Federal Maritime law appears to take an expansive view of the piercing the corporate veil doctrine. The standard is to pierce the veil when to do so would "achieve an equitable result." Williamson v. Recovery Ltd. P'ship, 542 F.3d 43, 53 (2d Cir. 2008). Ugh. So its all about fairness?
In In re Rickmers Genoa Litigation, 2009 LEXIS 30430 (SDNY Mrch 31, 2009), the court applied a very inclusive and loose 15-factor test to determine whether to pierce the veil. See if you recognize any of your clients here:
"(1) common or overlapping stock ownership between parent and subsidiary; (2) common or overlapping directors and officers; (3) use of same corporate office; (4) inadequate capitalization of subsidiary; (5) financing of subsidiary by parent; (6) parent exists solely as holding company of subsidiaries; (7) parent's use of subsidiaries' property and assets as its own; (8) informal intercorporate loan transactions; (9) incorporation of subsidiary caused by parent; (10) parent and subsidiary's filing of consolidated income tax returns; (11) decision-making for subsidiary by parent and principals; (12) subsidiary's directors do not act independently in interest of subsidiary but in interest of parent; (13) contracts between parent and subsidiary that are more favorable to parent; (14) non-observance of formal legal requirements; (15) existence of fraud, wrongdoing or injustice to third parties."
Ten out of 15 can easily apply to the most innocent of corporate structures.
Now watch how the court applies these factors. The parentheticals are my commentary:
"Here, the evidence presented raises triable issues as to whether piercing the corporate veil is warranted. The Non-Moving Parties have pointed to the facts that: ESMT is a wholly-owned subsidiary of ESM Group and may have been created to circumvent U.S. import laws or obtain lower prices for certain materials previously imported by ESM Group ("circumvent" is a loaded term, how about minimize impact? And lower prices are bad?); ESM Group directors sit on ESMT's board, sometimes constituting the entire ESMT board (not uncommon in small companies, particularly Iowa bank holding companies); ESM Group provides substantial financing to ESMT (a common reason to create a holding company is to raise capital); ESM Group designed ESMT's plant to manufacture SS-89 and supplied the capital, machinery, and expertise necessary to start the operation (sharing resouces); ESM Group developed the specifications for SS-89, gave that formula to ESMT (capital contribution), and instructed ESMT personnel on how to make SS-89; ESM Group conducts oversight of ESMT production facilities and procedures (sharing resources again); a significant majority of ESMT's output is sold to ESM Group, and ESM Group fulfills its SS-89 needs from ESMT (division of labor); although apparently sufficiently capitalized, ESMT's net profits were comparatively small in 2004 and 2005 (bad times? poor management?). This evidence tends to show that ESMT was transacting ESM Group's business rather than its own business. Taking this evidence as a whole, it is sufficient to create a triable issue as to whether veil piercing is warranted in this case."
These cases give me the willies.
-Marc Ward
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