Piercing the Corporate Veil to Reach Assets of Non-Shareholders
Generally, forming a San Diego and California corporation will provide a shield against a creditor attempting to reach the personal assets of the shareholders of the corporation. In general, a shareholder of a corporation is not personally liable for the acts or debts of the corporation. This is true for other corporate entities like limited liability companies. Corporate entities are regarded under California law as separate legal entities who are capable of contracting and engaging in separate legal actions. As such, the liability will be against the corporate entity itself. One would also think that a creditor should not be able to reach the assets of a non-shareholder either. However, there are some circumstances in which a non-shareholder’s assets can be at risk. Seeking the advice and counsel of an experienced San Diego corporate attorney can help avoid these risks.
There is a well-known exception to the corporate shield by which the courts will disregard the corporate status. This exception goes under the concept of “piercing the corporate veil.”
One question that has been raised is whether veil-piercing can reach the assets of non-shareholders. As noted, surprisingly, the answer seems to be “yes.” There are about 15 states in the US that allow veil-piercing against non-shareholders. California courts have not addressed the issue directly. There are two cases in which non-shareholders were held liable for corporate obligations under a veil-piercing analysis, but those cases involved a former shareholder and a soon-to-be shareholder. See Minton v. Cavaney, 56 Cal.2d 576 (Cal. Supreme Court 1961) (non-shareholder held liable for wrongful death where he was supposed to receive shares); Las Palmas Associates v. Las Palmas Center Associates, 235 Cal.App.3d 1220 (Cal. App. 2nd Dist. 1991) (corporate veil properly pierced to reach assets of non-shareholder who had transferred his shares to a sister corporation just prior to the relevant events). We predict that, given compelling facts, California courts will join the other states in holding that a non-shareholder can be held liable for corporate debts and liabilities.
Last summer, Idaho joined those states that allow veil-piercing against a non-shareholder. See Lunneborg v. My Fun Life, 421 P. 3d 187 (Idaho Supreme Court 2018). In that case, the corporation had only one shareholder and the non-shareholder was sole shareholder’s wife. All veil-piercing cases are fact-intensive. In the context of the case, the result in Lunneborg is not surprising. The Idaho Supreme Court considered various fairness issues in making the determination. Among the key factors were:
- The corporation had only one shareholder
- The shareholder’s spouse was on the board of directors and was the Executive Vice President and, at one point, the Chief Operating Officer — she had full knowledge and involvement; in other words, she was not a passive bystander
- The couple had at least four other corporations that they owned in a similar fashion
- The non-shareholder spouse was fully involved in the day-to-day financial operations of all the businesses
- The corporation did not observe corporate formalities such as annual shareholder meeting, meetings of the board of directors, etc.
- Monies were transferred between the individuals and the various affiliated companies without documentation, corporate minutes, contracts, loan papers, and/or evidence of repayments
- The corporate obligation at issue involved an unpaid employee severance package — wages and payments to employees will always warrant a close examination in a veil-piercing case
- The non-shareholder spouse was fully involved in the hiring of the employee and was consulted and informed leading up to the employee’s termination
As can be seen, the Lunneborg court had ample facts and evidence to support the legal result that the spouse’s assets could be reached to satisfy the judgment in favor of the employee with respect to his severance package. As can also be seen, the factual circumstances were unique.
Contact San Diego Corporate Law
For more information, contact attorney Michael Leonard of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard can be contacted via email or by calling (858) 483-9200. Like us on Facebook.