7/24/2019 kljkmg

1/33Electronic copy available at: http://ssrn.com/abstract=1313999

1

BECAUSE JUDGES ARE NOT ANGELS EITHER:1 LIMITING

JUDICIAL DISCRETION BY INTRODUCING OBJECTIVITY INTO

PIERCINGDOCTRINE

Jonathan A. Marcantel*

Ordinarily, individual shareholders are immune from liability arising from acorporations activities through the doctrine of limited liability.2 That is, absent apersonal breach of duty either in contract or in tort, an individual shareholder is onlyfinancially exposed to judgments against, or debts of, the corporation up to theshareholders investment.

3 All rules, of course, have exceptions. The most frequentlylitigated of those exceptions is the doctrine of piercing the corporate veil.4

Notwithstanding the frequent litigation surrounding the doctrine5and the bright-line rules courts have created to cabin the doctrine, disparate results frequently occur

*Assistant Dean of Assessment & Assistant Professor of Law, Lincoln Memorial University-DuncanSchool of Law. I would like to thank Dean Sydney A. Beckman and Professors J. Kirkland Grant andBarnali Choudhury for their thoughts and criticisms on this Article. Special thanks to Professor Sheila B.Scheuerman for both reviewing this Article and forcing me to work harder and be better. I would also liketo thank David C. Walker, Jennifer Price, and Patrick Slaughter for their research assistance. 1The title references works by James Madison and Thomas Jefferson. SeeTHE FEDERALISTNO. 51, at 319(Penguin Books 1987) (But what is government itself but the greatest of all reflections on human nature?If men were angels, no government would be necessary. If angels were to govern men, neither external norinternal controls on government would be necessary.); Thomas Jefferson, FIRST INAUGURAL ADDRESS(1801), reprinted in A COMPILATION OF THE MESSAGES AND PAPERS OF THE PRESIDENTS 17891897, at321 (Government Printing Press 1896) (Sometimes it is said that man cannot be trusted with thegovernment of himself. Can he, then, be trusted with the government of others? Or have we found angelsin the forms of kings to govern him?). 2 Patricia A. Carteaux, Corporations-Shareholder LiabilityLouisiana Adopts a Balancing Test forPiercing the Corporate Veil, 58 TUL. L. REV. 1089, 1091 (1984); Douglas J. Gardner, An InnovativeApproach to Piercing the Corporate Veil: An Introduction to the Individual Factor and Cumulative Effects

Analysis, 25 LAND &WATER L.REV. 563, 563 (1990).3Stephen M. Bainbridge, Abolishing L.L.C. Veil Piercing, 2005 U. ILL. L.REV. 77, 79 (2005); Gardner,supra note 2, at 142; Rebecca J. Huss, Revamping Veil Piercing for all Limited Liability Entities: Forcingthe Common Law Doctrine into the Statutory Age, 70 U.CIN.L.REV. 95, 103 (2001); Sung Bae Kim, AComparison of the Doctrine of Piercing the Corporate Veil in the United States , 3 TULSA J.COMP.&INTLL. 73, 73 (1995); Robert B. Thompson,Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L.REV. 1036, 1036 (1991).4Sandra K. Miller, Piercing the Corporate Veil Among Affiliated Companies in the European Communityand in the U.S.: A Comparative Analysis of U.S., German, and U.K. Veilpiercing Approaches, 36 AM.BUS.L.J. 73, 77 (1998); Stephen B. Presser, The Bogalusa Explosion, Single Business Enterprise, Alter

Ego, and Other Errors: Academics, Economics, Democracy, and Shareholder Limited Liability: BackTowards a Unitary Abuse Theory of Piercing the Corporate Veil, 100 NW.U.L.REV.405, 411 (2006);Thompson,supra note 3, at 1036.5 Commentators have described the use of the doctrine as rare. Frank H. Easterbrook & Daniel R.Fischel, Limited Liability and the Corporation, 52 UNIV.CHI.L.R. 89, 90 (1985); seeBainbridge, supranote 3, at 78. Contra Mack A. Olthoff, Beyond the FormShould the Corporate Veil be Pierced?, 64UMKCL.REV. 311, 311 (1995) (The doctrine of piercing the corporate veil is a frequently used by notnecessarily well understood concept.). Nonetheless, the doctrine is litigated more than any other theory incorporate law. Daniel J. Morrissey, Piercing All the Veils: Applying an Established Doctrine to a NewBusiness Order, 32 J. CORP. LAW 529, 541 (2007); Presser, supra note 4, at 411 (The critics of the

7/24/2019 kljkmg

2/33Electronic copy available at: http://ssrn.com/abstract=1313999

2

both internally within a jurisdiction and externally between jurisdictions,6 as, in mostcases, the courts use a factors analysis to determine when piercing is proper.7 Thesedisparate results have led to concerns by corporate scholars,8as the lack of predictabilityand consistency in the doctrines application is concerning as a matter of justice, as amatter of logical consistency, and, perhaps most practically, as a matter of counseling

clients

9

to avoid this unruly beast.This Article argues that piercing doctrine could be made predictable andconsistent through adoption of a conjunctive test requiring objective criteria for theelements of injustice, unity, causation, and insolvency. Part II of this Article brieflydiscusses the historical roots of the piercing doctrine, indicating its origination and thetypical categorizations and classifications of its various incarnations. This section furtherreviews each states classifications of piercing doctrine, ultimately finding the traditionalclassifications are generally lip-service used to mask an unguided, and inconsistentlyapplied, factors test. Part III of this Article discusses four remedies other scholars haveadvocated to alleviate the doctrinespredictability concerns. This Part further discussesthe deficiencies of each of those proposals. Finally, Part IV argues the doctrine can be

cabined through the introduction of a four-part conjunctive test. First, the proposed testrequires an injustice prong, compelling plaintiffs to demonstrate the corporation engagedin fraud, engaged in misrepresentation, or was undercapitalized. Special emphasis isprovided in this section to the element of undercapitalization and a novel method ofgenerating an objective test for determining undercapitalization. Ultimately, the Articleadvocates adopting the tort doctrine of custom as a mechanism to contain the discretionotherwise rampant in undercapitalization determinations. Second, the proposed testrequires an objective unity element that is premised upon control over the decision-making process. This element dispenses with the notion of seeking to determine whichshareholder has corporate unity and instead focuses piercing analysis on which

doctrine are wrong that cases raising veil-piercing are rare. In fact, the problem is one of the mostfrequently litigated in all of corporate law.) ; Thompson,supra note 3, at 1037.6Carteaux,supra note 2, at 1092 (The inconsistent articulation and application of these theories have leftthe law of piercing the corporate veil in hopeless disarray in many jurisdictions.); Huss, supra note 3, at110.7Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J.CORP.L. 479, 506 (2001) ([Veil Piercing] is anarea all too often characterized by ambiguity, unpredictability, and even a seeming degree ofrandomness.); Easterbrook & Fishel, supra note 5, at 91 (Piercing seems to happen freakishly. Likelightning, it is rare, severe, and imprincipled.); Jonathan M. Landers, A Unified Approach to Parent,Subsidiary & Affiliate Questions in Bankruptcy, U.CHI.L.REV. 589, 620 (1975); Thompson, supranote 3,at 1036.8Bainbridge, supra note 3, at 77; Huss, supranote 3, at 110; John H. Matheson & Raymond B. Eby, TheDoctrine of Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the

Test for Waiving Owners Limited-Liability Protection, 75 WASH.L.REV. 147, 147 (2000); David Millon,Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, 56 EMORY L.J.1305, 1306 (2007); Morrissey, supranote 5, at 529; Presser, supranote 5, at 405; Robert B. Thompson,Piercing the Corporate Veil: Is the Common Law the Problem?, 37 CONN.L.REV. 619, 620 (2005); AaronDean Wiles, Jr., The Tortious Conduct Exception: Holding Limited LiabilityCompanies Accountable forTheir Misconducts in Light ofEstate of Countryman v. Farmers Cooperative Assn, 40 N.ENG.L.REV.1065, 1073 (2006).9 See Miller, supra note 4, at 112 (The degree of judicial discretion surrounding the law of entityrecognition poses a distinct challenge to the business planner in search of predictability in the law.).

7/24/2019 kljkmg

3/33

3

shareholder(s) have unity with the decision giving rise to liability. Third, the proposedtest requires a causal element, requiring plaintiffs to demonstrate the inequitable conductgave rise to the plaintiffs harm. This section incorporates but-for causation andproximate causation into the piercing test. Finally, the proposed test requires aninsolvency prong, requiring plaintiffs to prove the corporation is insolvent to pay the

plaintiffs debt.

II. THEORIGINANDEVOLUTIONOFPIERCINGDOCTRINE

Limited liability is a bedrock feature of corporate law,10 as it encouragesdiversification and liquidity,11promotes market efficiency,12and decreases the need formonitoring of agents and officers.13 Although the origins of limited liability are unclearand have become the subject of scholarly debate,14it is clear that limited liability beganin the United States as a fairly rare event achieved through an individual act of thelegislature for special, usually infrastructural projects.15 That changed with the IndustrialRevolution, and by the 1840s, the majority of jurisdictions in the United States had

adopted some form of limited liability for incorporated entities, embracing the notion thatlimited liability would encourage investment as well as increase competitiveness inbusiness markets.16 With the growth of limited liability as a statutory norm, courts began

10 See 45 AM. JUR. 3DProof of Facts 1, 11 (2008) (quoting Nicholas Murray Butler, President ofColumbia University, Address at the 143d Annual Banquet of the Chamber of Commerce of the State ofNew York, Nov. 16, 1911 ([T]he limited liability corporation is the greatest single discovery of moderntimes . . . Even steam and electricity are far less important than the limited liability corporation and theywould be reduced to comparative impotence without it.)). 11 Bainbridge, supra note 7, at 49091; John P. Glode, Piercing the Corporate Veil in WyomingAnUpdate, 3 WYO.L.REV. 133, 134 (2003); Huss,supranote 3, at 105; Millon,supranote 8, at 1305; DanielQ. Posin, Turning Green: Louisianas Piercing-the-Corporate-Veil Jurisprudence and its EconomicEffects, 79 TUL. L. REV. 311, 315 (2004); Bradley C. Reed, Clearing Away the Mist: Suggestions for

