By: Charles B. Jimerson, Esq. and Daniel L. Buchholz, J.D. Candidate
For various reasons, a corporation’s limited liability shield for its shareholders is one of the corporation’s most valuable assets. Unfortunately, some individuals may abuse the corporate form’s limited liability status by using it to mislead or defraud creditors. As a result, courts will occasionally disregard a corporation’s limited liability protection by holding the individual shareholders liable to the corporation’s creditors. In other words, the court will pierce the corporation’s veil of limited liability. However, piercing the corporate veil is easier said than done. This blog post discusses the essential elements of corporate veil piercing in Florida and the common factors Florida courts utilize.
Essential Elements of Veil Piercing
Piercing the veil of limited liability is an equitable doctrine that is not, by itself, a cause of action. See Turner Murphy Co. v. Specialty Constructors, Inc., 659 So. 2d 1242, 1245 (Fla. 1st DCA 1995). Accordingly, a plaintiff cannot attempt to pierce a corporation’s veil unless the corporation itself is found liable and the judgment against the corporation is unsatisfied.
Notwithstanding the procedural aspects of the doctrine, Florida courts require the plaintiff establish three elements to pierce a corporation’s veil. Specifically, piercing the corporate veil requires the plaintiff prove: (1) a lack of separateness between the corporation and its shareholder(s); (2) improper conduct in the use of the corporation by the shareholder(s); and (3) that the improper conduct was the proximate cause of the alleged loss. See Solomon v. Betras Plastics, Inc., 550 So. 2d 1182, 1184-85 (Fla. 5th DCA 1989).
Prong One: Alter Ego/Mere Instrumentality
The first element requires evidence that the corporation was the alter ego or a mere instrumentality of its shareholder(s). Under the “alter ego” theory, the plaintiff must establish that “the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation.” Gasparini v. Pordomingo, 972 So. 2d 1053, 1055 (Fla. 3d DCA 2008) (citations omitted). Stated differently, individual liability under the alter ego theory is imposed where “the personal affairs of the shareholder become confused with the business affairs of the corporation.” Solomon, 550 So. 2d at 1184.
Alternatively, the “mere instrumentality” theory may be used to pierce the corporate veil of a subsidiary corporation to reach the parent corporation’s assets. Id. at 1184 n.2. Under the mere instrumentality theory, the plaintiff must establish that the parent corporation’s control is to such a degree that the subsidiary is a mere instrumentality of the parent. Ocala Breeders’ Sales Co. v. Hialeah, Inc., 735 So. 2d 542, 543 (Fla. 3d DCA 1999); Kelly v. Am. Precision Indus., Inc., 438 So. 2d 29, 31 (Fla. 5th DCA 1983).
Regardless of the theory, Florida courts have identified several factors to aid in their veil piercing analysis. Specifically, for the alter ego/mere instrumentality element, Florida courts consistently utilize the following factors:
- Domination by a single or few shareholder(s) (i.e., a wholly-owned subsidiary or a corporation with one or two individual shareholders)
- Failure to follow corporate formalities (e.g., failure to issue stock, elect a board of directors, and keep corporate records)
- Commingling of corporate and personal affairs (e.g., funds put in and taken out of the corporation for personal rather than corporate purposes)
- Inadequate capitalization
See Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141, 1151-52 (Fla. 3d DCA 1995) (citations omitted).
Additionally, for veil piercing cases that involve parent-subsidiary relationships, Florida courts also consider the following factors:
- Common Management: The same directors and officers control both the parent and subsidiary.
- Business Discretion: The subsidiary displays very little business discretion.
- Shared Facilities: The subsidiary and the parent share the same facilities, address, and telephone numbers.
- Use of Parent’s Employees: The subsidiary’s contracts are performed by employees of the parent.
- Shared Financial Accounts: The subsidiary shares bank accounts and financial obligations with the parent.
- Payment of Debts and Obligations: The parent pays the salaries, expenses, or losses of the subsidiary.
- Arms-Length Transactions: The subsidiary fails to deal with the parent at arms-length.
- Financing: The parent finances the subsidiary.
- Tax Treatment: The parent and subsidiary file consolidated income tax returns.
- Independent Profit Centers: The parent and subsidiary are not treated as independent profit centers.
See Ocala Breeders’ Sales Co., 735 So. 2d at 543-44; Hilton Oil Transp., 659 So. 2d at 1151-52.
However, while these are the most common factors, these lists are not exhaustive and no single factor is dispositive. Indeed, a mere failure to follow corporate formalities, without more, is not enough to pierce a corporation’s veil. John Daly Enters., LLC v. Hippo Golf Co., Inc., 646 F. Supp. 2d 1347, 1353 (S.D. Fla. 2009). Further, Florida courts will not pierce the corporate veil merely because the corporation is owned by only a few shareholders or is a wholly-owned subsidiary. See Hilton Oil Transp., 659 So. 2d at 1152. Conversely, as a practical matter, Florida courts are unlikely to pierce the veil of a publicly-traded corporation or a corporation with numerous (i.e., ten or more) shareholders. The rationale is not surprising: Ownership in a publicly-traded corporation or a corporation with numerous shareholders is too widely disbursed for one shareholder to take complete control over.
Prong Two: Unfair or Inequitable Conduct
Even if a plaintiff proves a lack of separateness between the corporation and its shareholder(s), Florida courts will not pierce the veil unless there is proof of improper conduct. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1117 (Fla. 1984). Therefore, the second element requires the plaintiff prove that the corporation was either organized or used to mislead or defraud creditors. Id. More specifically, Florida courts have noted improper conduct includes:
- Mere Device or Sham: The corporation was a mere device or sham to accomplish some ulterior purpose.
- Fraudulent or Illegal Purpose: The purpose of the corporation was to evade some statute or to accomplish some fraud or illegal purpose.
- Used for Fraudulent Purposes: The corporation was employed by the shareholders for fraudulent or misleading purposes (i.e., the corporation was used to commit fraud).
- Used to Frustrate Creditors: The corporation was organized or used to mislead creditors or to perpetrate a fraud upon them, or to evade existing personal liability.
Steinhardt v. Banks, 511 So. 2d 336, 339 (Fla. 4th DCA 1987) (citations omitted).
Thus, Florida courts appear to require the improper conduct be deliberate misconduct. In re Hillsborough Holdings Corp., 166 B.R. 461, 469 (Bankr. M.D. Fla. 1984). Accordingly, negligence or even reckless conduct are not sufficient to establish improper conduct under Florida law. Id. at 470; see also Ally v. Naim, 581 So. 2d 961, 963 (Fla. 3d DCA 1991) (holding piercing the corporate veil was not warranted even though the corporation’s owner breached its legal duty to provide insurance for its employees). Additionally, proof that the corporation’s “business affairs had been rather poorly handled,” alone, is insufficient to establish improper conduct. Advertects, Inc. v. Sawyer Indus., Inc., 84 So. 2d 21, 24 (Fla. 1955).
The equitable doctrine of piercing the corporate veil allows judgment creditors to hold a corporation’s owners personally liable for the corporation’s debts. However, disregarding the corporate limited liability veil is an extraordinary remedy in Florida. Accordingly, a judgment creditor must be well versed in this doctrine if it wishes to pursue a corporation’s owner in an individual capacity.