Corporation and LLC law - Piercing the corporate veil under Tennessee Law.

Posted on May 20 2013 8:10AM by Attorney, Jason A. Lee

Analysis:  The recent Tennessee Court of Appeals decision of Robert Thomas Edmunds v. Delta Partners, LLC, No. M2012-00047-COA-R3-CV, 2012 WL 6604580 (Tenn. Ct. App. December 18, 2012) discussed the concept of piercing the corporate veil under Tennessee law.  This case, in part, dealt with what is required to be established under Tennessee law in order to pierce the veil of a corporation.  In short, the doctrine of piercing the corporate veil allows, in certain circumstances, individual members or executives of a corporation (including an LLC - Limited Liability Company) to be personally responsible for the liabilities of the corporation.  This cased involved a dispute between an employer and a former employee over back pay (see detailed prior post on this same case on what constitutes an employment contract under Tennessee law). Edmunds at 1 - 3.  The employee was ultimately awarded damages by the trial court which were affirmed by the Appellate Court for back pay pursuant to an employment contract. Edmunds at 4 - 5. The plaintiff tried to hold the owner of the company personally responsible under the doctrine of “piercing the corporate veil”. 


The Tennessee Court of Appeals in this case discussed that a corporation is presumed to be a distinct legal entity that is separate from its members, shareholders, officers, as follows:


There is a presumption that a corporation is a distinct legal entity, wholly separate and apart from its shareholders, officers, directors, or affiliated corporations. In an appropriate case and in furtherance of the ends of justice, the separate identity of a corporation may be discarded and the individual or individuals owning all its stock and assets will be treated as identical to the corporation.  Discarding the fiction of the corporate entity, or piercing the corporate veil, is appropriate when the corporation is liable for a debt but is without funds to pay the debt, and the lack of funds is due to some misconduct on the part of the officers and directors.


In those circumstances, courts may pierce the corporate veil to find the “true owners of the entity” liable, or “to impose liability against a controlling shareholder who has used the corporate entity to avoid his legal obligations.” Our courts will disregard the corporation as a separate entity upon a showing that the corporation is a sham or dummy or such action is necessary to accomplish justice.


(citations omitted) Edmunds at 11.  The Tennessee Court of Appeals discussed the fact the doctrine of piercing the corporate veil applies equally to situations involving a LLC (Limited Liability Company) as well as a corporation.  In this case, the employer was a limited liability company, not a corporation, and the court found as follows:


As a general rule, members, owners, employees or other agents of a Tennessee limited liability company have no personal liability for the debts or obligations of the company. See Tenn.Code Ann. § 48–217–101(a)(1); Tenn.Code Ann. § 48–249–114(a)(1)(B). Under an equitable remedy known as “piercing the corporate veil,” however, “the separate legal entity of a corporation may be disregarded upon a showing that it is a sham or a dummy or where necessary to accomplish justice.”  Despite the inapplicability of the remedy's name, the “corporate veil” of a Tennessee limited liability company may also be pierced, utilizing the same standards.


(citations omitted).  The court went on to the note that the doctrine of piercing the corporate veil should only be applied in "extreme circumstances to prevent the use of a corporate entity to defraud or perform illegal acts”.  Edmunds at 12. (citing Pamperin v. Streamline Mfg., Inc., 276 S.W.3d 428, 437 (Tenn. Ct. App. 2008).  The Tennessee Supreme Court had set forth three elements required to pierce the corporate veil as between a parent corporation and a subsidiary.  These three elements are as follows: 


1) The parent corporation, at the time of the transaction complained of, exercises complete dominion over its subsidiary, not only of finances, but of policy and business practice in respect to the transaction under attack, so that the corporate entity, as to that transaction, had no separate mind, will or existence of its own.

2) Such control must have been used to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of third parties' rights.

3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.


Edmunds at 12. (citing Continental Bankers Life Ins. Co. of the South v. The Bank of Alamo, 578 S.W.2d 625 (Tenn. 1979).  In a subsequent decision the Tennessee Court of Appeals Tennessee Racquetball Investors, Ltd., v. Bell, 709 S.W.2d 617 (Tenn. Ct. App. 1986) recognized that these three elements are also required to hold an individual owner of the corporation or LLC liable for the debts of the corporation under the alter ego theory.  Edmunds at 12. 


There is a list of factors that Tennessee courts use to determine whether to pierce the corporation veil.  These were originally set forth in Federal Deposit Ins. Corp. v. Allen, 584 F. Supp. 386 (E.D. Tenn.  1984) and the factors are as follows:


Factors to be considered in determining whether to disregard the corporate veil include not only whether the entity has been used to work a fraud or injustice in contravention of public policy, but also: (1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities.


Numerous Tennessee Courts of Appeals decisions have cited to these factors and they are often referred to as the "Allen factors". See Edmunds at 13.  No specific factor is conclusive but rather the courts are allowed to rely upon a combination of factors to decide the issue. Edmunds at 13.


Ultimately, this case provided an excellent summary and review of the Tennessee cases on the doctrine of piercing the corporate veil and a claim to hold an individual member of a corporation or LLC personally liable for the debts of the company.  In this case the court found it was not appropriate to pierce the corporate veil.  This is a lengthy opinion and if you have any case or situation involving an attempt to hold an individual owner or member of a corporation or LLC personally liable, then this case should be reviewed in great detail.  However, for purposes of this post, the facts and discussion in this case is too lengthy to recite but I recommend you review it carefully if you are handling any type of case involving this situation.


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TAGS: Defenses, Corporation/LLC Law, Immunity
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Jason A. Lee is a Member of Burrow Lee, PLLC. He practices in all areas of defense litigation inside and outside of Tennessee.

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