Developing a Principled Veil Piercing Doctrine in China, 39 VAND. J. TRANSNATL L. 1643, 164647(2006); Thompson,supranote 3, at 1040 (Limited liability encouragesdevelopment of public markets forstocks and thus helps make possible the liquidity and diversification benefits that investors receive fromthose markets.).12Bainbridge, supranote 7, at 49091; Glode, supranote 11, at 134; Huss, supranote 3, at 105; Millon,supranote 8, at 1305; Posin,supranote 11, at 311; Reed,supranote 11, at 164647.13 Bainbridge, supra note 7, at 49091; Huss, supra note 3, at 105; Millon, supra note 8, at 1305;Morrissey,supranote 5, at 53641; Posin,supranote 11, at 311; Reed,supranote 11, at 164647.14Rutherford B. Campbell,Limited Liability for Corporate Shareholders: Myth or Matter-of-Fact, 63 KY.L.J. 23, 24 (19741975) (citing A. Berle, STUDIES IN THE LAW OF CORPORATE FINANCE3 (1928) (statingthe doctrine developed in Rome)).15Morrissey,supranote 5, at 534.16Huss,supranote 3, at 10304;seeMorrissey,supranote 5, at 534 (As the industrial revolution began in

earnest in the U.S. around 1825, businesses began to need capital from widespread investors. At that time,corporate statutes first started providing limited liability for shareholders.). For recent informationregarding an individual jurisdictions limited liability status, see ALA.CODE 10-2B-6.22 (1999); ALASKASTAT.10.06.438(2008);ARK.CODE ANN. 4-27-622 (2001); ARIZ.REV.STAT.ANN.10-622(2004);CAL.[CORP.]CODE 410(1990);COLO.REV.STAT.ANN. 7-106-203 (2009); CONN.GEN.STAT.ANN. 33-673 (2005); DEL.CODE ANN,tit. 8162(2001);FLA.STAT.607.0622(2007);GA.CODE ANN. 14-2-622 (2003); HAW. REV. STAT. ANN. 415-25 (1993); IDAHO CODE 30-1-622 (2005); 805 ILL. COMP.STAT. 310/23 (1993); IND.CODE ANN. 23-1-26-3 (1999); IOWA CODE ANN. 490.622 (2009); KY.REV.STAT. ANN. 271B.6-220 (2003); LA. REV. STAT. ANN. 12:93 (1994); MD. CODE ANN. [CORPS &ASSNS]2-215(2007);ME.REV.STAT.ANN. tit. 13C, 623 (2005); MICH.COMP.LAWS ANN. 450.1317

7/24/2019 kljkmg

4/33

4

to recognize situations where limited liability created inequitable results, and as areaction, developed the piercing doctrine.17

Theoretically, the piercing doctrine is nothing more than a judicially createdequitable remedy,18permitting plaintiffs to look beyond an entitys limited liabilitywhenthe entity or its owners have failed to behave in a manner consistent with legitimate

corporate institutions.

19

The rub, of course, has always been in determining whatcircumstances constitute a failure to act legitimately.20 While the courts have generatedvarious tests to determine under what circumstances a corporation is not actinglegitimately, very little consensus exists.21Furthermore, while scholars have attempted tocategorize the tests into concrete types of tests, the similarities of those tests tend toovershadow their differences. Specifically, various scholars and courts have denominatedthree types of tests22the alter ego test,23the instrumentality test,24and the injustice or

(2002); MINN.STAT. 302A.425 (2004); MISS.CODE ANN. 79-4-6.22 (2009); MO.CONST.art. II, 8;MONT.CODE ANN. 35-1-534 (2009); NEB.REV.STAT. 21-2041 (2007); NEV.CONST. art. 8, 3; N.H. REV.STAT.ANN. 293-A:6.22 (1999); N.J.STAT.ANN.14:A5-30(West, 2003);N.M.STAT.53-11-25

(2001);N.Y.

{B

US.C

ORP.]

LAW

628

(M

CKinney 2003); N.C.

G

EN.S

TAT. 55-6-22 (2007); N.D.

C

ENT.

CODE 10-19.1-69 (2005); OHIO REV.STAT.ANN. 1701.18 (2009); OR.REV.STAT. 60.151 (2007); 15PA.CONS.STAT. 1526 (1995 & Supp. 2009); S.C.CODE ANN. 33-6-220 (2006); S.D.CODIFIED LAWS47-1A-622 (2007); TENN. CODE ANN. 48-16-203 (2002); TEX. [Bus. Corp. Act] CODE ANN. 2.21(2003); UTAH CODE ANN. 16-10a-622 (2009); VT.STAT.ANN. tit. 11A, 6.22 (1997); VA.CODE ANN.13.1-646(2006);WASH.REV.CODE 23B.06.220 (2008); W.VA.CODE 31D-6-622 (2009); WIS.STAT. 180.0622 (2002 & Supp. 2009); WYO.STAT.ANN. 17-16-622 (2009).17SeeGlen D. West & Stacie L. Cargill, Corporation, 62 SMUL.REV. 1057, 1058 (2009).18Although limited liability exists statutorily for incorporated entities in every jurisdiction in the UnitedStates, the piercing doctrine is not a legislative exception to most of those statutes. SeeThompson, supranote 3, at 1041 (Almost all state corporations statutes simply ignore the whole idea of piercing thecorporate veil.);see alsoMorrissey,supra note 5, at 542 (State statutes typically provide limited liabilityfor shareholders unqualified by any reference to [piercing doctrine].). Furthermore, the piercing doctrine

is not an independent legislative construct in most United States jurisdictions. Morrissey, supra note 5, at

542 (State statutes typically provide limited liability for shareholders unqualified by any reference to[piercing doctrine].). Instead, the piercing doctrine is a judicial exception created through the courts

equity powers. Franklin A. Gevurtz, CORPORATION LAW (West 2000); Kenneth B. Watt, Piercing theCorporate Veil: A Need for Clarification of Oklahomas Approach, 28 TULSA L.J. 869, 870 (1993)(Courts pierce the corporate veil in order to protect third party plaintiffs from unjust injury by thecorporation, and most jurisdictions recognize the doctrine as an equitable concept.).19 See, e.g., Henry W. Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 CALIF. L.REV. 12, 19 (1925) (stating the test is whether the corporation used the corporation in good faith forlegitimate ends); Presser, supranote 4, at 407 (It is, or at least once was and ought to be, hornbook lawthat a shareholder or a parent corporation should not lose the protection of limited liability unless thatshareholder or parent has somehow abused the corporate form.). Other scholars have defined thedoctrine as a judicially created mechanism that ostensibly addresses excessive externalizing by companieswho would otherwise possess limited liability. See e.g., Bainbridge,supranote 3, at 77.20

Presser,supranote 4, at 412 (It is usually understood that to pierce the corporate veil some sort of abuseis required, but there is no consensus on what constitutes abuse. There are some jurisdictions that have

made clear that where the case involves contractual creditors, there must be proof of actual fraud before theshield of limited liability is removed. In other jurisdictions, fraud is not required, and some otherinjustice, illegality, or inequity is all that is necessary to piercing the corporate veil.).21Id.22Campbell,supranote 14, at 33.23Matthew D. Caudill,Piercing the Corporate Veil of a New York Not-for-Profit Corporation, 8 FORDHAMJ.CORP.&FIN.L. 449, 466 (2003) (stating the types of tests). The elements of the alter ego test are: (1)that the corporation is not only influenced by the owners, but also that there is such unity of ownership and

7/24/2019 kljkmg

5/33

5

equity test.25 Nevertheless, most states explicitly or implicitly use all or a portion of allthree of those tests in their individual piercing jurisprudence.26 In the final analysis,

interest that their separateness has ceased; and (2) that the facts are such that an adherence to the normalattributes, . . . treatment as a separate entity, of separate corporate existence would sanction a fraud or

promote injustice. White v. Winchester Land Dev. Corp., 584 S.W.2d 56, 61 (Ky. Ct. App. 1979) (citingCampbell,supra note 14, at 23 n.60). To the extent a discernable difference exists between this test and theinstrumentality test, this test is usually used to pierce verticallyin situations where a corporation is ownedby one or more individual shareholders. Marilyn Blumberg & Robert Burnett,Piercing the Corporate Veilin Florida: Defining Improper Conduct, 21 NOVA L.REV. 663, 665 (1997).24Caudill,supra note 23, at 466 (stating the types of tests). The instrumentality test was first introduced byProfessor Powell in 1931 and required the finding of three elements. First, the corporation must be a mereinstrumentality of the shareholder. Second, the shareholder must have exercised control over thecorporation in a manner that harmed the plaintiff. Finally, the refusal to disregard the corporate shell mustsubject the plaintiff to unjust loss. Campbell, supra note 14, at 24 (citing P. Powell, PARENT ANDSUBSIDIARY CORPORATIONS(1931)). To the extent a discernable difference exists between this test and thealter ego test, this test is typically used to pierce horizontallywhen a corporation is owned by one or morecorporations. Blumberg & Burnett,supra note 23, at 665.25

Caudill,supra

note 23, at 467 (stating the types of tests). The equity test has a variety of formulationsbut is generally a factors test that focuses on the element of inequity. Seeid.26Michael J. Gaertner, Reverse Piercing the Corporate Veil: Should Corporation Owners Have It BothWays?, 30 WM.&MARY L.REV. 667, 668 (1989). For specific state examples, see Shelton v. Clements,834 So.2d 775, 781 (Ala. Ct. App. 2002) (using the instrumentality and the injustice language); Murat v.F/V Shelikof Strait, 793 P.2d 69, 76 (Alaska 1990) (using the injustice language); Nerox Power Sys., Inc.v. M-B Contracting Co., 54 P.3d 791, 802 (Alaska 2002) (using the instrumentality language);Bischofshausen, Vasbinder, and Luckie v. D.W. Jaquays Min., 700 P.2d 902, 906 (Ariz. Ct. App. 1985)(using the alter ego and injustice language); Mid-Century Ins. Co. v. Gardner, 11 Cal. Rptr. 2d 918, 922(Ct. App. 1992) (using the alter ego and injustice language); Gorsich v. Double B Trading Co., 893 P.2d1357, 1362 (Colo. Ct. App. 1994) (using the alter ego, instrumentality, and injustice language); AngeloTomasso, Inc. v. Armor Const. & Paving, Inc., 447 A.2d 406, 410 (Conn. 1982) (citing the alter ego,instrumentality, and injustice language); Morris v. Cee Dee, L.L.C., 877 A.2d 899, 907 (Conn. Ct. App.2005) (using the instrumentality, alter ego, and injustice language); Irwin & Leighton, Inc. v. W.M.

