When a corporation is sued by a creditor, and the corporation has insufficient assets to cover the debt, the creditor may seek to disregard the corporate entity to get to the assets of the corporation’s owners, i.e., its shareholders. This is called “Piercing the Corporate Veil,” and it can only be accomplished under very limited circumstances.
The Texas Business Organizations Code provides limitations on the personal liability of a shareholder for the obligations of a corporation. However, this limitation does not apply if the creditor demonstrates that the shareholder caused the corporation to be used for the purpose of perpetrating, and did perpetrate an “actual fraud” on the creditor primarily for the direct personal benefit of the shareholder. “Actual fraud” involves dishonesty of purpose or intent to deceive.
The creditor must also show that the shareholder was the alter ego of the corporation which occurs when there is such a unity between the corporation and the shareholder that the corporation’s separateness has ceased, and holding only the corporation liable would be unjust. As proof of alter ego, a court may consider:
(1) the payment of alleged corporate debts with personal checks or other commingling of funds;
(2) representations that the shareholder will financially back the corporation;
(3) the diversion of company profits to the shareholder for his personal use;
(4) inadequate capitalization;
(5) other failure to keep corporate and personal assets separate; and
(6) the amount of financial interest, ownership and control the shareholder maintains over the corporation.
Experienced practitioners also utilize the Tortious Interference with Contract cause of action to attempt to hold a shareholder personally liable for a debt of a corporation. To establish Tortious Interference with Contract the following much be proven:
(1) the existence of a contract subject to interference;
(2) the occurrence of an act of interference that was willful and intentional;
(3) the act was a proximate cause of the plaintiff’s damages; and
(4) actual damage or loss occurred.
The second element of this cause of action is of particular importance when the defendant serves the dual roles of a shareholder and the third party who allegedly induces the corporation’s breach. To establish a prima facie case under such circumstances, the alleged act of interference must be performed in furtherance of the shareholder’s personal interests so as to preserve the logically necessary rule that a party cannot tortiously interfere with its own contract. Thus, a creditor must show that the shareholder acted in a fashion so contrary to the corporation’s best interests that his actions could only have been motivated by personal interests.
The rules regarding Piercing the Corporate Veil and Tortious Interference with Contract may be applied to other types of entities, although the rules may vary.
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Disclaimer: This post is not intended as legal advice. Every circumstance is unique and different rules may apply to your individual circumstances. Please contact an attorney to discuss your individual circumstances before taking any action in regards to any of the information discussed herein.