Dr. Steven A. Pottschmidt was employed by Dr. Thomas J. Klosterman. Dr. Thomas J. Klosterman was doing business as a corporation named Thomas J. Klosterman, M. D. Once Pottschmidt’s original employment agreement ended, he decided to bring a breach of contract suit against Klosterman. Pottschmidt was alleging that Klosterman had not paid him the actual amount he owed him under the agreement. Within two months of the lawsuit, Klosterman created a new corporation called Klosterman Family Practice, Inc.
Klosterman Family Practice, Inc. did not employ anyone other than the staff of the first corporation Thomas J. Klosterman, M. D. Also the new corporation Klosterman Family Practice, Inc. was in the same building as the first corporation was established. The second corporation had not changed its phone number, had not purchased new equipment or furniture, and had not taken on any new patients. For a while, the companies had two separate bank accounts until the first companies bank accounts were terminated, and income bills were placed in the second companies account. Potterschmidt wants the court to permit him to pierce the veil of both Thomas J. Klosterman, M. D. and Klosterman Family Practice, Inc. , to hold Dr. Klosterman directly liable for the money?
Issue
Potterschmidt wants the court to permit him to pierce the veil of both Thomas J. Klosterman, M. D. and Klosterman Family Practice, Inc. to hold Dr. Klosterman directly liable for the money? Is there enough evidence here to permit the veil piercing request by the plaintiff?
Analysis
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed.
Common law countries usually uphold his principle of separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil. Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the plaintiff. The ruling is based on common law precedents.
In the US, different theories, most important “alter ego” or “instrumentality rule”, attempted to create a piercing standard. Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders.
It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation. Conclusion: Yes Potterschmidt has enough evidence to permit a veil piercing. He can prove intermingling of assets of the corporation and manipulation of assets or liabilities to concentrate the assets or liabilities.