Anderson Co., 532 A.2d 983, 987 (Del. Ch. 1987) (using the instrumentality and injustice language); Lipsigv. Ramlawi, 760 So.2d 170, 187 (Fla. Ct. App. 2000) (using the instrumentality, alter ego, and injusticelanguage); Pazur v. Belcher, 659 S.E.2d 804, 807 (Ga. Ct. App. 2008) (using the instrumentality andinjustice language); Dews v. Ratterree, 540 S.E.2d 250, 254 (Ga. Ct. App. 2000) (using the alter egoinstrumentality, and injustice language); Roberts Hawaii Bus. Sch. Bus., Inc. v. Laupahoehoe Transp. Co.,982 P.2d 853, 870 (Hawaii 1999) (using the instrumentality, alter ego, and injustice language); Hutchisonv. Anderson, 950 P.2d 1275, 1279 (Idaho Ct. App. 1997) (using the alter ego and injustice language);Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 775 (Ill Ct. App. 2005) (using the instrumentality, alterego, and injustice language); Henderson v. Sneath Oil Co., 638 N.E.2d 798, 802 (Ind. Ct. App. 1994)(using the instrumentality and injustice language); Escobedo v. BHM health Assocs., Inc., 818 N.E.2d 930,933 (Ind. 2004) (using the alter ego and injustice language); Adam v. Mt. Pleasant Bank & Trust Co., 355N.W.2d 868, 872 (Iowa 1984) (using the alter ego and injustice language); Kvassay v. Murray, 808 P.2d896, 904 (Kan. Ct. App. 1991) (using the alter ego, instrumentality, and injustice language); White v.

Winchester Land Dev. Corp., 584 S.W.2d 56, 61 (Ky. Ct. App. 1979) (using the alter ego, instrumentality,and injustice language); Middleton v. Parish of Jefferson, 707 So.2d 454, 456 (La. Ct. App. 1998) (usingthe injustice language); Pine Tree Assocs. v. Doctors Assocs. Inc., 654 So.2d 735, 737 (La. Ct. App. 1995)(using the alter ego and instrumentality language); Residential Warranty Corp. v. Bancroft HomesGreenspring Valley, Inc., 728 A.2d 783, 789 (Md. Ct. App. 1999) (using the alter ego, instrumentality, andinjustice language); Foodland Distrs. V. Al-Naimi, 559 N.W.2d 379, 381 (Mich. Ct. App. 1996) (using theinstrumentality and injustice language); Davis v. Johnson, 415 N.W.2d 755, 758 (Minn. Ct. App. 1987)(using the alter ego, instrumentality, and injustice language); Buchanan v. Ameristar Casino Vicksburg,Inc., 957 So.2d 969, 978 (Miss. 2007) (using the instrumentality and injustice language); A & L, Inc. v.Grantham, 747 So.2d 832, 843 (Miss. 1999) (using the alter ego language); Saidawi v. Giovannis Little

7/24/2019 kljkmg

6/33

6

while some states have paid lip service to the idea of a multi-part conjunctive test, thesedenominations are useless metaphors,

27and most states have settled for a factors test,28

Place, Inc., 987 S.W.2d 501, 505 (Mo. Ct. App. 1999) (using the alter ego, instrumentality, and injusticelanguage); Berlin v. Boedecker, 887 P.2d 1180, 1188 (Mont. 1994) (using the alter ego, instrumentality,

and injustice language); Medlock v. Medlock, 642 N.W.2d 113, 124 (Neb. 2002) (using the alter ego andinjustice language); Lorenz v. Beltio, Ltd., 963 P.2d 488, 496 (Nev. 1988) (using the alter ego and injusticelanguage); Terren v. Butler, 597 A.2d 69, 72 (N.H. 1991) (using the alter ego and injustice language);Verni ex rel. Burstein v. Harry M. Stevens, Inc., 903 A.2d 475, 498 (N.J. Ct. App. 2006) (using the alterego, instrumentality, and injustice language); Scott v. AZL Resources, Inc., 753 P.2d 897, 900 (N.M. 1988)(using the alter ego, instrumentality, and injustice language); John John, L.L.C. v. Exit 63 Dev., L.L.C., 826N.Y.S.2d 657, 661 (N.Y. Ct. App. 2006) (using the alter ego, instrumentality, and injustice language);Monteau v. Reis Trucking & Const., Inc., 553 S.E.2d 709, 712 (N.C. Ct. App. 2001) (using the alter ego,instrumentality, and injustice language); Red River Wings, Inc. v. Hoot, Inc., 751 N.W.2d 206, 221 (N.D.2008) (using the alter ego and injustice language); Belvedere Condominium Unit Owners Assn. v. R.E.

Roark Cos., Inc., 617 N.E.2d 1075, 1085 (Ohio 1993) (using the alter ego and injustice language); Ok. Oil7 Gas Exploration Drilling Program 1983-A v. W.M.A. Corp., 877 P.2d 605, 609 (Ok. Ct. App. 1994)(using the alter ego, instrumentality, and injustice language); Amfac Foods, Inc. v. International Sys. &

Controls Corp., 654 P.2d 1092, 1099 (Or. 1982) (using the alter ego, instrumentality, and injusticelanguage); College Watercolor Group, Inc. v. William H. Newbauer, Inc., 360 A.2d 200, 207 (Pa. 1976)(using the instrumentality and alter ego language); R & B Elec. Co. v. Amco Constr. Co., 471 A.2d 1351,1354 (R.I. 1984) (using the instrumentality, alter ego, and injustice language); Sturkie v. Sifly, 313 S.E.2d316, 318-319 (S.C. Ct. App.) (using the instrumentality, alter ego, and injustice language); Ethan DairyProds. V. Austin, 448 N.W.2d 226, 229 (S.D. 1989) (using the instrumentality, alter ego, and injusticelanguage); Oak Ridge Auto Repair Service v. City Fin. Co., 425 S.W.2d 620, 622 (Tenn. Ct. App. 1967)using the instrumentality, alter ego, and injustice language); Mancorp, Inc. v. Culpepper, 802 S.W.2d 226,227 (Tex. 1009) using the instrumentality, alter ego, and injustice language); Transamerica Cash Reserve,Inc. v. Dixie Power & Water, Inc., 789 P.2d 24, 26 (Utah 1990) (using the instrumentality, alter ego, andinjustice language); Jack C. Keir, Inc. v. Robinson & Keir Pship, 560 A.2d 957, 958 (Vt. 1989) (using thealter ego and injustice language); Cheatle v. Rudds Swimming Pool Supply Co., 360 S.E.2d 828, 831 (Va.1987) (using the alter ego and injustice language); Harrison v. Puga, 480 P.2d 247, 254 (Wash. Ct. App.1971) (using the alter ego and injustice language); Miles v. CEO Gomes, Inc., 753 P.2d 1021, 1024 (Wy.

1988) (using the alter ego, instrumentality, and injustice language); Miller, supra note 4, at 90(Commentators and some judicial decisions have organized the prodigious case law into categoriesconsisting of instrumentality theory, the alter ego theory, and the identity theory. However, suchcharacterizations are not helpful in light of the numerous descriptive phrases that are used, apparentlyinterchangeably, by the courts. Some courts have abandoned all efforts to articulate a theory and insteadtake a laundry list approach to the identification of factors likely to justify veil -piercing. . . .).27Blumberg & Burnett,supra note 23, at 665.28SeeEcon Marketing, Inc. v. Leisure Am. Resorts, Inc., 664 So.2d 869, 870 (Ala. 1994) (providing a listof factors); Murat v. F/V Shelikof Strait, 793 P.2d 69, 76 (Alaska 1990) (same); Anderson v. Stewart, 234S.W.3d 295, 296 (Ark. 2006) (same); Mid-Century Ins. Co. v. Gardner, 11 Cal. Rptr. 2d 918, 922 (Ct. App.1992) (same); Raleigh v. Mitchell, 947 A.2d 464, 47071 (D.C. 2008); Graham v. Palmtop Properties, Inc.,645 S.E.2d 343, 346 (Ga. Ct. App. 2007) ; Roberts Hawaii Bus. Sch. Bus. , Inc. v. Laupahoehoe Transp.Co., 982 P.2d 853, 871 (Hawaii 1999) (same); Hutchison v. Anderson, 950 P.2d 1275, 1279 (Idaho Ct.

App. 1997) (same); Cosgrove Distr., Inc. v. Haff, 798 N.E.2d 139, 141 (Ill. Ct. App. 2003) (same);Escobedo v. BHM health Assocs., Inc., 818 N.E.2d 930, 933 (Ind. 2004) (same); Kvassay v. Murray, 808P.2d 896, 904 (Kan. Ct. App. 1991) (same); White v. Winchester Land Dev. Corp., 584 S.W.2d 56, 61 (Ky.Ct. App. 1979); Pine Tree Assocs. v. Doctors Assocs. Inc., 654 So.2d 735, 738 (La. Ct. App. 1995);Johnson v. Exclusive Properties Unlimited, 720 A.2d 568, 571 (Me. 1998); Evans v. Multicon Const.Corp., 574 N.E.2d 395, 398 (Mass. Ct. App. 1991) (same); Hoyt Properties, Inc. v. Production ResourceGroup, L.L.C., 736 N.W.2d 313, 318 (Minn. 2007) (same); Hardy v. Brock, 826 So.2d 71, 75 (Miss.2002); Medlock v. Medlock, 642 N.W.2d 113, 124 (Neb. 2002) (same); Lorenz v. Beltio, Ltd., 963 P.2d488, 497 (Nev. 1988) (same); Verni v. Harry M. Stevens, Inc., 903 A.2d 475, 498 (N.J. Super. Ct. App.Div. 2006); Scott v. AZL Resources, Inc., 753 P.2d 897, 900 (N.M. 1988) (same); East Hampton Union

7/24/2019 kljkmg

7/33

7

permitting trial courts to consider, ignore, and weigh various factors as the situationnecessitates.29 Of course, because these decisions are necessarily factually charged, they

Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 122 (N.Y. App. Div. 2009) (same); AtlanticTobacco, Co. v. Honeycutt, 398 S.E.2d 641, 643 (N.C. Ct. App. 1990) (same); Coughlin Constr. Co. v. Nu-

Tec Indus., 755 N.W.2d 867, 873 (N.D. 2008) (same); Lewis v. Central Ok. Med. Group, Inc., 998 P.2d202, 206 (Ok. Ct. App. 1999) (same); Osloond v. Osloond, 609 N.W.2d 118, 122 (S.D. 2000) (same);Colman v. Colman, 743 P.2d 782, 786 (Utah 1987) (same); Olen v. Phelps, 546 N.W.2d 176, 18081 (Wis.1996) (same); Kaycee Land and Livestock v. Flahive, 46 P.3d 323, 325 (Wyo. 2002) (same); Elizabeth E.Brown, A Guide to Winning Alter Ego Claims, 15 AM.BANKR.INST.L.J. 15, 15 (June 1996) (Althoughthey may combine or state them differently, most courts utilize . . . [a] 12 factor[] [test]. . . .); Matheson &Eby, supra note 8, at 163 (The failure of the courts previous attempts to articulate a single test fordisregarding the corporate form and holding the owners of the corporation responsible for the businesss

financial responsibilities has resulted in a number of overlapping lists of factors that are passed off astests.).29The California Court of Appeals attempted to create an exhaustive list of factors used by courts in Assoc.Vendors, Inc. v. Oakland Meat Co., 26 Cal. Rptr. 806, 813815 (Ct. App. 1962). There, the court providedthe following as a list of factors used by courts to justify their piercing decisions:

