A ruling last year by the Federal District Court for the District of Delaware raises some very difficult questions about the strength of the “corporate veil” in cases where the plaintiff seeks recovery under a federal statute. In fact, the court may have opened Pandora’s box. The case is Blair et al. v. Infineon Tech. A.G., Civ. No. 09-295 (SLR), 2010 WL 2608959 (D. Del. June 29, 2010).
Plaintiffs, former employees of two wholly-owned subsidiaries of defendant Qimonda AG, which was a subsidiary of defendant Infineon Technologies AG (Infineon), brought a class action alleging, among other things, that the defendants, during mass layoffs, violated the Employee Retirement Income Security Act (ERISA) and the North Carolina Wage Payment Act by terminating their employment without paying severance properly due under the Infineon Group Severance Plan. The Qimonda subsidiaries filed for bankruptcy in February 2009. The plaintiffs sought to pierce the corporate veil of the Qimonda subsidiaries in order to hold Infineon liable for the unpaid severance benefits. Defendant Infineon made a motion to dismiss on the grounds that the parent was protected from liability by the corporate veil of the bankrupt subsidiaries.
The plaintiffs argued that the corporate veil of the subsidiaries should be pierced and the defendants should be treated as an alter ego or “single employer,” liable for plaintiffs’ back pay and benefits. To support this argument, the plaintiffs claimed that there was a high interdependency of business operations in the form of formal and informal consolidation of financial, strategic, legal, and human resources operations. In their motion to dismiss, the Infineon defendants argued that plaintiffs failed to adequately plead that the Qimonda Subsidiaries were established for the purposes of committing fraud or visiting injustice upon plaintiffs, and the plaintiffs’ complaint failed to invoke enough of the factors identified by the Third Circuit to warrant piercing of the corporate veil under ‘alter ego’ doctrine. Infineon’s motion to dismiss was denied.
The court began its discussion of the issues by saying, “It is a general principle of corporate law “deeply ingrained in our economic and legal systems that a parent corporation … is not liable for the acts of its subsidiaries.” United States v. Bestfoods, 524 U.S. 51, 61 (1998). It then went on to discuss exceptions to the general rule. Interestingly, the court made two important statements in footnotes. First, it said, “The parties’ briefs occasionally refer to separate state and federal alter ego tests without specifying how the alter ego test is different under state law. The alter ego analysis is in fact the same under state or federal law because “[v]eil piercing is not dependent on the nature of the liability. Under both state and federal common law, abuse of the corporate form will allow courts to employ the tool of equity known as veil-piercing.” 18 Francis C. Amendola et aI., C.J.S. Corporations § 14 (2010).” One wonders if the court’s decision is consistent with that statement.
In a subsequent footnote, the court noted that “Trevino [Trevino v. Merscorp, Inc., 583 F. Supp. 2d 521,528 (D. Del. 2008)] uses the language “shareholders” instead of “subsidiaries” but, for purposes of the single entity test, the same principles apply to corporation/shareholders and parent/subsidiaries. See Laifail, Inc. v. Learning 2000, Inc., 2002 WL 31667861, at 11 (D. Del. Nov. 252002).” This is a significant footnote because it means that individual shareholders may be personally liable for damages caused by a corporation’s violations of a federal statute if the corporate veil can be pierced. It is one thing to hold the parent corporation liable for the acts of a subsidiary, a concept already expressed in some state and federal environmental laws, but something else altogether to create personal liability for individuals who own shares in a corporation.
