On Piercing the Corporate Veil

First off, I must thank my colleagues here at the Corporate Justice Blog for inviting me to guest-post here. It's a privilege.

This week, I taught my Business Associations students about piercing the corporate veil. Among the cases we covered is one of the classics (and one of my favorites), Baatz v. Arrow Bar. In this South Dakota case, a husband and wife injured in an accident with a drunk, uninsured motorcyclist sue the corporation that owns the bar at which the motorcyclist was served (asserting dram shop liability under an applicable statute) and also sue the shareholders of the corporation on a veil piercing theory. The shareholders and their daughter (who is the manager of the bar) move for summary judgment and it is granted. So the case against them is dismissed, and the decision is affirmed on appeal.

Some students do not like the result in this case. In particular, they point to the thin capitalization of the corporation with loans (which the court finds is not dispositive in the veil-piercing analysis), the failure of the corporation to buy insurance, and the fact that the daughter of the owners was the bar manager. Of course, these students are very sympathetic to the plaintiffs' plight--an uninsured (and likely judgment-proof) motorist and a corporation with limited wherewithal are the only other potentially responsible parties.

I fear that true middle age has set in (if the shoe fits . . . ) given my commentary on the case this year. I found myself saying something akin to the following: if you don't like the result in this case (as to the dismissal of the case against the shareholders), then maybe you don't like the corporate form altogether. My thought was directed mostly at those who rely on the undercapitalization argument for veil piercing. Here (in my view), the shareholders were not using the corporate form to commit fraud or other wrongful conduct or injustice. (The dissent apparently disagrees, when it characterizes the individual plaintiffs actions as fraudulent and states: "As a result of this holding, the message is now clear: Incorporate, mortgage the assets of a liquor corporation to your friendly banker, and proceed with carefree entrepreneuring.") However, the shareholders' capitalization of the entity was not egregiously low, in any case. (In fact, Internet searches reveal that, although the couple who originally owned Arrow Bar are both deceased, the bar continues to be operated by their daughter.) In essence, state legislatures allow individuals to use corporations in just this way, to shield themselves from personal liability for the obligations of the business, whether in contract or tort or under a statutory law. Those same state legislatures could mandate and enforce minimum capital requirements (and in fact they used to do so). So, our problem--if we don't like the veil-piercing result in Baatz--is with the corporation, an easy target in the new millennium.

Or is it? Perhaps the more essential and direct problem with the result in the Baatz case is that businesses selling alcohol in South Dakota, at least at that time, were neither required to maintain a minimum capital nor maintain a minimum amount of dram shop insurance. Since bars are required to be licensed to sell alcohol (through the liquor permitting process), it would seem that there is an easy way to enforce these types of requirements without changing or eviscerating corporate law or the corporate form. This type of solution would give the plaintiffs in Baatz the possibility of some relief for their injuries while, at the same time, preserving the corporate form as an engine of commerce.

I welcome your further thoughts . . . .