Piercing the Corporate Veil
Drury Development v. Foundation Insurance Company
Thomas E. Vanderbloemen and Adam C. Bach
Gallivan, White, & Boyd, P.A.
The recent economic downturn has resulted in a spike in bankruptcy filings by
corporations all over the country. From small town grocers to multi-national corporations, the
credit squeeze is being felt in numerous corporate pocketbooks. As money tightens, corporations
are frequently finding themselves unable to meet their obligations. When this occurs, many
business owners find protection behind the corporate veil, shielding their individual assets from
liability. A recent case out of South Carolina, however, may be causing concern over just how
effective this shield is.
In Drury Development Corp. v. Foundation Ins. Co., 380 S.C. 97, 668 S.E.2d 798 (2008),
the South Carolina Supreme Court was asked to consider whether or not a judgment against a
corporation is a prerequisite to an alter ego claim to pierce the corporate veil. The plaintiff,
Drury Development Corp. (“Drury”), entered into a risk-sharing agreement with the defendant,
Foundation Insurance Company (“Foundation”). Drury alleged that at the conclusion of the
agreement, Foundation owed Drury $86,023.00. Foundation was unable to pay and entered into
rehabilitation, which was ultimately unsuccessful and led to Foundation’s insolvency. Drury
sued for breach of contract, fraudulent inducement of contract, negligence, conversion, and
unjust enrichment. Drury also sought to pierce the corporate veil to hold Foundation’s parent,
subsidiary, and individual shareholders liable for Foundation’s alleged obligation, even though
there had been no underlying judgment against Foundation.
Foundation filed a motion to dismiss based on the theory that Plaintiff could not pierce
the corporate veil without first obtaining a judgment against Foundation. The United States
District Court for the District of South Carolina certified the question to the South Carolina
Supreme Court, which ultimately concluded that a judgment against the corporation was not a
prerequisite to an action to pierce the corporate veil.
The South Carolina Supreme Court began its analysis by reaffirming that veil-piercing is
an equitable remedy. As a matter of equity, part of the test for piercing the corporate veil
requires the plaintiff to demonstrate that “fundamental unfairness” would result from recognition
of the corporate entity. “The essence of the fairness test is simply that an individual businessman
cannot be allowed to hide from the normal consequences of carefree entrepreneuring by doing so
through a corporate shell.” Id. at 801 According to the Court, were they to adopt a rule that
judgment must be obtained prior to commencing an action to pierce the corporate veil, creditors
of an insolvent or unresponsive corporate defendant would be required to file a pro forma action
before seeking to pierce the corporate veil in a subsequent action. The Court declined to adopt
this rule, finding that it “would require South Carolina’s trial courts to resolve in two separate
actions what they now ably determine in one.” Id. at 801.
For creditors and claimants seeking payment from a corporation this decision certainly
has advantages, including the ability to bring one action against the corporation, to search for
assets to satisfy a resulting judgment, and to eliminate the need to bring supplemental
proceedings at the conclusion of litigation. For many businesses, however, the decision raises
serious concerns about just how effective the corporate shield is. For example, under the
decision a corporation, as well as its parent company, subsidiaries, shareholders, and possibly its
directors, must be prepared to litigate both the underlying claim and an alter ego claim where a
creditor seeks to pierce the corporate veil. This leads to two actions being litigated concurrently,
one on the underlying action and one on the veil-piercing action, which exposes corporate clients
and their shareholders, parents, and subsidiaries to far more intrusive discovery than if the
underlying action was tried alone. A business owner must be prepared to have discovery
conducted into corporate solvency and formalities, record-keeping, personal use of corporate
assets, and a host of other areas that may not ordinarily be discoverable in the underlying action.
The additional litigation costs for business owners raises questions about just how useful the veil
is from a practical standpoint.
Furthermore, attorneys now need to consider advising clients at the corporate formation
stage to be prepared to defend their corporate structure and corporate formalities at all times and
to be aware of potentially increased costs of doing business. If any claim against the corporation
can be coupled with a claim to pierce the corporate veil and both are successful, the individual
businesses owners’ assets may be exposed to liability through joint and several liability statutes.
This issue is not unique to South Carolina -- Drury relies on authority from California,
New York, and Missouri. From initial discovery to final verdict, a veil-piercing action adds a
host of issues to any litigation. As companies around the country are trying to recover
obligations in uncertain economic times, and as the law regarding corporate veil-piercing
develops in each jurisdiction, companies and their counsel need to be keenly aware of just how
thin the veil might be.
Thomas E. Vanderbloemen is a partner and Adam C. Bach is an associate with Gallivan, White & Boyd, P.A. in
Greenville, South Carolina, where they represent clients in business and commercial litigation matters. For more
information, please call 864-271-9580 or visit www.gwblawfirm.com.