(1) Commingling of funds and other assets, failure to segregate funds of the separateentities, and the unauthorized diversion of corporate funds or assets to other thancorporate uses; (2) the treatment by an individual of the assets of the corporation as hisown; (3) the failure to obtain authority to issue stock or to subscribe to or issue the same;(4) the holding out by an individual that he is personally liable for the debts of thecorporation; (5) the failure to maintain minutes or adequate corporate records, and theconfusion of the records of the separate entities; (6) the identical equitable ownership inthe two entities; (7) the identification of the equitable owners thereof with the dominationand control of the two entities; (8) identification of the directors and officers of the twoentities in the responsible supervision and management; (9) sole ownership of all of thestock in a corporation by one individual or the members of a family; (10) the use of thesame office of business location; (11) the employment of the same employees and/orattorney; (12) the failure to adequately capitalize a corporation; (13) the total absence of

corporate assets, and undercapitalization; (14) the use of a corporation as a mere shell,instrumentality or conduit for a single venture or business of an individual or anothercorporation; (15) the concealment and misrepresentation of the identity of the responsibleownership, management and financial interest, or concealment of personal businessactivities; (16) the disregard of legal formalities and the failure to maintain arms lengthrelationships among related entities; (17) the use of the corporate entity to procure labor,services or merchandise for another person or entity; (18) the diversion of assets from acorporation by or to a stockholder or other person or entity, to the detriment of creditors,of the manipulation of assets and liabilities between entities so as to concentrate theassets in one and the liabilities in another; (19) the contracting with another with intent toavoid performance by use of a corporate entity as a shield against personal liability, or theuse of a corporation as a subterfuge of illegal transactions; (20) and the formation and useof a corporation to transfer to it the existing liability of another person or entity.

Bainbridge, supranote 7, at 510 (quoting Assoc. Vendors, Inc., 26 Cal. Rptr. at 81315). Nevertheless,courts have used other factors as well. See Kavanaugh v. Ford Motor Co., 353 F.2d 710, 717 (7th Cir.1965) (stating the court would review factors such as whether: 1) the corporation originated with thepurpose of, or was ultimately used to, circumventing public policy or positive law; (2) the parent financesthe subsidiary; (3) the subsidiary has no business unique to itself; (4) the parent uses the subsidiarys assetsas its own; and (5) the parent controls the actions of the subsidiary); Millon, supra note 8, at 1305 (Whenone attempts to rationalize the piercing cases according to some other set of values, one encounters adismal morass of repetitive rhetoric masking conclusory evaluation. The cases typically list a series ofmore or less standard factors. Little if anything is said about how they are to be weighed or which ones are

7/24/2019 kljkmg

8/33

8

are largely more reflective of thejudgespersonalopinion on this caseas opposed to thejudges interpretation of the general law.30 Thus, in terms of predictability andconsistency, the tests have become only slightly more sophisticated than the smell test.31

The lack of a specific test is further exacerbated by the existence of multiple typesof piercing cases. That is, in addition to the multifarious tests in general, the courts

weigh different factors more heavily depending on the type of piercing case.

32

Thus,there are tort versus contract cases,33horizontal versus vertical piercing cases,34reversepiercing cases,35and triangular piercing cases.36 Each of these, of course, asks the judgeto focus attention on specific types of factors within the test but does not provide anyobjective means for deciding when piercing would be appropriate.

A. Tort Versus Contract Cases

While the separation between tort and contract theories in ordinary litigation cansometimes prove difficult,37the courts have routinely viewed the two as finitely distinctin both the application of piercing and its theory.38 The separation of tort and contract, as

it applies to piercing theory, stems from perceived choice of the parties.

39

That is, in tortcases, the plaintiff does not necessarily choose to engage a relationship with thedefendant.40 Rather, in many cases that relationship is thrust upon the plaintiff.41 Incontrast, contract cases are ordinarily the result of two or more bargaining parties who

necessary or sufficient by themselves to support a piercing result.); Morrissey, supra note 5, at 544(Without a unified criterion for piercing, courts have relied on what one commentator called, a number of

overlapping lists of factors that are passed off as a test.) (quoting Matheson & Eby,supra note 8, at 173).30Bainbridge,supra note 7, at 514; Robert W. Hamilton, The Corporate Entity, 49 TEX.L.REV. 979, 990(1971) (stating the tests used to determine when piercing is appropriate are merely artifices used by courtsto justify their conclusions); Presser, supra note 4, at 411 ([T]he current state of veil-piercing law ischaotic. . . .).31Huss,supra note 3, at 110 (noting that the principle is arbitrary in its use).32 Franklin A. Gevurtz, Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding theDoctrine of Piercing the Corporate Veil, 76 OR.L.REV. 853, 88487 (1997) (stating undercapitalization isonly typically deemed important in tort cases).33Caudill, supranote 23, at 467 (summarizing Judge Posners view that horizontal and vertical piercingshould only be available in fraudulent misrepresentation cases); Gevurtz, supranote 32, at 853 (stating thedifference between contract and tort piercing cases); Morrissey, supra note 5, at 545 (noting a distinctionbetween contract and tort cases for purposes of piercing).34John H. Matheson, The Limits of Business Limited Liability: Entity Veil Piercing and Successor LiabilityDoctrines, 31 WM.MITCHELL L.REV.411, 41920 (2004) (noting the distinction between horizontal andvertical veil piercing cases).35Caudill, supra note 23, at 467 (Reverse piercing occurs when a court holds a controlled corporation,which has been misused as the alter ego or instrumentality of a shareholder, liable for the debts of thatcontrolling shareholder.).36

Id.at 469 (Triangular piercing occurs when a controlled corporation is held liable for the debts of anaffiliated corporation, through an intermediary controlling shareholder. The liability flows in a triangle,first from the controlled corporation to the controlling shareholder, then from the controlling shareholder tothe affiliated corporation.).37For instance, the fine bifurcation between the two is less clear in quasi-contractual, equitable theoriessuch as promissory estoppels, as those theories have developed in both tort and contract jurisprudence.38See, e.g., Edwards Co. v. Monogram Indust., 730 F.2d 977, 982 (5th Cir. 1984).39See Millon,supranote 8, at 134547, 1355.40Id.41Id.

7/24/2019 kljkmg

9/33

9

each possess the power to investigate one another prospectively before entering therelationship.42 While this distinction seems somewhat irrelevant in a vacuum, itstheoretical underpinning makes sense, if nowhere else, when discussing the injusticeelement of piercing doctrine.

The injustice element in piercing doctrine stems from its historical roots. That is,

piercing doctrine evolved as a judicial, equitable response to the perceived (or actual)unfairness that could result from the application of strict limited liability statutes.43 Thus,notwithstanding the mandates of limited liability, courts have permitted plaintiffs topierce the corporate veil in circumstances wherein it would be unjust to permit thedefendant to hide behind the black letter of the lawthe defendant has engaged in fraud,misrepresentation, or undercapitalization, for example. In this context, the theoreticalnotion of choice plays a significant role because it defines what level of injustice couldhave existed between the parties, and thus, how rigorously the court will enforce thediscretion of equity jurisdiction.44 For example, in the context of fraud, one party to acontract can investigate another prior to entering the relationship.45 Presumably, adiligent effort in this regard would uncover any material fraud, and thus, parties to a

contract have some ability to engage in self-help prospectively.

46

This theoretically, ofcourse, would lead to a less rigorous exercise of equity jurisdiction on the basis that thecourts will only invoke equity jurisdiction to help those who have done everythingpossible to help themselves.47 In contrast, classic tort plaintiffs do not always possessthis ability.48 For instance, if a plaintiff is injured by a faulty widget produced by theplaintiff and used by a third party, then the plaintiff lacked the ability to investigate forundercapitalization, and thus, the plaintiffs claim for the exercise ofequity jurisdiction ispresumably better.49

Notwithstanding this seemingly sound theoretical argument, empirical studies donot indicate that courts actually apply this model on the average.50 Rather, contrary towhat one might think, courts most frequently pierce in contract cases.51 Nevertheless, the

42Gevurtz,supra note 32, at 85859; Millon,supranote 8, at 134547, 1355; Thompson,supra note 3, at631.43West & Cargill,supranote 17, at 1058.44Supranote 42.45Id.46Id.47CHARLES FISK BEACH,JR.,MODERN EQUITY: COMMENTARIES OF MODERN EQUITY JURISPRUDENCE ASDETERMINED BY THE COURTS AND STATUTES OF ENGLAND AND THE UNITED STATES 5354 (Baker,Voorhis & Co. 1892); WILLISTON ON CONTRACTS 69:34 (4th ed. 2009) (Fraud victims have two dutiesof care: they cannot close their eyes to a known risk, and they cannot close their eyes to a risk that isobvious, even if they dont perceive the risk. Equity will not interfere on behalf of one alleging fraud

where the person relying on the misrepresentation had an opportunity to prevent any injury by due

diligence.); Watt,supranote 18,87273 (The standard for piercing the corporate veil may depend uponwhether the underlying cause of action against the corporation sounds in contract or in tort. Typically, incontract claims, a party knows the other party to the contract. Many authorities, therefore, assert that theplaintiff must prove a higher degree of culpability in a contract case than in a tort case for the court topierce the corporate veil because the plaintiff has sufficient information to make an informed choice as towhether to deal with the corporation before entering the transaction.). 48Supranote 42.49Id.50Thompson,supra note 3, at 1039.51Id.

7/24/2019 kljkmg

10/33

10

distinction still plays some role in which factors a court deems important in a piercinganalysis.52For instance, in contract cases, undercapitalization is largely ignored,53whilein tort cases, undercapitalization is generally deemed important.54 Thus, in terms ofapplication, the distinction between the two types of cases tends to focus on the elementof injustice.

B. Horizontal Versus Vertical Piercing Cases

In contrast with the dichotomy between tort and contract casesa dichotomy thataffects all piercing casesthe distinction between horizontal and vertical piercing casesonly affects a small subclass of piercing casescases wherein a plaintiff seeks to piercethrough one corporation that possesses some relationship with another corporation.

