“Ordinarily a corporation is regarded as a legal entity, separate and apart from its stockholders.” Jones & Trevor Mktg, Inc. v. Lowry, 2012 UT 39, ¶ 13 (2012). As a separate entity, a “corporate veil” shields shareholders from liability for the actions of the corporation. However, if the corporation is in reality an alter-ego of one or more shareholders, then there is a basis to pierce the corporate veil, and those shareholders can be liable for the corporation’s actions.
Piercing the corporate veil is not easy. Courts “will only reluctantly and cautiously pierce the corporate veil.” Salt Lake City Corp. v. James Constructors, Inc., 761 P.2d 42, 46 (Utah Ct. App. 1988).
In Utah, there is a two-part test, known as the “Norman test,” to determine whether a corporation is an alter-ego for one or more shareholders. See Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979). To pierce the corporate veil, a plaintiff must meet the “formalities requirement” and the “fairness requirement to pierce the corporate veil.
The Formalities Requirement
The formalities requirement requires the plaintiff to show “such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist.” Id.; see also Messick v. PHD Trucking Serv., Inc., 678 P.2d 791, 794 (Utah 1984).
Traditionally, courts have determined whether the formalities requirement is met by examining the seven “Colman factors,” which are: “(1) undercapitalization of a one-[person] corporation; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder; (5) nonfunctioning of other officers or directors; (6) absence of corporate records; [and] (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders.: Colman v. Colman, 743 P.2d 782, 786 (Utah Ct. App. 1987).
The Colman factors are not an exhaustive list, and they do not all need to be met to pierce the corporate veil. Indeed, “it is possible that evidence of even one of the Colman factors may be sufficient to suggest both elements of a party’s alter ego theory and therefore preclude summary judgment.” Lowry at ¶18. In essence, the court looks to whether the corporation is run more like an extension of the shareholder(s) than as a separate corporation.
The Fairness Requirement
The second part of the Norman test, often called the “fairness requirement,” requires the movant to show that observance of the corporate form would sanction a fraud, promote injustice, or condone an inequitable result. See Norman at 1030. The fairness requirement is “addressed to the conscience of the court[.]”Messick v. PHD Trucking Serv., Inc., 678 P.2d 791, 794 (Utah 1984).
Normally, a party contracting with a corporation voluntarily assumes the risks inherent with doing business with an entity with limited liability. In many ways, the fairness requirement looks are whether an additional risk was placed on that party which the party could not anticipate. For example, if a corporation is not adequately capitalized, then the party contracting with the corporation could have no recourse if the corporation fails to make payment pursuant to that contract.
For more specific information about this particular subject, please call my office at 801-691-7770 for a free consultation or see the following web pages:
- Whiting & Jardine, LLC Home Page: www.WhitingJardine.com
- Corporate Governance: http://whitingjardine.com/practice_areas.php?part=corporate
- Dissolution: http://whitingjardine.com/practice_areas.php?part=dissolution
- Formation and Entity Structure: http://whitingjardine.com/practice_areas.php?part=entity
- Collections: http://whitingjardine.com/practice_areas.php?part=collections
- Breach of Contract Litigation: http://whitingjardine.com/practice_areas.php?part=breach
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