Brief Fact Summary. Home Owners Cooperative Inc. (D), whole owners of Westerlea Builders, Inc., a subsidiary, controlled the subsidiary’s affairs but committed not fraud or injury to Westerlea’s creditors.
Synopsis of Rule of Law. The doctrine of “piercing the corporate veilâ€, and holding a corporation liable for its subsidiary is inapplicable if no fraud, misrepresentation, or illegality has been committed.
The law permits the incorporation of a business for the very purpose of escaping personal liability.
View Full Point of LawIssue. Is the doctrine of “piercing the corporate veilâ€, and holding a corporation liable for its subsidiary inapplicable if no fraud, misrepresentation, or illegality has been committed?
Held. (Froessel, J.) No. The doctrine of “piercing the corporate veilâ€, and holding a corporation liable for its subsidiary is inapplicable if no fraud, misrepresentation, or illegality has been committed. The trial court should not have “pierced the corporate veil†of Westerlea’s background to identify Home Owners (D). The law permits the incorporation of a business precisely to escape personal liability, the “piercing†doctrine applies only to instances of fraud to achieve equity. Home Owners (D) purpose for creating Westerlea was within public policy. Affirmed.
Dissent. (Van Voorhis, J.) As a subsidiary, Westerlea is a direct extension of Home Owners (D), Westerlea was not run to make profits. The stockholders of Home Owners (D) benefited from this arrangement similarly to dividends. Westerlea, consequently, is an agent of Home Owners (D).
Discussion. “Piercing the corporate veil†is done in two ways, (1) the corporation is so dominated by its shareholders, that no separate entity is assumed to exist. Usually, this is when they treat corporation assets as their own, using company funds for personal use. (2) recognizing the corporation as a legitimate entity would sanction fraud of injustice. With this approach, the intention of incorporating was to minimize personal and tort liabilities.