Horizontal piercing involves a plaintiffs attempt to pierce the veil of one

subsidiary to reach the assets of another subsidiary who shares a parent corporation.55Thus, for example, imagine corporation A, a parent corporation, owns shares in threesubsidiary corporations, B, C, andD, each of whom produce different types of widgets.

A horizontal piercing claim would involve a plaintiff attempting to pierce the veil of Binan attempt to attack the assets of C. If this process were drawn as a visual depiction,then, the plaintiff would literally be attempting to simultaneously attack two corporationsof equal power within the larger corporate hierarchythus, the term horizontal.

Parent

Subsidiary Subsidiary

The phrase vertical piercing evolved from the same visual notions. Verticalpiercing occurs when a plaintiff attempts to pierce through the corporate shield of asubsidiary to reach the assets of a parent.56 Thus, in the example above, a plaintiff wouldbe attempting to pierce the corporate shield ofBto reach the assets ofA. In contrast withhorizontal piercing, the plaintiff is no longer attempting to pierce two corporations ofequal power within the hierarchy of the corporate structure. Rather, the plaintiff is nowattempting to pierce an inferior corporate entitya subsidiaryin an attempt to reach theassets of a superior corporate entitythe parent. If drawn as a visual depiction, theplaintiff would be literally drawing a piercing line upwardshence, the name.

Parent

Subsidiary Subsidiary

52SeePresser,supranote 4, at 412 (It is usually understood that to pierce the corporate veil some sort ofabuse is required, but there is no consensus on what constitutes abuse. There are some jurisdictions thathave made it clear that where the case involves contractual creditors, there must be proof of actual fraudbefore the shield of limited liability is removed. In other jurisdictions, fraud is not required. . . .).53Thompson,supra note 3, at 1039.54Gevurtz,supra note 32, at 88487.55Id.at 89899.56Id.

7/24/2019 kljkmg

11/33

11

In terms of application, courts tend to focus their inquiry on control or unityfactors when analyzing horizontal and vertical piercing cases and deemphasize injusticeelements.57

C.

Reverse Piercing Cases

Reverse piercing cases can occur as an overlay of any of the types of piercingcases discussed above, as reverse piercing is an attempt by a plaintiff to pierce ashareholder, or, in the case of a multi-corporate structure, a superior, to reach the assetsof an inferior.58 Thus, in the common corporate context where there is a single corporateentity and a number of shareholders, a reverse pierce would be an attempt by the plaintiffto piece through the shareholder to reach the assets of the corporation.59

Corporation

Shareholder Shareholder Shareholder

Or, in the context of a multi-corporation structure, a reverse pierce would occur where aplaintiff attempts to pierce a parent to reach the assets of a subsidiary.60

Parent

Subsidiary Subsidiary

In terms of application, as with horizontal and vertical piercing cases, courts tendto emphasize the control and unity elements and deemphasize the injustice elements. Inaddition, some have argued this type of piercing should only be available in contractualmisrepresentation cases.61

D. Triangular Piercing Cases

Triangular piercing cases are the most complicated of the piercing structures, asthey potentially entail all of the hallmarks of the above structures with a twisttriangularpiercing cases can arise from tort or contract case, have elements of horizontal andvertical structures, and can be pierced in reverse.62 Triangular piercing cases exist wherea plaintiff attempts to pierce a parent corporation to reach a shareholder of the parent, inan attempt to reach an otherwise unrelated corporation of which the shareholder owns an

57Id.at 89899.58SeeCaudill,supranote 23, at 467.59Id.60Id.61Id.(summarizing Judge Posners views on reverse piercing).62Id.

7/24/2019 kljkmg

12/33

12

interest.63 Thus, imagine a parent company, A, is solely owned by a Shareholder, B.Furthermore imagine that Bowns shares in an unrelated corporation, C. Now imaginethat while the plaintiff has only dealt withAandB, at most, the plaintiff has had no directrelationship with C. Nevertheless, bothAandB are insolvent. Thus, the plaintiff seeksto pierceAto reachBto reach C, as in the figure below:

A (Insolvent Corporation) C (Solvent Corporation)

B (Shareholder)

This, of course, forms a triangle, giving rise to the name.In terms of application, as with horizontal, vertical, and reverse piercing cases,

courts tend to emphasize the control and unity elements and deemphasize the injusticeelements.64 In addition, some have argued this type of piercing should only be available

in contractual misrepresentation cases.

65

III. PREDICTABILITY AND CONSISTENCY AS GOALS OF MODERN

JURISPRUDENCE

The concepts of predictability and consistency are said to have first arisen on amandatory basis, at least in England, in the Magna Carta.66While the Magna Carta wasdesigned to limit the power of the King, as opposed to the powers of democraticgovernments, it has nonetheless formed the essential basis of our modern democraticsystem,67working its way into some of the most prominent documents within the UnitedStates.68 While predictability and consistency have certainly formed the basis for largerdiscussions about all of our governmental branches,69these twin goals are most pressingin the context of judicial decisions and have assisted the reasoning of nearly every

63Id.64Id.65Id.(summarizing Judge Posners views on triangular piercing).66See Christine N. Cimini,Principles of Non-Arbitrariness: Lawlessness in the Administration of Welfare,57 RUTGERS L.REV. 451, 459 (2005) (Historically, concepts of non-arbitrariness extent back to the MagnaCarta, and a general repudiation of governmental arbitrariness is evidenced in many documents that formthe foundation of our current legal system.).67See id.68See Thomas R. Phillips, The Constitutional Right to a Remedy, 78 N.Y.U.L.REV. 1309, 1310 (2003)

(stating portions of the Magna Carta exist in the United States Constitution as well as at least forty stateconstitutions).69SeeJohn Harrison, The Power of Congress Over the Rules of Precedent, 50 DUKE L.J. 503, 516 (2000)(nothing adherence to judicial precedent is sound policy because it promotes evenhandedness,predictability, consistency, and reliance); Julia Shear Kushner, The Right to Control Ones Name, 57U.C.L.A.L.REV. 313, 326 (2009) (noting a statute with fewer guidelines for a court to consider would leadto less predictability and consistency and more litigation); David Weiss, The Foreign Corrupt PracticesAct, SEC Disgorgement of Profits, and Evolving International Bribery Regime: Weighing the

Proportionality, Retribution, and Deterrence, 20 MICH. J. INTL L. 471, 502 (2009) (noting the FCPAsregulatory scheme owes some level of predictability and consistency to parties that is seeks to regulate).

7/24/2019 kljkmg

13/33

13

appellate court in the country.70 Most notably, they are the keys goals imbedded withinthe doctrine of stare decisis.71

While many civilizations have recognized the prudence of reviewing historicaljudicial decisions as a means to understand current litigation,72stare decisis, or stand bythe thing decided and do not disturb the calm,73ultimately originated in its present form

70See, e.g., Planned Parenthood of Pa. v. Casey, 505 U.S. 833, 854 (1992) (stating the doctrine of staredecisis is indispensable to the rule of law); Thomas v. Wash. Gas Light Co., 448 U.S. 261, 272 (1980)(holding stare decisis plays an important role in orderly adjudication . . . [and] serves the broader societalinterests in even handed, consistent, and predictable application of legal rules); Moragne v. States Marine

Lines, 398 U.S. 375, 403 (1970); Keck v. Dryvit Sys., Inc., 830 So.2d 1, 7-8 (Ala. 2002); In re G.K., 497P.2d 914, 916 (Alaska 1972); Andrews v. Blake, 69 P.3d 7, 18 (Ariz. 2003); Chamberlin v. State FarmMut. Auto. Ins. Co., 36 S.W.3d 281, 284 (Ark. 2001); Sierra Club v. San Joaquin Local Agency FormationCo., 981 P.2d 543, 552 (Cal. 1999); Creacy v. Industrial Comn, 366 P.2d 384, 386 (Colo. 1961); Conwayv. Town of Wilton, 680 A.2d 242, 246 (Conn. 1996); Keeler v. Harford Mut. Ins. Co., 672 A.2d 1012, 1017(Del. 1996); Carl v. Childrens Hosp., 702 A.2d 159, 180 (D.C. Ct. App. 1997); Muhammed v. State, 782So.2d 343, 365 (Fla. 2001); Atlanta Coca Cola Bottling Co. v. Gates, 171 S.E.2d 723, 734 (Ga. 1969);Gardner v. Gardner, 810 P.2d 239, 243 (Haw. Ct. App. 1991); Matter of Doe, 911 P.2d 140, 144 (Idaho Ct.

App. 1996); Wakulich v. Mraz, 785 N.E.2d 843, 848 (Ill. 2003); In re Sandy Ridge Oil Co., 510 N.E.2d667, 670 (Ind. 1987); State v. Fremont, 749 N.W.2d 234, 242 (Iowa 2008); Roberts v. Krupka, 779 P.2d447, 456 (Kan Ct. App. 1989); Matheney v. Com., 191 S.W.2d 599, 608 (Ky. 2006); Irish v. Gimbel, 743A.2d 736, 737 (Me. 2000); Livesay v. Baltimore County, 862 A.2d 33, 40-41; Stonehill College v. Mass.Comn Against Discrimination, 808 N.E.2d 205, 216 (Mass. 2004); Robinson v. City of Detroit, 613

N.W.2d 307, 319-320 (Mich. 2000); State v. Manford, 106 N.W.2d 907, 908 (Minn. 1906); Tideway OilPrograms, Inc. v. Serio, 431 So.2d 454, 465 (Miss. 1983); Ronnoco Coffee Co. v. Director of Revenue, 185S.W.3d 676, 681 (Mo. 2006); State v. Kirkbride, 185 P.3d 340, 343 (Mont. 2008); Metro Renovation, Inc.v. State Dept. of Labor, 543 N.W.2d 715, 721 (Neb. 1996); Miller v. Burk, 188 P.3d 1112, 1124 (Nev.2008); Clark v. Clark, 222 A.2d 205, 208 (N.H. 1966); Arrow Builders Supply Corp. v. Hudson TerraceApartments, 105 A.2d 387, 391 (N.J. 1954); Padilla v. State Farm Mut. Auto. Ins. Co., 68 P.3d 901, 904(N.M. 2003); People v. Taylor, 878 N.E.2d 969, 978 (N.Y. 2007); Bacon v. Lee, 549 S.E.2d 840, 852(2001); Hanson v. Williams County, 389 N.W.2d 319, 336 (N.D. 1986); Westfield Ins. Co. v. Galatis, 797N.E.2d 1256, 1260 (Ohio 2003); Ok. County v. Queen City Lodge No. 197, 156 P.2d 340, 345 (Ok. 1945);

