In an Alaska Supreme Court opinion issued on Friday, August 17th, the court wrestled with corporate veil piercing issues and their interplay with bankruptcy law. Only corporations are normally liable for their debts. The officers, shareholders and directors aren’t liable for corporate debts. This concept of limited corporate liability is referred to as a veil. Veil piercing refers to a court’s decision to disregard the veil and hold people behind the veil liable. In a split decision the court ruled that the jury award for damages against the officer, shareholder and directors would stand.
An employee sued a corporation and its president for back wages in superior court. The corporation filed for Chapter 11 bankruptcy the very next day. The bankruptcy court discharged the corporation’s debts. The superior court dismissed the corporation, but allowed the employee to proceed to trial against the president on a veil-piercing theory. A jury found that the corporation was a mere instrumentality of the president, and that the president owed the former employee wages under a bonus agreement.
The Bankruptcy Issues.
When a corporation files bankruptcy, the corporation’s legal claims become property of the bankruptcy estate. The corporation president argued that the corporation owned the right to bring the veil-piercing claim and the employee couldn’t now bring it against him. Even if this were true, the trustee never asserted the veil piercing claim and abandoned that asset.
Furthermore, the company had no right to bring a wage claim against its own president. Accordingly, the employee’s complaint did not allege injury to the corporation. Absent a corporate injury the corporation could not sue its own president.
Corporate discharge does not affect whether a trial court can determine a corporation’s indebtedness for the purpose of establishing third party liability. Thus, the court could pierce the corporate veil to hold the president liable, bonding companies, guarantors, or other third parties.
Mere Instrumentality Test Sufficient for Piercing Corporate Veil:
The mere-instrumentality test is a sufficient basis to pierce the corporate veil. The superior court did not err in piercing the veil based on the jury’s finding that the mere-instrumentality test.
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