Introduction
This article outlines the instances and reasons Arkansas courts have pierced the corporate veil of corporations and Limited Liability Companies (LLCs). The doctrine of piercing the corporate veil is a legal concept used to hold shareholders or members of a legal entity personally liable for the corporation's or LLC's actions when the corporate form has been abused. Bonds v. Hunt, 2010 Ark. App. 415. This article will explore the legal standards and specific instances where Arkansas courts have applied this doctrine.
Legal Standards/Rules
In Arkansas, the doctrine of piercing the corporate veil is founded in equity and is applied to prevent an injustice when the corporate form has been abused. Agrifund, LLC v. Regions Bank, 2020 Ark. 246. The burden of proof lies with the party seeking to pierce the veil, who must demonstrate that the corporate form was abused to their injury. Common instances where the corporate form may be disregarded include attempts to hinder, delay, or defraud creditors, evade contract obligations, or perpetuate fraud and injustice generally. Agrifund, LLC v. Regions Bank, 2020 Ark. 246; Rush-Bradley v. Van Ore, 2009. The issue of whether the corporate entity has been fraudulently abused is a question for the court. Arkansas courts apply this doctrine with great caution, and it is generally invoked in cases involving fraud or deception.
History of Application
Arkansas courts have consistently held that the corporate veil may be pierced when the corporate form has been abused to the injury of a third party. Wyatt v. Wyatt, 2018 Ark. App. 177. For instance, in K.C. Properties of Northwest Arkansas, Inc. v. Lowell Investment Partners, LLC, the court stated that the court will disregard the corporate facade when the corporate form has been illegally abused to the injury of a third party. Fulmer v. Hurt, 2017 Ark. App. 117. This principle underscores the necessity of proving abuse of the corporate form to justify piercing the veil. Agrifund, LLC v. Regions Bank, 2020 Ark. 246.
As noted in Anderson v. Stewart, the doctrine of piercing the corporate veil is founded in equity and is applied when the facts warrant its application to prevent an injustice. Agrifund, LLC v. Regions Bank, 2020 Ark. 246. This equitable foundation means that courts will look at the specific facts of each case to determine whether the corporate form has been misused.
Common instances where the corporate veil has been pierced include attempts to hinder, delay, or defraud creditors, evade contract obligations, or perpetuate fraud and injustice. Agrifund, LLC v. Regions Bank, 2020 Ark. 246; Rush-Bradley v. Van Ore, 2009. This indicates that courts are particularly vigilant in cases involving fraudulent or deceptive practices.
Arkansas case law regarding piercing the corporate veil requires a finding that the corporate form has been abused to the injury of a third party. Wyatt v. Wyatt, 2018 Ark. App. 177. This requirement ensures that the doctrine is not applied arbitrarily but is based on concrete evidence of abuse.
Additionally, Arkansas courts have noted that piercing the corporate veil should be applied with great caution. The courts have specifically emphasized that "piercing the fiction of a corporate entity should be applied with great caution". Bonds v. Hunt, 2010 Ark. App. 415. This cautionary approach ensures that the corporate form is respected and only disregarded in cases of clear abuse.
Examples of Conduct that Warranted the Piercing of the Corporate Veil
Common instances where the corporate form may be disregarded include when an entity attempts to hinder, delay, or defraud creditors, evade a contract obligation, or perpetuate fraud and injustice. Generally, piercing the corporate veil requires a finding that the corporate form has been abused to the injury of a third party.
The Arkansas Court of Appeals found piercing the corporate veil to be proper in a case where a husband had commingled marital assets with those of his corporations. The husband was using corporate funds to pay for personal expenses to the wife’s detriment. Wyatt v. Wyatt, 2018 Ark. App. 177, 545 S.W.3d 796 (Ct. App.).
Sham entities are a great example. In a previous case, the Arkansas Court of Appeals found that the “defendant manufacturer operated a sham corporation, as it was inadequately capitalized, and because of the way its business was transacted and its records were kept, its corporate veil should be pierced.” Winchel v. Craig, 55 Ark. App. 373, 374, 934 S.W.2d 946, 946 (1996). Another case resulted in piercing the corporate veil where a corporation “was legally incorporated, but no shares were ever issued, no board of directors was elected, no by-laws were adopted, and corporate minute books were not maintained. Piercing the corporate veil is founded on the premise that where a corporation is only a legal, rather than an actual, entity, its existence will not shield the shareholders from personal liability.” Hembree v. Baxter, No. CA 83-387, 1984 Ark. App. (Ct. App. Aug. 29, 1984).
In another case, a stockholder tried to use a corporate shield to protect herself from personal liability. She disposed of the corporation owners’ property and the corporation itself failed to follow corporate formalities, such as displaying the word “incorporated” on signs or correspondence, and failing to properly maintain meeting minutes and financial records. The court in that case found that piercing the corporate veil was proper. Additionally, the Arkansas Supreme Court found that piercing the corporate veil and holding officers individually liable was proper where they “failed to properly maintain business records, thereby failing to comply with the Ark. Code Ann. § 23-52-112(a) of the Arkansas Check Casher's Act.” Anderson v. Stewart, 366 Ark. 203, 234 S.W.3d 295 (2006).
Arkansas courts have also found piercing the corporate veil to be proper where executives of a subsidiary, instead of acting independently in the subsidiary’s interest, took orders from the parent entity in the interest of the parent entity. Directors cannot lawfully manage affairs of one corporation in the interest of another.
Other less heinous conduct, such as "hindering and delaying creditors" and "evading a contract obligation" have also been held out to be acts that will support piercing the veil. Fulmer v. Hurt, 2017 Ark. App. 117, ¶ 6, 515 S.W.3d 129, 133 (Ct. App.)
Conclusion
In summary, Arkansas courts have pierced the corporate veil in instances where the corporate form has been abused to the injury of a third party. Wyatt v. Wyatt, 2018 Ark. App. 177. The doctrine is founded in equity and is applied to prevent injustice, particularly in cases involving fraud or deception. Common instances include attempts to hinder, delay, or defraud creditors, evade contract obligations, or perpetuate fraud and injustice. The burden of proof lies with the party seeking to pierce the veil, and courts apply this doctrine with great caution to ensure that the corporate form is not disregarded without just cause. Agrifund, LLC v. Regions Bank, 2020 Ark. 246.
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