Poet v. Thompson, 144 P.3d 1067, 1072 (Or. Ct. App. 2006); Stilp v. Com., 905 A.2d 918, 954 (Pa. 2006);State v. Musumeci, 717 A.2d 56, 68 (R.I. 1998); Springob v. Farrar, 514 S.E.2d 135, 141 (S.C. Ct. App.1999); Midcom, Inc. v. Oehlerking, 722 N.W.2d 722, 727 (S.D. 2006); Union Tr. Co. v. WilliamsonCounty Bd. of Zoning Appeals, 500 S.W.2d 608, 615 (Tenn. 1973); Ex Parte Porter, 827 S.W.2d 324, 300(Tex. Crim. App. 1992); State v. Shoulderblade, 905 P.2d 289, 291 (Utah 1995); Baker v. State, 744 A.2d864, 878 (Vt. 1999); Pulliam v. Coastal Emergency Servs. of Richmond, Inc., 509 S.E.2d 307, 310 (Va.1999); Bishop v. Miche, 973 P.2d 465, 471 (Wash. 1999); Meadows v. Meadows, 468 S.E.2d 309, 317 (W.Va. 1996); Johnson v. Controls, Inc. v. Employers Ins. of Wausau, 665 N.W.2d 257, 286 (Wis. 2003);Cook v. State, 841 P.2d 1345, 1353 (Wyo. 1992); see alsoTHE FEDERALISTNO. 80, at 446 (Penguin Books1987) (The mere necessity of uniformity in the interpretation of the national laws decides the question.Thirteen independent courts of final jurisdiction over the same causes, arising upon the same laws, is ahydra in government from which nothing but contradiction and confusion can proceed.).71 Wash. Gas Light Co., 448 U.S. at 272 (holding stare decisis plays an important role in orderly

adjudication . . . [and] serves the broader societal interests in even handed, consistent, and predictableapplication of legal rules).72SeeThomas Healy, Stare Decisis as a Constitutional Requirement, 104 W.VA.L.REV.43, 54 (2001)(In ancient Greece, judges relied on past cases to settle commercial disputes, while early Egyptian judges

prepared a rudimentary system of law reports to help them guide their decisions. Roman judges alsodisplayed a tendency to follow the example of their predecessors. . . . Though courts in Greece, Egypt, orRome may have consulted past decisions for guidance, they were never bound, even presumptively, bythose decisions . . .).73James C. Rehniquist, The Power that Shall be Vested in a Precedent: Stare Decisis, the Constitution,and the Supreme Court, 66 B.U. L. REV. 345, 347 (1986); Mark Sabel, The Role of Stare Decisis in

7/24/2019 kljkmg

14/33

14

in England.74 The doctrine was then transferred to the United States both through thecolonial governments75and the understanding of our founding fathers.76

Predictability and consistency in judicial judgments are important for obviousreasons. They promote public confidence in the law;77 foster certainty;78 enhancestability in the law;79create efficiency;80promote unbiased, meritorious decisions;81 and

encourage judicial restraint.

82

However, they are particularly important in the context ofbusiness law, as business transactions inherently presume continuity in the law as it existstoday.83 Thus, predictability and consistency in this realm encourages citizens to conductbusiness, leading to a more viable economy.84 Inversely, unpredictability and

Construing the Alabama Constitution of 1901, 53 ALA.L.REV. 273, 373 (2001); Victor E. Schwartz, CarySilverman & Phil Goldberg, Toward Neutral Principles of Stare Decisis in Tort Law , 58 S.C.L.REV. 317,320 (2006); see alsoLuis Diego Canseco & Enrique Pasquel, Stare Decisis, Commercial Exchanges, andPredictability: A Proposal to Confront the Reform of the Judicial Branch , 20 FLA.J.INTL L. 31, 49 (2008)(stating stare decisis literally means to keep to the determined decision and maintain the calm).74 For a thorough examination of the doctrines evolution in England, see Healy, supra note 72, at 43;Canseco & Pasquel, supra note 73, at 49 (stating stare decisis originated in Rome but developed in its

present form in Great Britain).75Healy,supra note 72, at 73; Rehniquist,supra note 73, at 348.76THE FEDERALISTNO. 78, at 44142 (Penguin Books 1987) (There is yet a further and weighty reasonfor the permanency of the judicial offices which is deducible from the nature of the qualifications theyrequire. It has been frequently remarked with great propriety that a voluminous code of laws is one of theinconveniences necessarily connected with the advantages of free government. To avoid arbitrarydiscretion of the courts, it is indispensable that they should be bound down by strict rules and precedentswhich serve to define and point out their duty in a particular case that comes before them . . .); Jordan

Wilder Connors, Treating Like Subsections Alike: The Scope of Stare Decisis as Applied to JudicialMethodology, 108 COLUM.L.REV. 681, 685 (2008) (Although the Constitution contains no reference tostare decisis, ample evidence suggests that the Framers and commentators at the time of ratificationcontemplated its application and supported some manner of its use.).77Rehniquist, supra note 73, at 347; Kelly Parker, Of Sleeping Dogs and Silent Love: Stare Decisis andLawrence v. Texas, 41 IDAHO L.REV. 177, 188 (2004); Sabel,supra note 73, at 373; Connors,supra note

76, at 685; Schwartz, Silverman & Goldberg,supra note 73, at 320.78 Healy, supra note 72, at 51; Canseco & Pasquel, supra note 73, at 49; Christopher J. Peters, FoolishConsistency: On Equality, Integrity, and Justice in Stare Decisis, 105 YALE L.J. 2031, 2039 (1996).79 Healy, supra note 72, at 70; Sabel, supra note 73, at 373; Canseco & Pasquel, supra note 73, at 49;Peters,supra note 78, at 2039.80Healy,supranote 72, at 108; Parker,supra note 77, at 188; Pariisis G. Filippatos, The Doctrine of StareDecisis and the Protection of Civil Rights and Liberties in the Rehnquist Court, 11 B.C.THIRD WORLD L.J.335, 338 (1991); Sabel, supra note 73, at 373; Connors, supra note 76, at 685; Peters, supra note 78, at2039.81SeeHealy,supranote 72, at 109; Sabel,supra note 73, at 373;see alsoFilippatos,supra note 80, at 338(stating stare decisis promoted fairness); Connors,supra note 76, at 685 (same).82Healy,supra note 72, at 109.83Rehniquist, supra note 73, at 348; Connors, supra note 76, at 685; Peters, supra note 78, at 2039; see

also Miller, supra note 4, at 112 (The degree of judicial discretion surrounding the law of entityrecognition poses a distinct challenge to the business planner in search of predictability in the law.). 84Healy, supra note 72, at 108; Parker, supra note 77, at 188 (Stare decisis provides some moorings sothat men may trade and arrange their affairs with confidence. Stare decisis serves to take the capriciouselement out of the law and give stability to a society. It is a strong tie which the future has to the past.(quoting William O. Douglas, Stare Decisis, 49 COLUM. L. REV. 735, 736 (1949)); Kelly Parker, OfSleeping Dogs and Silent Love: Stare Decisis and Lawrence v. Texas, 41 IDAHO L.REV. 177, 188 (2004)([Consistency] is of the greatest importance because of its stabilizing effect on the private ordering ofeconomic relationships. (quoting John Paul Stevens, The Life of a Judge-Made Rule, 58 N.Y.U.L.REV. 1,14 (1983)).

7/24/2019 kljkmg

15/33

15

inconsistency discourage business by generating a lack of reliance. Notwithstanding thisobvious truth, these integral twin principles do not exist in piercing doctrine.85 Instead,as stated earlier, piercing doctrine operates in a factually intensive vacuum that is whollyremoved from traditional notions of stare decisis.86

The crux of the problem has been, then, to create a system that preserves the

fundamental notions of fairness entangled within the piercing doctrine, while attemptingto achieve some level of predictability and consistency with its application. That problemhas proven a tough beast to slay, as the current piercing formulations provide anextraordinary degree of discretion to the judiciary. Nevertheless, a number of scholarshave proposed a variety of mechanisms to alleviate the predictability and consistencyproblem.

IV. PROPOSALS BY OTHER SCHOLARS

A number of proposals already exist to remedy the predictability and consistencyproblems the doctrine currently generates. Generally, two types of theories exist, each

respectively focusing on either abolishing the doctrine altogether or alleviating thedoctrines more inhospitable characteristics through codification of a more stringent test.All of these proposals suffer from deficiencies.

A. Proposals Advocating Elimination of the Doctrine

Three prominent theories exist for elimination of the doctrine. Those are: 1) theBainbridge Proposal;87 2) the Mandatory Insurance Proposal88; and 3) the MandatoryCapitalization Proposal.89

1. The Bainbridge Proposal

Professor Bainbridge has been an outspoken critic of piercing doctrine and hasexplicitly advocated its abolition for two reasons. First, he posits that the doctrine isunprincipled and uncontrollable.90 Second, he argues the doctrine has predictability costswhile not serving any policy goals.91

As to the first reason, Professor Bainbridge argues fairly simply, and correctly,that veil piercing lacks any objective criteria capable of prospective analysis orapplication.92 Rather, veil piercing tests are composed of a variety of factors that a court,retrospectively, will review to determine whether piercing is appropriate.93 This

85Huss,supranote 3, at 110 (noting the principle is arbitrary in its application).86

Id.87Bainbridge,supranote 7, at 479.88While this proposal does not explicitly recommend abolition of the doctrine, the proposal is, by its verynature, a replacement for the doctrine. Thus, the doctrines abolition is implicit.89While this proposal does not explicitly recommend abolition of the doctrine, the proposal is, by its verynature, a replacement for the doctrine. Thus, the doctrines abolition is implicit.90Bainbridge,supranote 7, at 479.91Id.92Id.93Id. at 510.

7/24/2019 kljkmg

16/33

16

obviously leads to uncertainty and unpredictability from a corporate planningperspective.94 Exacerbating the problem, Professor Bainbridge argues courts frequentlyseize on one aspect of the factors test and consider it dispositive, even when that aspect,standing alone, is simply a common virtue of even legitimate corporations.95

As to the second reason, Professor Bainbridge argues that this unpredictability has

social costs without any social benefit.

