Piercing the veil - Next Generation Bar Exam

1. What is the general standard for piercing the corporate veil?

   Domination so complete that the corporation had no separate existence, plus fraud or injustice if the form were respected. Both elements, domination and resulting injustice, are ordinarily required.

2. Why are courts more reluctant to pierce the veil for contract creditors than for tort victims?

   Contract creditors chose to deal with the corporation and could have investigated or demanded guarantees. Tort victims are involuntary creditors who had no chance to protect themselves.

3. What is enterprise liability?

   Treating affiliated corporations under common control as a single enterprise liable for each other's obligations. Courts apply it when sister corporations are operated as one business without regard to their separate identities.

4. Which factor do courts treat as especially significant in deciding whether to pierce the veil for a tort claim?

   Inadequate capitalization. Courts rarely pierce on undercapitalization alone, but it weighs heavily when tort victims cannot recover.

5. In which kind of corporation do courts almost exclusively pierce the veil?

   Closely held corporations. Shareholders of publicly traded corporations are virtually never held liable on a veil-piercing theory.

6. What is reverse veil piercing?

   Disregarding the entity to reach its assets for a controlling owner's personal obligations. Jurisdictions are divided on whether to permit it, particularly when an outside creditor seeks it.

7. When will a court hold a parent corporation liable for its subsidiary's obligations?

   When the parent so dominates the subsidiary that it is a mere instrumentality, and injustice would otherwise result. Ownership and overlapping directors alone are not enough.

8. A sole shareholder runs a minimally insured taxi corporation, pays personal bills from its account, and holds no meetings. An injured passenger sues him. What result is likely?

   The court pierces the veil and holds the shareholder personally liable. Undercapitalization, commingling, and disregard of the corporate form combine with an involuntary tort creditor.

9. Which shareholder conduct concerning funds is a common factor supporting veil piercing?

   Commingling personal and corporate funds. Treating corporate assets as personal property shows that the corporation lacks a separate existence.

10. A well-capitalized corporation that observes all formalities breaches a supply contract on its sole shareholder's decision. On what ground will the court refuse to pierce the veil?

    Control by a sole shareholder, without misuse of the corporate form, is not enough to pierce. Every closely held corporation is controlled by its owners; piercing requires abuse causing injustice.

11. When the veil is pierced, which shareholders are held personally liable?

    Those who dominated or actively participated in the corporation's misuse. Passive shareholders are generally not held liable.

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