This limited article addresses “piercing the corporate veil,” which refers to the limited circumstances under which the liability shield of a registered legal entity (an LLC or corporation) may be pierced and the individuals behind that entity held personally accountable. Knowing when this might or might not occur is an important factor in asset protection since a piercing event defeats on of the central purposes of forming an entity in the first place!

Piercing the veil is an equitable remedy that is available only in exceptional circumstances. Denis Burns, Managing Partner of The Burns Firm has accomplished this “Veil Piercing” threshold two times in his career as an expert.

To pierce the corporate veil a party to a lawsuit must prove that actual fraud was committed primarily for the direct personal benefit of the corporate shareholder or LLC member.

Some of our clients have heard the phrase, “alter ego.” What does “alter ego” mean? Under the [now discarded] alter ego theory, courts disregard the corporate entity when there exists such unity between the corporation and individual that the corporation ceases to be separate, and when holding only the corporation liable would promote injustice. In other words, the company had failed in its mission to maintain itself as a legal entity independent of its owner. While Texas law eliminates the alter-ego theory as a basis for veil-piercing, it cannot be eliminated as a factor in a case where actual fraud is present, particularly since piercing in Texas has always been linked to values of fairness and justice.

The same standards apply to both corporations and LLCs as to “piercing” even though provisions of the law may refer to a corporation rather than an LLC and to shareholders rather than members. Accordingly, LLC members can expect to receive the same treatment as shareholders of a corporation, no more, no less.

As stated above, piercing the veil is an equitable remedy that is available only in exceptional circumstances. The following are two such exceptional circumstances.

First, in Signal Peak Enterprises of Texas, Inc., and Cecil Stephens, Appellants, v Bettina Investments, Inc., and Oakhill, Inc., Appellees on Appeal from the 68^th Judicial District Court Dallas County, Texas Trial Court Cause 00-06462-C (“Bettina”), the shareholders who operated bingo parlors for the property owners played “fast and loose” with their accounting of receipts from bingo parlors. The corporation had poor or no accounting for the receipts of cash collected in their reporting to the property owners (“Interested Parties”). Their contract to operate these bingo parlors ended and immediately the newly contracted entity reported significantly higher revenue from these same bingo parlors. Smelling a “rat” the Interested Parties sued the former corporation and their shareholders for underreporting revenue in which in part was owed to them. The Bettina Plaintiffs were at a loss as to how to recover their damages.

Denis Burns CPA was the expert witness in Bettina that successfully testified to “pierce the corporate veil” creating personal liability to the shareholders and obligating them to pay this underreporting of revenue.

Second, in contentious litigation styled Capex Outsource, LLC v. Ricci Ankton and Get it Here, Inc. in the District Court of Rockwall County, Texas, Cause No.1-17-0349 the judgement creditor sued to collect assets that were ostensibly owned by a separate corporation outside of their reach. The judgement debtor used the corporation to place assets, otherwise attachable, inside the corporation and beyond the reach of the judgement creditor. While this transfer worked for several years, Denis Burns CPA analyzed and successfully testified as an expert that the debtor corporation(s) were merely used as an Alter Ego to delay or defraud judgement creditors from collecting their judgement. The court agreed with Burns and allowed the judgement creditor to reach into the separate corporation to collect his judgement.

In both instances, had the corporation followed corporate formalities, the corporate shield would have been respected and the shareholders protected from personal responsibility. Simply put, the Nightmare could have been avoided.

The law applicable to piercing continues to evolve. The safest practice is to establish and maintain the corporate entity with thorough and ongoing documentation that is contained in a company book. Certificates for membership/shareholder interests should also be issued. It is sound business practice to periodically document significant activities and events affecting one’s company using resolutions, special meetings, and the like, thereby pre-empting alter-ego type piercing allegations before they arise.

Denis Burns is a CPA and the Managing Director of The Burns Firm. During the past 30 years Denis has been qualified as an expert and/or testified in that capacity in no less than 26 lawsuits.  His testimony was effective in two District Courts whereby the benefits of a corporation were disregarded and found the shareholder(s) personally liable or unable to use the corporate shield to place assets outside of the reach of creditors.