierce the Corporate Veil Across the Country
As is typical of subrogation law, states vary in how they handle corporate liability and what is required to pierce the corporate veil. It is worth considering a few cases from different states:
Missouri
Southside National Bank v. Winfield Financial Services Corp. (Missouri Court of Appeals, 1989)
In this case, Southside National Bank had been awarded an $88,000 judgment against Winfield Investment Company. However, prior to the judgment, Robert O. Scott, the sole owner, shareholder, and director of WIC as well as Winfield Financial Services Corp, transferred assets from WIC to WFS in a bid to hide assets from the bank but maintain control of the company. The court looked at two spikes for piercing the veil:
- Control or influence: Scott was the sole shareholder, director, and president of both corporations. The transfers – which included his personal residence – demonstrated he was the alter ego of both entities.
- Improper use of the corporation: The transfers were executed to avoid fulfilling a legal obligation and constituted clear subterfuge.
The court found that Scott had indeed used the corporations to commit fraud and held the previously transferred assets subject to the bank’s claim. This case highlights the importance of both elements: complete control and wrongful use of the corporate entity.
New York
William Pasalakwa Builders v. Resnick Developers South (Southern District of New York, 1985)
In this case, a family-owned corporation was accused of using its corporate structure to avoid paying a judgment. Under New York law, the plaintiffs needed to prove two elements in order for the court to pierce the veil:
- Complete domination: The owners exercised total control over the corporation in the transaction at issue.
- Fraud or Wrongful Purpose: The domination was used to commit a fraud or wrong that caused injury to the plaintiff.
Evidence of domination included a lack of corporate formalities, shared office space, commingling of personal and corporate funds, overlapping personnel, and use of corporate assets for personal benefit. The Second Circuit found the evidence could support a finding of excessive control and domination and remanded the case for a new trial. This case demonstrates that courts will pierce the veil when domination results in unjust loss or injury.
Ohio
Caldwell v. Custom Craft Builders, Inc. (Ohio Eighth District, 2025)
In this case, Danyette Caldwell sued both Acorn Plumbing & Heating LLC and its owner, Oscar Lawrence, for failing to deliver two furnaces for which she had paid. After paying for the furnaces, Acorn LLC pulled her building permit. Caldwell believed that the contractor she had hired was acting as a representative of Acorn. The trial court initially imposed corporate and personal liability against Lawrence, but the Ohio Court of Appeals partially reversed the ruling, noting:
- There was no evidence showing Lawrence exercised complete control over Acorn.
- There was no evidence of fraud or illegal conduct by Lawrence.
- There was no evidence that Lawrence’s control caused injury to the plaintiff.
The court emphasized that mere ownership or managerial control is insufficient to pierce the corporate veil; there must be proof of an alter ego relationship accompanied by wrongful conduct. This case reinforces that both requirements are necessary in order to get behind the corporation to hold an individual personally responsible.
Texas
Texas is a special case because it sets an extremely high bar to pierce the corporate veil. Under Texas law, the plaintiff(s) must prove actual fraud: a dishonest purpose and/or intent to deceive. Constructive fraud, such as commingling of funds, is not sufficient without a clear intent to deceive.
Castleberry v. Branscum (Tex., 1986)
This case involved two corporate owners who failed to maintain corporate formalities and comingled personal and corporate funds. While the Texas Supreme Court found constructive fraud sufficient, later statutory changes clarified that only actual fraud allows for veil piercing. This case highlights the importance of state-specific legal experience: Texas subrogation attorneys have a more stringent standard to meet in these types of cases.
Is anything in subrogation standard across states? Read our article: Subrogation Fault Lines Spread Across States to learn how different jurisdictions evaluate fault in subrogation lawsuits.
Lifting the Liability Veil: Implications for Subrogation Strategy
Piercing the corporate veil is particularly relevant to subrogation claims because tortfeasors are often corporations and may dissolve or transfer assets to avoid paying claims. Subrogation lawyers must determine whether veil-piercing arguments are viable:
- Is there evidence of asset transfers? Public records can reveal suspicious activities, especially when involving real estate or sizable assets.
- Is there evidence of insider knowledge? Internal corporate evidence may be necessary to prove fraudulent intent.
- Is there a pattern of behavior? Actions such as repeatedly opening new corporate entities to continue the same business can support a fraud claim.
- Is there evidence of complete control over the corporation? Courts have often required this in order to award a recovery.
It is important to remember that even in favorable jurisdictions, courts maintain a high standard of proof and require clear evidence of both alter ego and wrongful use of the corporate form. A thorough forensic investigation with clear lines of evidence and detailed documentation is crucial.
Subrogation lawyers should examine corporate records for commingled funds, overlapping personnel, or shared assets among related entities, as well as public documents for corporate filings, financial statements, and property transfers. Seek discovery strategically – depositions and internal records may reveal the extent of control and evidence of fraud/improper purpose. And never forget that veil-piercing standards vary across states, especially in the required level of evidence for fraud/wrongful intent.
By combining careful fact investigation with a clear understanding of state-specific subrogation and corporate liability law, legal teams can identify when piercing the corporate veil is a realistic avenue to recovery. For litigators and subrogation professionals, understanding the nuances of piercing the corporate veil is crucial. It allows them to navigate complex cases where a corporation has been used to shield responsible parties from liability, ensuring that justice is served and damages are recoverable.
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