The Corporate Veil
One of the primary benefits of doing business through a legal entity, such as a corporation, is that the entity is considered separate and distinct from the people who create and own them. Ordinarily the owners and operators of the entity are not personally responsible for its debts or obligations.
In other words, the entity is usually solely responsible for its debts and obligations. The same holds true for a subsidiary company, which is considered separate and distinct from the larger parent corporation. The limited liability afforded by business entities is sometimes referred to as the “corporate veil.”
Piercing the Corporate Veil
Not surprisingly, corporations and individuals will setup sham or shell corporations with few or no assets to try and insulate them from liability. In such situations, the corporate veil of limited liability is fraudulently or misleadingly used as a sword to frustrate a company’s creditors and injured parties from recovery.
“Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s owners or directors personally liable for the corporation’s actions or debts. The doctrine may be used to disregard the corporation to reach its owners and to hold those owners personally responsible for the corporation’s debts and obligations.
Requirements for Piercing the Corporate Veil in Florida
Initially, it should be noted that under Florida law, courts are reluctant to pierce the corporate veil except in “exceptional circumstances.” Molenda v. Hoechst Celanese Corp., 60 F.Supp.2d 1294, 1300 (S.D. Fla. 1999). With that said, to pierce the corporate veil in Florida, a plaintiff is required to show:
[T]hat the corporation is in actuality the alter ego of the stockholders and that it was organized or after organization was employed by the stockholders for fraudulent or misleading purposes, or in some fashion that the corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not bona fidely established or, in general, that property belonging to the corporation can be traced into the hands of the stockholders.
Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1120 (Fla. 1984) (quotation omitted).
However, the Florida Supreme Court has held that “the corporate veil may not be pierced absent a showing of improper conduct.” Dania Jai-Alai Palace, Inc., 450 So. 2d at 1121 (emphasis added). See also, Roberts’ Fish Farm v. Spencer, 153 So. 2d 718, 721 (Fla. 1963) (discussing the appropriateness of disregarding the corporate entity when it was formed or used for some illegal, fraudulent, or other unjust purpose).
Cases following Dania Jai-Alai Palace, Inc., illustrate the requirements for piercing the corporate veil in Florida. For example, in WH Smith, PLC v. Benages & Assoc., Inc., 51 So. 3d 577, 583 (Fla. 3d DCA 2010), the court held that a parent company’s alleged conduct of instructing subsidiaries to breach an agreement with a judgment creditor, without more, did not constitute the type of “improper conduct” necessary to pierce the corporate veil.
In Geigo Props., LLP v. R.J. Gators Real Estate Grp., Inc., 849 So. 2d 1109, 1110 (Fla. 4th DCA 2003), the court found “the mere use of a shell corporation to enter into the lease, and the subsequent breach of the lease by failing to pay rent, did not constitute the type of improper conduct necessary to pierce the corporate veil.” In N. Am. Clearing, Inc. v. Brokerage Comp. Sys., Inc., 666 F.Supp.2d 1299, 1308 (M.D. Fla. 2009), a Federal court applying Florida law found “[c]ausing a corporation to intentionally breach a contract or commit conversion, without more, does not mislead or defraud creditors such that the corporate veil should be pierced.”
The take away from these cases is that in order to pierce the corporate veil in Florida, a plaintiff must show (1) that the company is the “mere instrumentality” or “alter ego” of another party and (2) and that party engaged in “improper conduct” in the formation or use of the corporation. These two requirements are discussed next.
Corporate Formalities Must Be Observed
“Mere Instrumentality” or “Alter Ego”
A pre-requisite to formal recognition of entities as “separate,” which in turn gives rise to the corporate veil, is adherence to certain corporate formalities. If they are not observed, separate entities can be found to be the “mere instrumentality” or “alter ego” of the owner or controlling entity. To determine whether a corporation is a “mere instrumentality” or “alter ego,” necessitates an analysis of how the owners and operators used their corporation.
Among other things, the entity must actually operate separately from its owners. Under the alter ego doctrine, when a corporation is the mere instrumentality or conduit of another corporation or person, the corporate form may be disregarded. Typically, courts will find that the entity is an “alter ego” where the corporation is not only influenced by the owners, but that there is such unity of ownership and interest that their separateness has ceased.
In other words, the owners used the corporation for their personal benefit so as to blur the distinction between corporate and personal affairs. For example, if the owners or those in control of the corporation use the entity for personal matters or use its assets for payment of their own personal obligations, those individuals can be held liable. Walton v. Tomax Corp., 632 So. 2d 178, 180 (Fla. 5th DCA 1994).
If the owners dominate and control the corporation to such an extent that the corporation has no independent existence and adherence to the normal attributes of separate corporate existence would sanction a fraud or promote injustice, the corporate veil will be disregarded. The rationale is that if the owners themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect the entity’s creditors.
For example, often small business owners use their company for personal benefit, rather than the business’ benefit. The owner might use the business credit card to put gas in their personal vehicle or make other personal purchases. Almost as often, this is done without realizing the importance of observing corporate formalities, rather than with the intention of defrauding the business’s creditors.
Improper Conduct
The failure to observe corporate formalities is not enough by itself to pierce the corporate veil. Nor does the fact that business affairs have been poorly handled, without more, justify piercing the corporate veil. Ally v. Naim, 581 So. 2d 961, 962 (Fla. 3d DCA 1991). Instead, piercing the corporate veil additionally requires a showing of improper conduct, either in the improper formation or the improper use of the corporation.
“Improper conduct” involving the corporate form can mean: (a) that the corporation was organized or used to mislead or defraud creditors, or (b) that the corporate form was used fraudulently or for the purpose of perpetrating a fraud upon creditors, or (c) that the owners depleted corporate assets for their own personal use. See Walton, 632 So. 2d at 180.
For example, the corporate veil may be pierced where the entity was “created or used in order to mislead or defraud creditors.” Acquisition Corp. of Am. v. Am. Cast Iron Pipe Co., 543 So. 2d 878, 881–82 (Fla. 4th DCA 1989). Even if the corporation was originally established for legitimate purposes, the corporate veil may be pierced when it has been used to commit fraud. See Harrell v. Accurate Orthotics & Prosthetics, Inc., 529 So. 2d 358, 359 (Fla. 2d DCA 1988).
Improper conduct has been found where a sham corporation was used to accomplish some ulterior purpose, evade some statute or to accomplish some fraud, or use of the corporation for fraudulent or misleading purposes, especially of creditors. Steinhardt v. Banks, 511 So. 2d 336, 339 (Fla. 4th DCA 1987).
Additionally, a parent corporation must be held liable for its subsidiary’s debt where the subsidiary had no bank account, no assets, no capital, and no employees, and the subsidiary had entered into the contract with the creditor knowing that it had no ability to perform the contract because all of its revenues are deposited directly to the parent’s account. Ocala Breeders’ Sales Co. v. Hialeah, Inc., 735 So. 2d 542, 543 (Fla. 3d DCA 1999).