More importantly, the court said, “For reasons of public policy, the alter ego standard for piercing the corporate veil is often more lenient for causes of action arising under ERISA, a federal statute, than state law. See United Elec., Radio & Mach. Workers of Am., 960 F.2d at 1092 (1st Cir. 1992) (“In an ERISA case, the applicable federal standard can sometimes be less rigorous than its state common law counterparts. The rationale … is grounded on [sic] congressional intent.”); Lumpkin [et al.v. Envirodyne Industries], 933 F.2d at 460-61 (‘The underlying congressional policy behind ERISA clearly favors the disregard of the corporate entity in cases where employees are denied their pension benefits.”); Alman v. Danin, 801 F.2d 1,4 (1st Cir. 1986) (“Allowing [the parent] of a marginal [undercapitalized subsidiary] to invoke the corporate shield in circumstances where it is inequitable for them to do so and thereby avoid financial obligations to employee benefits plans, would seem to be precisely the type of conduct Congress wanted to prevent.”). ”
Looking at the three cases cited by the Blair court, United Electrical, Lumpkin and Alman, it is notable that Lumpkin is not a “veil piercing” case. In fact, the issue arose only because Defendant Envirodyne, the parent corporation, made the argument that it should be treated as the ‘alter ego’ of its subsidiaries so that it would get the benefit of a settlement and release agreement entered into by the subsidiaries. The court quickly disposed of this odd, tangential argument.
The other two cases are on point, although they are both decisions of the Court of Appeals for the First Circuit (Mass., Maine, NH, RI and Puerto Rico). United Electrical, Radio and Machine Workers of America, Et Al., Plaintiffs, Appellees, v. 163 Pleasant Street Corporation, et al., was primarily a case about personal jurisdiction over a parent corporation for the acts of a subsidiary, although this issue did require an examination of the corporate veil. In United Electrical the Circuit Court of Appeals for the First Circuit said:
“Under Massachusetts common law, disregarding the corporate form is permissible only in rare situations. See Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 15-16 (1st Cir.1985) (lining [sic] criteria to be evaluated in considering veil piercing under Massachusetts law); My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748, 751-52 (1968) (similar). It would, however, serve no useful purpose to explore the interstices of the state-law standard. This is, after all, a federal question case–and in federal question cases, courts are wary of allowing the corporate form to stymie legislative policies. [citations omitted; emphasis added]. For this reason, a federal court, in deciding what veil-piercing test to apply, should “look closely at the purpose of the federal statute to determine whether the statute places importance on the corporate form, an inquiry that usually gives less respect to the corporate form than does the strict common law alter ego doctrine.” Town of Brookline v. Gorsuch, 667 F.2d 215, 221 (1st Cir.1981) (citations omitted).”
In Alman, the First Circuit said: “The general rule adopted in the federal cases is that “a corporate entity may be disregarded in the interests of public convenience, fairness and equity,” [citing to Capital Telephone Co. v. FCC, 498 F.2d 734, 738 (D.C.Cir.1974).] In applying this rule, federal courts will look closely at the purpose of the federal statute to determine whether the statute places importance on the corporate form [citations omitted], an inquiry that usually gives less respect to the corporate form than does the strict common law alter ego doctrine….”[emphasis added]
The Blair decision and the cases cited by the Blair court raise three provoking questions. First, if a defendant can show that its corporate veil should be recognized under a traditional common law test in the relevant state, at what point does the intent of Congress, as expressed in a federal statute, override the state law determination? How does a court weigh the value of “public policy” underlying a federal statute against the state’s interest in promoting limited liability of its corporations’ shareholders? Is it purely a “fairness” test? If so, how can any shareholder ever know that he or she has the protection of the corporate veil, regardless of the steps might be taken to ensure the separate identity of the corporation.
Second, the cases discussed above involved claims brought under ERISA. But why should the result be limited to ERISA? There are countless other federal statutes. Isn’t there a “public policy” behind, say, Rule 10b-5 issued pursuant to the Securities Exchange Act of 1934 (making it unlawful to make a material misstatement or omit to state a material a material fact in the purchase or sale of a security)? What about OSHA or the anti-trust statutes or the Consumer Product Safety Act or the Fair Labor Standards Act or the Clean Water Act, to name just a few. Could individual shareholders be held liable for damages under these federal statutes if the corporation was unable to pay the damages?
Finally, why is this doctrine limited to federal statutes? There are innumerable state statutes that express public policy, as determined by the state legislatures, yet no state courts have added “public policy” underlying a state statute as a factor in determining whether the corporate veil should be disregarded. Thus, contrary to the footnote in the Blair decision mention above, it seems that there is a different standard for “veil piercing” in federal court than in state court, at least where the plaintiff’s claim rests on a federal statute. If that is true, shareholders of every insolvent corporation have more to worry about than losing their investment.