With financial fraud on the rise, the inevitable question facing creditors is how to collect from businesses when debts go unpaid. While the balance sheet and P&L may show zeroes, that does not necessarily mean that there is no money that is recoverable where there has been impropriety by the officers and owners of the business (or even employees and third parties).
Recovery of assets in seemingly hopeless situations is frequently achieved by requesting that a court pierce the corporate veil of the business to attempt to recover directly from the officers and owners of the business. That said, there are several issues to consider when evaluating whether there is a sufficient basis to attempt to pierce a corporate veil. Namely, Do the facts support veil piercing? Do you already have a judgment against the business? and Are you dealing with a corporation or a limited liability company?
What is the Standard for Veil Piercing in Illinois?
Illinois courts will pierce the corporate veil “where: (1) there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist, and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances.” Buckley v. Abuzir, 2014 IL App (1st) 130469, ¶ 13 (1st Dist. Apr. 10, 2014) (quoting Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 371 Ill. App. 3d 1019, 1033-34 (1st Dist. Mar. 14, 2007).
In determining whether the “unity of interest” prong is satisfied, courts will examine many factors, including “(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s-length relationships among related entities; and (11) whether, in fact, the corporation is a mere façade for the operation of the dominant stockholders.” Id. at ¶ 13 (quoting Gass v. Anna Hospital Corp., 392 Ill. App. 3d 179, 186 (5th Dist. Jun. 23, 2009)).
As to the “corporate fiction” prong, a court must determine “whether the circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances”….and, specifically “whether there is some unfairness, such as fraud or deception, or the existence of a compelling public interest that justifies piercing.” Id. at ¶ 34 (citing Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491, 500, 507 (2d Dist. Dec. 14, 2005).
When to Bring Veil Piercing Claims?
In Illinois, piercing the corporate veil is not an independent cause of action and is instead “a means of imposing liability in an underlying cause of action.” Id. at ¶ 9 (citing Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2d Dist. Oct. 4, 2002)). Moreover, a party may bring a separate action for a judgment already obtained against a corporation to pierce its veil and to impose liability against third parties. Id. (citing Lange v. Misch, 232 Ill. App. 3d 1077, 1081 (4th Dist. Aug. 13, 1992)). As such, a request for the equitable remedy of veil piercing may be brought in an initial action or, alternatively, subsequent to the entry of judgment in a separate action. “[A] party who has secured a judgment against a corporation may not seek to pierce the corporate veil in supplementary proceedings. However, a judgment creditor who has managed to secure a judgment against a corporation and seeks to hold the individual shareholders and directors of a judgment debtor corporation liable for that judgment may consider alternative remedies.” Pyshos v. Heart-Land Dev. Co., 258 Ill. App. 3d 618, 624 (1st Dist. Feb. 17, 1994). If it is proved in the corporate veil suit that the defendant was the alter ego “then the decision not to defend the underlying suit would have been [the] defendant’s, ipso facto”. Buckley, 2014 IL App (1st) 130469, ¶ 9.
Who Can be Liable for Veil Piercing?
In Illinois, the case law is clear that a court may pierce the corporate veil to impose liability on owners and can also do so to impose liability on officers, directors, employees, and even third parties who exercise “equitable ownership and control over a corporation, such that separate personalities no longer exist.” Id. at ¶¶ 17-31 (analyzing other state’s case law evaluating whether the veil can be pierced to reach non-shareholders). A party can be an equitable owner where he or she exercises authority or control over a corporation and disregards corporate form. Id. at ¶ 29 (citing Fontana, 362 Ill. App. 3d at 501, 503); see also id at ¶ 17 (“our research shows that the majority of jurisdictions addressing this question allow veil-piercing against nonshareholders). Additionally, with few exceptions, those jurisdictions that allow veil-piercing against nonshareholders have not required that the nonshareholder hold other formal roles within the corporation—for instance, as an officer, director, or employee—but rather abandon such formalism in favor of an equitable approach focusing on the individual’s domination of the corporation.
Can You Pierce the Veil of All Business Entities?
As noted above, Illinois courts have consistently held, under certain circumstances, that a veil of a corporation can be pierced; however, the courts have reached inconsistent conclusions as to whether the veil of a limited liability company can be pierced. Compare Lewis, Yockey & Brown, Inc. v. Fetzer, 2022 IL App (4th) 210599, ¶ 19 (4th Dist. Jun. 9, 2022) (comparing corporations and LLCs and finding that veil of LLC could not be pierced) with Benzakry v. Patel, 2017 IL App (3d) 160162, ¶¶ 66-68 (3d Dist. Apr. 5, 2017) (allowing piercing of LLC corporate veil where evidence of inadequate capitalization and commingling of funds). While the court’s analysis in Lewis appears to be questionable, there is a current conflict in the Illinois districts as to whether a LLC’s corporate veil can be pierced or not.
Even if the equitable remedy of veil piercing is not available as to a LLC, there are other causes of action and equitable remedies to consider where there is evidence of impropriety.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Morgan I. Marcus | Commercial Litigation, Bankruptcy, Creditors’ Rights, Appellate Practice
Morgan brings 10 years of experience in representing financial institutions, loan servicers, and creditors on the trial and appellate levels in federal, state, and bankruptcy courts and in arbitration. His focus is on commercial litigation, creditors’ rights, and bankruptcy litigation. If you need assistance with a related matter, contact Morgan.
