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How to Pierce the Corporate Veil Under New York Law

Image: elektroholunder/Creative Commons

Unfortunately, from the myriad questions I have received on this topic over the last few years, it is apparent that there are many misconceptions about what "piercing the corporate veil" is insofar as New York is concerned. This article aims to clarify some of those issues.

What is "Piercing the Corporate Veil?"

It is important to first define what "piercing the corporate veil" is. Basically, the states' legislatures enacted various statutes that allow people to incorporate, particularly in the business arena.

And, it should come as no surprise, one of the primary reasons for this is to allow people to start small - or even large - businesses, but doing so behind a layer of protection afforded to the corporate form. Stated differently, the corporate form allows for protection against personal liability. Consequently, the laws as drafted and applied, make it rather difficult to violate that corporate protection.

There is a caveat to this rule, however.

The corporate form (or "veil") can be pierced when the rules that underlie the privileges of maintaining a corporation are not abided.

In other words, the protections against personal liability afforded by the corporation can be forfeited where the corporate form itself is used as a vehicle to defraud others. And in those cases, the plaintiff may be entitled to pierce the defendant's corporate veil.

What a Plaintiff Needs to Prove in Order to Pierce the Defendant's Corporate Veil

In very general terms, the person seeking to pierce the corporate veil will need to allege (and prove) facts with great specificity - rather than naked, broad-based allegations - that the defendant company was effectively a sham. 

Primary examples of this would be as follows:

(1) Where the individual defendant and the corporation commingled funds, and where the corporation failed to file its own, independent tax returns; or, 

(2) Where the defendant moves money around from one project to another when your company is insolvent, i.e., "when the present fair salable value of his assets is less than the amount of that will be required to pay his probable liability on his existing debtors as they become absolute and matured."

What a Court Can Do If/When the Corporate Veil is Pierced

Focusing on the latter case, where a defendant was moving money between accounts, here's what a Court may do: 

It may invalidate the transfers retroactively, finding that they are a fraudulent conveyance - even if these transfers were made innocently.

And the danger - from the defendant's perspective - doesn't end there; if the court finds that the funds were commingled with individuals' accounts (among other things), the court may allow the plaintiff to pierce the corporate veil and hold those people behind it personally liable for these debts. 



 


Jonathan Cooper
Employment Litigation and School Negligence Lawyer