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Piercing the Corporate Veil in California

Updated: Nov 11, 2023

I've discussed veil piercing previously, but what does that look like in California? How does it actually work in practice? If there is a serious threat of veil piercing (whether against you or you against another corporation), what does that look like?


California has developed a two-prong test for veil piercing. These are the two elements that must be satisfied in order to pierce the corporate veil in California:

  1. Unity of Interest: That there is such a unity of interest between the individual and the entity, that the distinction between them no longer exists; and

  2. Injustice: that, based on the facts of the particular case, to recognize that distinction would promote injustice or would allow fraud.

See Minifie v. Rowley (1921) 187 Cal. 481.


This test may sound vague, but the reality is that veil piercing is difficult. It is the exception, not the rule. The party who wants to pierce the veil must have a convincing reason for doing so. And the policy is simple: without the "corporate veil," what's the point of forming a corporation?


Let's take a look at each prong of the test:


Unity of Interest


There is a large number of factors that a court might consider when making the determination. But ultimately, the burden is on the person trying to pierce the veil to prove the unity of interest and unjust (or inequitable) result. Some of the factors that California considers:

  1. Commingling funds and other assets;

  2. Failure to segregate funds of the separate entities;

  3. Unauthorized diversion of corporate funds or assets to other than corporate uses;

  4. Treatment by an individual of the assets of the corporation as his own;

  5. Failure to obtain authority to issue stock or to subscribe to or issue the same;

  6. Holding out by an individual that he is personally liable for the debts of the corporation;

  7. Failure to maintain minutes or adequate corporate records;

  8. Confusion of the records of separate entities;

  9. Identical equitable ownership of separate entities;

  10. Identification of the equitable owners with the domination and control of the two entities;

  11. Identification of the directors and officers of the two entities in the responsible supervision and management;

  12. Sole ownership of all of the stock in a corporation by one individual or the members of a family.

This list goes on and on, and the list is not exclusive. See Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft (1999). 69 Cal. App. 4th. 226, 249-250.


Even though veil piercing is only available in the most extreme circumstances, your corporation's best option is to neutralize as many of these factors as possible.


Resulting Injustice or Fraud


Veil piercing is what's called an "equitable" doctrine. These means the goal is to avoid injustice, and it does not require an actual showing of fraud. If the plaintiff can show bad faith, that would be sufficient under this prong.


And the reason that "actual fraud" is not required is that because justice might demand veil piercing where actual fraud (under California law) is not present. For example, David loans $1 million to Cal. Corp., a corporation of which he is a shareholder. David makes the loan to make Cal. Corp. appear financially secure. Believing Cal. Corp. is financially secure, Phil loans Cal. Corp. $1 million dollars. Ultimately, Phil's money is lost, and Phil sues Cal. Corp. and David. Phil cannot prove that David made any representation to him (which is required for fraud in California). But the goal is not to prove fraud, but to prevent injustice. The Court will likely allow Phil to pierce the corporate veil.


Conclusion


The best way to avoid veil piercing is to maintain your corporate records and abide by all the requisite corporate formalities: get a separate bank account, don't mix your money with the entity's, have bylaws, have your book up-to-date and available for inspection, keep annual meeting minutes (for shareholders and the Board), file your annual statements of information on time, pay the corporation's taxes, etc.

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