Piercing the corporate veil is a legal concept that involves separating the business entity from its owner, allowing the owner to be protected from personal liability for the business’s debts. The applicable law can be nebulous, and protection against personal liability may not always be available, especially if a single owner of a business uses personal funds to run the company—or uses the business’s funds for their own purposes. A recent legal case from North Dakota illustrates some of the factors that determine whether the business is operating separately or merely as the alter ego of its owner. Read on to learn more.
The Case of West Dakota Oil, Inc. vs. Kathrein Trucking, LLC
West Dakota Oil, Inc. sued Lee Kathrein and Kathrein Trucking, LLC in May 2020 for failure to pay for fuel. The causes of action were breach of contract, unjust enrichment, and quantum meruit. The district court ruled in favor of West Dakota Oil in September 2021 and ordered Kathrein and his company, a limited liability company (LLC) to pay $63,412.
The decision to hold Kathrein personally liable was based on the concept of piercing the corporate veil. The court found that Kathrein had
- secured the company’s debt with a trailer he personally owned,
- disregarded the formalities required for an LLC, and
- purchased items and utilized assets from West Dakota Oil for his personal use.
Lee Kathrein appealed to the North Dakota Supreme Court. The supreme court noted in its May 2022 opinion that the lower court had not sufficiently addressed the three foregoing findings and explained how they applied. The court reversed the lower court’s decision because it had failed to make findings relating to each of the factors and some of its findings were unsupported by the evidence. Based on its review of the record, the court determined that the evidence did not support the district court’s decision to pierce the veil, and therefore, Kathrein should not have been found personally liable for his company’s debts.
When Can the Corporate Veil Be Pierced?
LLCs, despite their name, are like corporations in that their veils can be pierced. To pierce the corporate veil and hold a business owner liable for the business’s debts, a party must prove some or all of the following:
- Failure to observe corporate formalities
- Lack of sufficient capitalization of the business
- Siphoning of business funds by the dominant shareholder
- Other officers not participating in the business
- Insufficient corporate record keeping
- Nonpayment of dividends
- Insolvency of the corporation
- “Injustice, inequity, or fundamental unfairness”
Another question to consider is whether a company could be considered a business owner’s “alter ego.” This occurs when there is “such a unity of interest between the company and its owner that separate personalities do not exist.”
State Supreme Court Ruling
The North Dakota Supreme Court stated that the only evidence West Dakota Oil presented to support its case was the use of Lee Kathrein’s trailer title as collateral for the business. The court found that there was insufficient evidence to show that Lee Kathrein had disregarded corporate formalities or used his business account for personal purchases. The court also noted that the district court had not addressed other factors that, if proven, would have allowed West Dakota Oil to pierce the corporate veil.
Learning More About Business Law Concepts
While there is not a specific list of actions that will lead to a finding of piercing the corporate veil, courts will look at the totality of the circumstances. Attorneys should advise their clients on the best practices to avoid such a ruling.
To learn more about LLCs and how to help your clients protect theirs, watch the on-demand webinar Liability Protections for LLCs and Charging Orders with Jay Adkisson.