In North Carolina, litigants frequently seek to "pierce the veil" of limited liability companies, in order to reach the assets of individual members. In Part 1 of this series, I outline the traditional approach to veil piercing in the corporate context, and how North Carolina construes the doctrine.
Historically the corporate veil can be pierced, and liability imposed on shareholders, when courts find sufficient evidence of a combination of the following factors: (1) inadequate capitalization; (2) non-compliance with corporate formalities; (3) complete domination and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations. Glenn v. Wagner, 313 N.C. 450, 455, 329 S.E.2d 326, 330-31 (1985) (citing generally, Robinson, North Carolina Corporation Law ยงยง 2-12, 9-7 to -10 (3d ed. 1983)).
In addition, North Carolina courts will "pierce the corporate veil" where
an "individual exercises actual control over a corporation,
operating it as a mere instrumentality[.]" Becker v. Graber
Builders, Inc., 149 N.C. App. 787, 790, 561 S.E.2d 905, 908 (2002)
(citation omitted). The North Carolina Supreme Court set forth the
"instrumentality rule" as follows:
"[When a] corporation is so operated that it is
a mere instrumentality or alter ego of the
sole or dominant shareholder and a shield for
his activities in violation of the declared
public policy or statute of the State, the
corporate entity will be disregarded and the
corporation and the shareholder treated as one
and the same person, it being immaterial
whether the sole or dominant shareholder is an
individual or another corporation. Henderson v. Finance Co., 273 N.C. 253, 260, 160 S.E.2d 39, 44
(1968). Liability may be imposed on an individual controlling a
corporation as an "instrumentality" when the individual had:
(1) Control, not mere majority or complete
stock control, but complete domination,
not only of finances, but of policy and
business practice in respect to the
transaction attacked so that the
corporate entity as to this transaction
had at the time no separate mind, will or
existence of its own; and
(2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetrate the violation of a statutory
or other positive legal duty, or a
dishonest and unjust act in contravention
of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of.
Glenn, 313 N.C. at 455, 329 S.E.2d at 330.
NEXT: The North Carolina LLC Act, and its provisions relating to individual liability of LLC members.
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