A Dream Is a Wish Your Heart Makes

National and worldwide shutdowns, imposed to protect citizens from COVID-19, might leave your contract counterparts unable to satisfy their obligations. Even in good times, the perennial hope of contract creditors is to find backup sources of payment. That’s the dream: roping in a deep pocket to make good. One way is to secure a guaranty. Another is to pierce the corporate veil, going after a parent company or controlling stockholder who allegedly runs the whole show.

The problems with piercing are manifest. Controlling shareholders are entirely permissible and they can vote their shares to bring themselves economic advantage. Forming corporations and limited liability companies to shield individual owners from liability is allowed, and encouraged, by legislatures nationwide. Both are the norms in corporate law. It is only when ownership is used to trample on process, to avoid following corporate formalities, that problems may arise. But even that is not enough. The corporate form must be used to perpetrate a fraud. A controlling or 100%-owning shareholder can be sloppy in the details of exercising its power, but in order to justify piercing, the shareholder must use its position to engage in no less than outright fraud married with a desire to employ the owned entity for the sole purpose of insulating its fraud-perpetrating parent. A puppet-puppet master dynamic.

Is it hard to pierce? Absolutely. But it’s not impossible. Our team has been on both sides of the issue, prosecuting and defending piercing. We have pierced the corporate veil before a federal jury and defended the judgment in a federal Court of Appeals. We have secured dismissal of deficiently alleged piercing claims at the pleading stage. And more. While the details differ from state to state, we know the fundamentals and we know how to win. Whether the post-COVID world finds you under attack to be held liable for the debts of another (a nightmare) or you seek to broaden the playing field to recover money due to you (a dream), we can help.

Arthur F. Fergenson is a Senior Counsel in our Maryland office.
Heather L. Williams is an Associate in our Maryland office.