Empirical Investigation of Corporate Veil Piercing Cases
Is the law and determinations in individual cases of corporate veil piercing an “unprincipled hodgepodge of seemingly ad hoc and unpredictable results”? Often it may seem so. Now, however, Political Science professor Christina Boyd and Law professor David Hoffman have teamed up to take a look at actual cases to learn how these sort of cases actually work in practice. As someone who has always thought that theory and practice are equally important in understanding and applying legal concepts, I was thrilled and excited to come across this study which will be forthcoming in Northwestern Law Review in an article entitled Disputing Limited Liability.
The study involves investigation of six years of data of federal district court cases from 2000 to 2005 involving corporate veil piercing litigation. It looks to actual results in these cases as measured by outcomes in motion practice during discovery, at summary judgment, during trial, and in post-trial practice to arrive at “a set of observations which speak to the life of veil piercing law, rather than the gauzy rationalizations presented by judges’ written responses.” Boyd and Hoffman conclude
Plaintiffs do win far more often during litigation than popular accounts of the doctrine’s rare nature would have us expect, but their ultimate chance of obtaining relief on the merits is obscured by settlement. which disposes two of three veil piercing cases filed in federal court…. To owners of the smallest of businesses, the message coming from this data is unfortunately both clear and unsatisfying: neither reliance on legal formalities not pat expectations about the pro-business orientation of conservative judges will protect your firm from the need to dispute its veil in court.
The abstract summarizes their discoveries:
Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing than corporations; undercapitalization is strongly associated with success while conclusory grounds like “facade” and “sham” are not; and defendants’ legal speculation is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than companies employing many workers.
Hoffman has also summarized key findings of the study in a series of blog posts on Concurring Opinions:
Among other interesting findings, Hoffman points out that while 78% of the cases “resulted in plaintiffs realizing some value from their veil piercing claims”, often through settlement, judicial determinations of veil piercing happened in only about 6% of the cases.
Now, from down here in the trenches, the findings and conclusions of this study mostly seem to match what I would have expected based on the case law and lawsuits I’ve seen in my own law practice. In particular, the study supports my viewpoint that one of the reasons LLCs are better for closely held businesses is that it’s just harder to get in trouble than with corporations which require more record-keeping. It also doesn’t surprise me much that if you can show undercapitalization, you’re likely to have a winner from a plaintiff’s standpoint. Still it’s always interesting to see how these issues play out in general.