96

The social costs, of course, are inconsistency,unpredictability, the potential for over-capitalization and thus reduction in liquidity, thedifficulty in advising clients prospectively, the difficulty in planning from the clientsperspective, and the general undermining of limited liability.97 In terms of socialbenefits, Professor Bainbridge does not believe veil piercing serves any.98 Rather,because its application is unprincipled, he believes it could not serve any of the socialbenefits typically discussed as the policy basis supporting its existenceserving as avalve release for excessive externalization.99 Furthermore, Professor Bainbridge arguesthe injustice purportedly prevented by piercing doctrine is actually equally preventableusing existing causes of actionmisrepresentation, fraud, and fraudulent transferstatutes.100

For the most part, Professor Bainbridge and I agreecurrent veil piercingjurisprudence is extremely unprincipled and wildly unpredictable. Furthermore, I agreewith Professor Bainbridge that the majority of the doctrines effectsand policy goals canbe served through existing causes of action. Nevertheless, eliminating veil piercing doeshave costs to legitimate policy goals. Furthermore, while existing causes of action aresufficient to serve most areas of potential abuse, existing causes of action are nonethelessinsufficient in the context of undercapitalization.101

First and foremost, I remain convinced that piercing serves a deterrent goal.Second, I remain convinced that piercing serves as a valve release for the extremeinequitable aspects of limited liability. As to the first, while the estimation is not easilysusceptible to concrete proof, the intuitive notion seems unequivocal. The potential ofpiercing causes shareholders to act differently than they would if piercing did not exist.102

94Id.at 481.95Id. at 524.96Id. at 514.97Id.at 481.98Id. at 516.99Id.100Id.101 See Millon, supra note 8, at 135859 (Scholarsmost recently Professor Bainbridgehave arguedthat established legal doctrines already exist that provide mechanisms for holding shareholders personallyliable to corporate creditors in appropriate cases. According to this view, the law of fraudulentmisrepresentation and of fraudulent conveyance are adequate to the task of policing the abuse of limited

liability and therefore obviate the need for veil piercing. . . . Actions for misrepresentation and fraudulentconveyance would not, however, reach all of the cases in which shareholders have used limited liability inways that offend public policy. As argued above, shareholders who cause the corporation to incur debtwhile knowing that repayment is impossible or highly unlikely arguably should be treated differently fromthose whose corporations default despite their good faith efforts to manage the business in a financiallyresponsible manner.).102SeePresser,supranote 4, at 412 n. 25 (quoting Robert W. Hamilton & Jonathan R. Macey, C ASES ANDMATERIALS ON CORPORATIONS INCLUDING PARTNERSHIPS AND LIMITED LIABILITY COMPANIES 355 (8thed. 2003) ([T]he very vagueness and uncertainty of the piercing doctrine encourages adequatecapitalization (and the purchase of liability insurance) by corporations . . . .).

7/24/2019 kljkmg

17/33

17

Thus, for example, shareholders less frequently undercapitalize than they otherwisewould for fear of exposure to piercing. Or, shareholders of close corporations havegreater incentives to watch each other to prevent fraud. Of course, one could argue,somewhat in line with Professor Bainbridges second argument,103 that these causes ofaction already exist in one form or another, and thus, piercing is simply duplicative. In

terms of deterrence, however, piercing still serves an independent goal. The fear ofexposing ones personal assets to a judgment in part serves an over-deterrence goalanalogous to that of punitive damagesit not only removes the financial incentives, thuscreating a break even scenario, it also provides exposure over and above what thecorporation might have actually sustained, thus making inequitable conduct a poorbusiness decision.104

For example, imagine a corporation, A, is owned by shareholders B, C, and D.Imagine further that B engages in fraud against E, and E later sues seeking to pierce.WhileEcould certainly sueAandBfor fraud even absent piercing, Es recovery wouldbe limited to funds available from A and B. With the addition of piercing, however, Cand Dare now potentially personally liable as well, creating an incentive to watch the

storeand prevent such activity.Or, imagine a circumstance where a corporation is constantly undercapitalizedand is subsequently sued. While fraudulent transfer laws certainly permit reach backs

for previous transfers, they only permit a plaintiff to access funds that were in factfraudulently transferred. Thus, financial incentives could still exist for a corporation toundercapitalize, as even if successful, a plaintiff would only recover the amounts of thetransfers. Additionally, given the likelihood of the plaintiffs success and the likelihoodof being sued in the first place, undercapitalizing could still make good fiscal sense in acost-benefit analysis. That perspective, however, is at least less true when shareholdersare faced with the possibility of personal liability exceeding that which the corporationcould have ever been solvent to pay in the first place. Once over-deterrence enters thecost-benefit analysis, it can not only remove the financial incentives, it can cause thependulum to shift in the other direction. Finally, although piercing is rare and currentlyunprincipled,105 its rarity still likely bears some deterrent effect, as people quite simplyact differently when no risk exists than when some risk exists. More importantly, thedeterrent effect could be enhanced through making application of piercing theory morepredictable. In other words, I am not prepared to throw the baby out with the bathwater.Rather, I just want to get new water.

Furthermore, in part responding to Professor Bainbridges first reason and in partresponding to his second reason, piercing does serve as a valve release in circumstanceswhere existing causes of action would not. For instance, imagine a corporationaccidentally grossly undercapitalizes such that the corporation is not within the reach offraudulent transfer laws.106 Imagine further there is no classic siphoning, and the only

103Bainbridge,supranote 7, at 516.104 Cf. Kemezy v. Peters, 79 F.3d 33, 33 (7th Cir. 1996) (stating overdeterrence is a goal of punitivedamages because it eliminates what could otherwise be a positive cost-benefit analysis).105Bainbridge,supranote 7, at 481.106 This circumstance can happen more easily than one might think. See Nina A. Mendelson, Control-Based Approach to Shareholder Liability for Corporate Torts, 102 COLUM. L. REV. 1203, 1263 (2002)(Until a corporation has actual knowledge that a specific lawsuit is threatened or pending, a plaintiff will

have difficult time showing that the transfer was made with a knowledge that a lawsuit has been filed or

7/24/2019 kljkmg

18/33

18

equitable basis for seeking funds outside the corporate assets is premised on thecorporations failure to properly capitalizethere is no basis for a cause of action formisrepresentation, fraud, etc. This is one of many circumstances piercing was intendedto prevent. That is, piercing is intended to mitigate some of the more extreme aspects oflimited liability and serve as a mechanism for plaintiffs to achieve a remedy where a

corporation has failed to act legitimately.

107

While academics and courts can certainlydisagree on whenit is appropriate to pierce, it is difficult for anyone to admit there are notat leastsome circumstanceswherein piercing should be permitted.

In the final analysis, I readily admit that piercing doctrine, as currently conceivedand applied, is unpredictable, inconsistent, and at least lackluster at achieving its statedgoals. However, a better test would achieve better results.

2. Mandatory Insurance

While adherents to the mandatory insurance108 proposals have not specificallynoted that elimination of the doctrine is a goal, the concept behind the proposal is in the

nature of a replacementa mechanism designed to eliminate the need for piercingdoctrine altogether using insurance as a vehicle.As to mandatory insurance, the concept behind the mandatory insurance argument

is that a corporation, as a matter of legislative requirement, should always carrysufficient insurance.109 While this remedy certainly could create more predictabilityand consistency than existing piercing doctrine, at least as far as the theories have come,there does not appear to be any objective link that a corporation could use to know howmuch insurance to have. Nevertheless, the corporation would presumably need todiscern: the nature of its activities; the foreseeable, and sometimes less foreseeable,potential harms of its activities; and the potential damage amounts for those activities;among other possible considerations. Again, at least as far as the theories have come, thecorporation would need to know these things in a vacuumuntethered to any objectivecriteria or external information to assist with the decision-making process. Additionally,to the extent the mandate arose as a specific number or calculus promulgated by alegislative body, such a theory would require a legislative body to account for the varioustypes of existing industries, the various types of potential industries, the potential harmsthose industries could create, and the types of damages those harms could create.Needless to say, this is a tall order that would come with substantial prospective costs.

threatened, and hence with actual intent to hinder, delay, or defraud a creditor.) (quoting The Uniform

Fraudulent Transfer Act 4(a)(1)).107

See, e.g., Ballantine,supra note 19, at 19 (stating the test is whether the corporation used the corporationin good faith for legitimate ends); Presser, supranote 4, at 407 (It is, or at least once was and ought to be,hornbook law that a shareholder or a parent corporation should not lose the protection of limited liabilityunless that shareholder or parent has somehow abused the corporate form.).108 Huss, supra note 3, at 129 (citing Robert W. Hamilton, Registered Limited Liability Partnerships:Present at the Birth (Nearly), 66 U. COLO. L. REV. 1065, 1076 (1995)); Gregory W. Wix, Piercing theCorporate Veil: Should Michigan Consider Statutory Solutions?, 79 U. DET. MERCY L. REV. 637, 654(2002) (reviewing the proposals of other scholars).109Huss, supra note 3, at 129 (citing Hamilton, supra note 108, at 1076); Wix, supra note 108, at 654(reviewing proposals by other scholars).

7/24/2019 kljkmg

19/33

19

Assuming this could be achieved through actuarial models,110 mandatoryinsurance nonetheless would encourage risky behavior.111This premise again needs noproof to sustain it, as its intuitive roots are so strikingly clear. Insurance, in the firstinstance, is intended to create a sense of safety in the insured.112 That safety derives fromthe notion that the insured has engaged in risk-sharing with the insurance company.113 In

the case of the insureds risk, the ultimate payment is made prospectively through apremium; thus, the insureds risk is disgorged each month. That, of course, is not true ofthe insurance company. This creates a situation where, at any given moment, the risk asto both parties is asymmetrical, even if the risk is ultimately evenly shared over time.

In the context of a piercing case, shareholders who are most likely to get piercedare those who play fast and loose with their corporate structure with the presumablenotion that getting pierced is statistically unlikely. If insurance were mandatory, thoseindividuals would be further emboldened to engage in even riskier behavior, as their riskof loss would be substantially less and they would have already paid for the privilegeof the gamble. While this option would certainly serve to protect would-be plaintiffsfrom insolvent corporations, it would simply force some corporations to shoulder the

burden for othersthose corporations who do nothing wrong and are not the target ofmandatory insurance would pay enhanced premiums for insurance they do not need inorder to pay for those who game the system by engaging in risky conduct. From a publicpolicy perspective, this result is undesirable.

