Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate Veil

Abstract

This article undertakes a comprehensive exploration of the doctrine of piercing the corporate veil. Its thesis is that piercing in favor of contract creditors ultimately is based upon finding grounds to let the contract creditor out of its agreement to look only to the corporation for payment. This means either fraud or the failure to live up to implied terms governing the controlling shareholder's dealings with corporate assets. Inadequate capital -- which in this context should refer to working capital rather than the shareholder's initial investment -- is largely relevant only for the purpose of showing that promises of corporate performance were fraudulent given the controlling shareholder's knowledge that the corporation could not perform. Piercing in favor of tort victims should be based largely upon the failure to have insurance to cover foreseeable levels of risk, which leads to a failure to internalize accident costs. Many of the other factors mentioned as leading to piercing are either irrelevant, or assume subsidiary relevance as evidence of these basic grounds to pierce or as establishing the appropriate defendant.