Piercing the Corporate Veil – a Complicated Remedy

Plaintiff Jones has what appears to be a good breach of contract or perhaps a business tort case against ABC Corp.  The initial draft of Plaintiff Jones’ complaint alleges facts which, if proven at trial should carry the day.  ABC Corp.’s actionable conduct also appears to have caused Plaintiff Jones to sustain significant, provable damages.

However,  ABC Corp.’s capacity to pay a substantial judgment is questionable and, given the nature of the claims, insurance coverage is unlikely.  Therefore, counsel informs Plaintiff Jones that while the case has substantial merit, winning the case could turn out to be an academic victory because collecting a judgment against ABC Corp. is far from certain.  Plaintiff Jones, bewildered, asks how this could be, noting that ABC Corp. is a subsidiary of Acme Conglomerate, Inc.  and Acme Conglomerate, Inc. is owned by Mr. Money Bags.  Plaintiff Jones inquires, “doesn’t  Acme Conglomerate, Inc. or Mr. Money Bags have to pay?”

Plaintiff Jones’ bewilderment is understandable.  Counsel’s response to Plaintiff Jones’ question, “it depends” while not the answer Plaintiff Jones hoped for it is the correct one.

The applicable legal principals are well established.  “[A] corporation is a separate entity from its shareholders and . . . a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.”  State, Dept. of Environmental Protection v. Ventron Corp., 94 N.J. 473, 500 (1983) (internal citations omitted).  The primary way to hold shareholders of a corporation responsible for the misdeeds of the corporation is by “piercing the corporate veil.”

Doing so is no easy task.  “Even in the case of a parent corporation and its wholly-owned subsidiary, limited liability normally will not be abrogated.”  Id.  Moreover, “[e]ven in the presence of corporate dominance, liability generally is imposed only when the parent has abused the privilege of incorporation by using the subsidiary to perpetrate a fraud or injustice, or otherwise to circumvent the law.” Id. at 501.  Indeed, it is expected and lawful for a parent company to control the affairs of its subsidiaries. OTR Associates v. IBC Services, Inc., 353 N.J. Super. 48, 51 (App. Div. 2002). Individual shareholders, even shareholders who own 100% of the corporation’s stock, like Mr. Money Bags, enjoy similar protections.

A finding of abuse of the corporate form by the parent company or individual shareholders, therefore, is required in order to pierce the corporate veil so as to hold the parent company responsible for the subsidiary’s obligations. It is impossible to list every conceivable scenario constituting an abuse of the corporate form.  However, New Jersey courts have noted that “the hallmarks of that abuse are typically the engagement of the subsidiary in no independent business of its own but exclusively the performance of a service for the parent and, even more importantly, the undercapitalization of the subsidiary rendering it judgment-proof.”  OTR Associates, 353 N.J. Super. at 52.  A showing of undercapitalization requires more than proof that the corporation ran out of money due to poor results.  Rather, it means for example, undercapitalization or insolvency resulting from the dominant stockholder, such as a parent corporation or controlling shareholder, “siphoning off funds of the corporation. . . .”  Craig v. Lake Asbestos of Quebec, Ltd., 843 F.3d 145, 150  (3d Cir. 1988) (applying New Jersey law).

After some discussion, Plaintiff Jones comes to understand that as a general rule a corporation’s controlling shareholder is not responsible for the corporation’s obligations but, if ABC Corp. was “merely a façade” for Acme Conglomerate, Inc.’s operations or a “mere instrumentality” of a controlling shareholder, then Acme Conglomerate, Inc. or Mr. Money Bags could be forced to pay.  Id. Plaintiff Jones then asks:  “When and how do I find out whether I can go after Acme Conglomerate, Inc. or Mr. Money Bags?”

Once again, the answer is “it depends.” “However, more than likely we will not be able to use the court process to dig into ABC Corp.’s finances until after you get a judgment against ABC Corp.”  Plaintiff Jones, taken a bit aback, again asks how this could be.

The starting place for answering this question is recognizing that “piecing the corporate veil” is not a cause of action unto itself for imposing legal liability but, rather, is an equitable remedy to cure “the fundamental unfairness [that] will result from a failure to disregard the corporate form.”  Verni ex rel. Burnstein v. Harry M. Stevens, Inc., 387 N.J. Super. 160, 198 (App. Div. 2006) (internal quotations omitted).  It follows, then, as the Court in Four Seasons at N. Caldwell Condo. Ass’n v. Hovanian, stated:

As a matter of logic, a Court cannot disregard the corporate form to hold a parent liable for the actions of a subsidiary unless there has been a proven wrong perpetrated by the subsidiary. That necessarily is not determined unless and until there is a judgment indicating as much.  In addition, in most cases it is difficult to conceive that a party seeking to pierce the corporate veil of a subsidiary would have sufficient knowledge of the subsidiary’s internal operations and financial condition and its relationship to its parent be able to plead and prove a veil-piercing claim until after it secures a judgment and has the ability to explore the pertinent facts through post-judgment discovery.

Four Seasons at N. Caldwell Condo. Ass’n v. Hovanian, 2019 N.J. Super. Unpub. LEXIS 3492 at *50 (Law Div. May 28, 2019). These same principles apply when the controlling shareholder is an individual rather than another corporation.

However, as recently noted by the Court in River Pointe Homeowners Ass’n, Inc. v. Pulte Homes of NJ, Ltd. P’ship, 2925 N.J. Super. Unpub. LEXIS 50 at *8 (Law Div. Jan. 8, 2025) recently found, delaying financial condition discovery until after a judgment is entered is not an absolute rule.  In Four Seasons at N. Caldwell Condo. Ass’n v. Hovanian, the trial court noted instructions from the Appellate Division directing it to hold a hearing, perhaps with live testimony, “on the obligation and extent of defendants to produce corporate veil piercing evidence. . . .”  Id. at *9-10.  The Court in River Pointe Homeowners Ass’n, Inc., at the Appellate Division’s direction, departed from the general rule because the case was more than seven years old, with more than thirty corporate defendants, and hundreds of pages of discovery demands so as to facilitate appellate review.  Id.

This article only scratches the surface of the complexities inherent in piercing the corporate veil. Epstein Ostrove has experienced attorneys ready to help those who, like Plaintiff Jones, may need to pierce a corporation’s veil in order to recover on a meritorious claim.  Epstein Ostrove also helps businesses and individuals like ABC Corp., Acme Conglomerate, Inc., and Mr. Money Bags seeking guidance as to how to avoid a misstep that could result in a loss of the protections offered by the corporate form.

See How Epstein Ostrove, LLC Can Help You