3. Mandatory Capitalization

The concept behind mandatory capitalization is somewhat similar to theunderlying notion behind mandatory insurance, with one exception: the origin of thefund maintained for would-be plaintiffs.114 As explained above, in the context ofmandatory insurance, the fund is derived from insurance. In the context of mandatorycapitalization, however, the funds derive from the corporation itself.115 The fund is thenkept as retained earnings that are available in the event of liability.116

110 Actuarial methods are classical risk management techniques that use mathematical equations todetermine appropriate premiums for insurance policies. SeeStephen A. Kane, Identifying and AssessingAdverse Selection, 3 J.BUS.&ECON.RES. 9, 15 (March 2005).111 See Richard Lempert, Low J Probability/High Consequence Events: Dilemmas of DamageCompensation, 58 DEPAUL L.REV. 357, 385 (2009); see alsoGeorge L. Priest, Insurability and PunitiveDamages, 40 ALA. L. REV. 1009, 1025 (1989) (Put in economic terms, activities of insureds aredifferentially susceptible to marginal incentives from insurance. Where the existence of insurancesignificantly reduces marginal incentives to reduce harm, the harms become uninsurable. An act for whichthe occurrence is subject to the volition of the insured is highly susceptible to insurance incentives: theexistence of insurance directly reduces the costs of such acts and makes them uninsurable.).112

See Jeffery W. Stempel, Domtar Baby: Misplaced Notions of Equitable Apportionment Create aThicket of Potential Unfairness for Insurance Policyholders, 25 WM.MITCHELL L.REV. 769, 896 (1999)(Insurance is usually described as one partys agreement to suffer a certain but relatively small loss (i.e.,the premium payment) in return for obtaining the insurers agreement to cover the possibility of contingent

but larger losses.).113Id.114 Huss, supra note 3, at 129 (citing Hamilton, supra note 108, at 1076; Wix, supra note 108, at 654(reviewing the proposals of other scholars).115Supranote 114.116Id.

7/24/2019 kljkmg

20/33

20

In many ways, mandatory capitalization theories suffer from the same types ofcriticisms seen in mandatory insurance schemes. Thus, a legislative body, to determinethe appropriate amount, would need to account for the various types of existingindustries, the various types of potential industries, the potential harms those industriescould create, and the types of damages those harms could create, among other

considerations. As least as far as the theories have come, these decisions would be madepresumably using traditional mechanisms like actuarial models. As stated earlier, thecosts for such an activity would be great.117

Admittedly, my test uses latent elements of mandatory capitalization. But, insteadof using traditional actuarial models, which have substantial prospective costs, my testuses the doctrine of custom, as will be described in more detail in the next section. Inaddition, my test includes other elements of a conjunctive testelements that would notsubstantially alter existing piercing doctrine while substantially making the test moreobjective.

B. Codification Requiring Fraud or Siphoning and Insolvency

The second category of proposal attempts to create predictability and consistencythrough the creation of a conjunctive test. By far the most prominent of these proposalsis the Matheson and Eby Proposal.118

The crux of the Matheson and Eby Proposal is that the piercing doctrine should berefashioned to require a demonstration of two elements.119 First, Matheson and Ebyargue that plaintiffs should be required to demonstrate fraud or siphoning.120 Second,Matheson and Eby argue plaintiffs should be required to demonstrate insolvency.121

On the positive side, this proposal is moving in the proper direction. That is,instead of attempting to eliminate the doctrine altogether, the proposal seeks to limitjudicial discretion through the vehicle of a conjunctive test. Nevertheless, the proposalfalls short in two respects. First, the proposal requires the existence of either fraud orsiphoning to the exclusion of undercapitalization. As I will discuss in Part V.A.,undercapitalization is a necessary option for piercing, if the judicial system is to preservethe purpose of piercing doctrineto prevent injustice. Second, the proposal lacks a unityelement. While the unity element has been widely criticized as markedly unrelated toany equitable basis for piercing, the unity requirement ensures that not every shareholdercould be personally liable for the corporate debts. Rather, only those shareholders whoare truly controlling the corporation and using it improperly would be subject to that typeof liability. Imagine for example that corporation A has two shareholders, B and C.

117Mandatory capitalization schemes exist in some isolated industries. For instance, the banking industry

legislatively has mandatory capitalization requirements. However, those requirements are for a singularindustry. Proponents of mandatory capitalization advocate extending those mechanisms to everyindustry,a much more daunting task.118Matheson & Eby,supra note 8, at 182.119Id.at 18788.120Id.121Id. As discussed in section IV, the insolvency requirement is a concept inherent in the doctrine itself.Thus, properly viewed Matheson and Ebys proposal simply argues that the doctrine should be applied

when and only when a demonstration of fraud or siphoning exists. The proposal does not contemplate anyother necessary conduct for application of the doctrine.

7/24/2019 kljkmg

21/33

21

Imagine that C is completely a passive shareholder who takes no interest in the day-to-day operations ofA. Imagine further thatBcompletely controlsAand usesAas an alterego, instrumentality, or any other creative metaphor. If a plaintiff sued A andsuccessfully pierced, both Band Cwould have potential exposure, as, without the unityrequirement, every shareholder of a corporation, however passive, would be exposed to

piercing. In this circumstance, piercing doctrine would create more inequity than it wasdesigned to remedy. Furthermore, it would discourage passive investment.Thus, while the Matheson & Eby Proposal certainly creates more predictability

and consistency in the application of piercing doctrine, it does so at the expense of thedoctrine itselfit compromises the doctrines ability to achieve the purpose ofpreventing injustice.

V. A PROPOSAL

While the twin goals of predictability and consistency are important, or should be,to the proper administration of the law, most academics and judges would agree that bothmust be sacrificed in those rare instances where those goals are in direct conflict with the

goal of justice. While piercing doctrine has certainly been viewed in that light for thecourse of its existence, the doctrine need not be so unanchored to both achieve its goal ofjustice and provide predictability and consistency.

It is with this context that I propose a new test that, if adopted, would mitigate theproblems of unpredictability and inconsistency generated by the overabundance ofjudicial discretion in piercing doctrine. Piercing doctrine should become a static,conjunctive test that requires the following: 1) an injustice requirement that can beachieved through a showing of fraud, misrepresentation, or undercapitalization; 2) a unityrequirement; 3) a causation requirement; and 3) an insolvency requirement.

A. Piercing Should Require Evidence of Injustice

While some courts certainly require the existence of some injustice element

before piercing, many do not.122 Further, even among those that require an element ofinjustice, few courts specifically and explicitly require that a plaintiff demonstratespecific types of injustice.123 Instead, courts have produced an incredibly broaddefinition of injustice that requires nothing even remotely close to an actual standard. 124In some instances, this broad definitional structure has permitted courts to pierce upon asimple showing of unity and insolvency.125 In other cases, some type of fraud is

122SeeGevurtz,supra note 32, at 865 ([R]ecent opinions state that meeting the impermissible dominationand control element can, in itself, justify piercing.)123SeePresser,supranote 4, at 412 (It is usually understood that to pierce the corporate veil some sort of

abuse is required, but there is no consensus on what constitutes abuse.).124Id.125SeeGevurtz,supra note 32, at 865 ([R]ecent opinions state that meeting the impermissible dominationand control element can, in itself, justify piercing.); Susan A. Kraemer, Corporate Law, 76 Denv. L. Rev.729, 734 n.32 (1999) ([S]ome jurisdictions require fraud or inequitable result, whi le other jurisdictionswill disregard the corporate entity based only on a finding of excessive unity of interest alone.). Whileunity is certainly an important element to a piercing claim, its sufficiency to pierce absent harm makes littlesense, as there is no doubting that close corporations will nearly always meet the test. Furthermore, as Iwill discuss later, insolvency is a necessary precondition to piercing in the first instance. Thus, in terms ofdiscerning whether a corporationshould bepierced, it adds little to the analysis.

7/24/2019 kljkmg

22/33

22

required.126 Thus, in effect, this broad inquiry creates both external inconsistencyorinconsistency between different jurisdictionsand internal inconsistencyorinconsistency between various decisions within the same jurisdiction.

It is with this background that I propose the following: piercing doctrine shouldrequire a demonstration of fraud,127misrepresentation,128or undercapitalization.129 This

solves three problems. First, a static injustice requirement ensures that the shareholder orentity is in fact engaging in behavior piercing is attempting to preventthe use of limitedliability as an absolute shield for injustice.130 Thus, in addition to creating externalconsistency, it creates consistency with the goals of the doctrine. Second, and furtherelaborating on the goal of the doctrine, the introduction of an actual harm requirementwill prevent piercing on the mere basis that unity and insolvency exist. Finally, creatingset, stable types of injustice will encourage both internal and external consistency, as itwill prevent individual judges from simply checking their guts to see if something

unjust has occurred.In terms of predictability and consistency, the first two of these injustice tests

fraud131and misrepresentation132are fairly simple, as they rely on definitions already

jurisprudentially well-worn. That is, fraud and misrepresentation are already fairly staticconcepts both internally within jurisdictions and externally between jurisdictions.Accordingly, rather than try to revamp those systems, which seem to be working well, Ipropose to incorporate these traditional definitions into the piercing test in their existingforms.133

The final option in the test, however, is not as easily defined. The element ofundercapitalization has proven to be one of the more difficult problems in existingpiercing doctrine, at least in terms of predictability and consistency. This truth is largely

126Joseph E. Casson & Julia McMillen, Protecting Nursing Home Companies: Limited Liability ThroughCorporate Restructuring, 36 J.HEALTH L. 577, 592 (2003).127 This element incorporates a portion of both the Bainbridge and Matheson & Eby approaches. SeeBainbridge,supranote 7, at 517; Matheson & Eby,supra note 8, at 182.128This element incorporates a portion of the Bainbridge approach. SeeBainbridge,supranote 7, at 517.129While Professor Bainbridge certainly discussed the potential of undercapitalization serving as a basis ofliability in the context of siphoning cases, my proposal views siphoning as a separate mechanism forpiercing and extends the notion of undercapitalization much more broadly than Professor Bainbridgeenvisioned it.130SeeCampbell, supranote 14, at 36 (What the formula comes down to, once shorn of verbiage aboutcontrol, instrumentality, agency and corporate entity, is that the liability is imposed to reach an equitableresult.) quoting E. Latty, SUBSIDIARIES AND AFFILIATED CORPORATIONS191 (1936)).13137 AM.JUR.2DFraud and Deceit 475 (2009) (To establish a prima facie fraud claim, the plaintiffmust prove the following elements by clear and convincing evidence: (1) false representation orconcealment of material fact; (2) reasonably calculated to deceive; (3) made with the intent to deceive; (4)

resulting in injury or detrimental reliance.).132Generally, the elements of fraud and misrepresentation are similar. See37 C.J.S. Fraud 77 (2009)(The difference between intentional or fraudulent misrepresentation and negligent misrepresentation is

that the latter only requires that the statement or omission was made without a reasonable basis forbelieving its truthfulness, rather than an actual knowledge of its falsity.).133This is somewhat of a change, as courts do not typically apply these tests stringently in piercing cases.See 18 AM.JUR.2DCorporations 57 (2009) (Under the circumstances of the case, a showing of moralculpability, in addition to other factors, is often necessary to justify disregarding a corporate entity,although it has been said that proof of plain fraud is not a necessary element in a finding to disregard thecorporate entity.).

7/24/2019 kljkmg

23/33

23

a result of the fact that few people could readily discern what it means to beundercapitalized from a corporate perspective.

1