A Review of Piercing the Veil Cases in ArkansasCarol R. GoforthClayton N. Little Professorthat if certain owners of a business fail to respect the separate existence of that business,third parties (and sometimes even insiders)need not recognize the business either. Thelanguage of these opinions often asks whetherthe corporation was “a mere instrumentalityof the principals,”2 or whether the corporationwas no more than the “alter ego” of the personagainst whom recovery is sought.3 In recentyears, this doctrine has been applied to otherlimited liability enterprises, so it is no longeraccurate to speak solely in terms of piercingthe “corporate” veil.4 The veil of limited liability can be pierced, when it is appropriate to doso, for entities such as the LLC as well.Before turning to the specifics of when itmight be appropriate to pierce the veil, somegeneral observations may be helpful. First,I. What Does it Mean to “Pierce theVeil”Piercing the veil is an equitable doctrinedeveloped at common law, which under certaincircumstances allows a court to order that theseparate legal existence of a business entitybe disregarded. Originally, the doctrine wasdesigned to allow creditors and other claimants to recover against the shareholders of acorporation, despite the usual rule that shareholders have no personal liability for debts ofthe corporation. Early cases held that piercingwas available only if “the privilege of transacting business had been illegally abused tothe injury of a third party.”1 This evolved overtime so that, in very general terms, the modern rule seems to be predicated on the notion1. E.g., Rounds & Porter Lumber Co. v. Burns, 216 Ark. 288, 290, 225 S.W.2d 1, 2-3 (1949). For a more detailed consideration of the history of piercing in Arkansas, the opinion in Winchel v. Craig, 55 Ark. App. 373, 380-82, 934 S.W.2d946, 950-51 (1996), traces the progression of the doctrine in Arkansas through 1996.2. In re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1224 (8th Cir. 1987).3. For example, consider the discussion of the alter ego analysis in Winchel v. Craig, 55 Ark. App. 373, 380; 934S.W.2d 946, 950 (Ark. App. 19960), citing Humphries v. Bray, 271 Ark. 962, 611 S.W.2d 791 (1981).4. For example, in Anderson v. Stewart, 366 Ark. 203, 234 S.W.3d 295 (2006), the court expressly held that piercingcould apply to LLCs.17

ARKANSAS LAW NOTES 2011although the vast majority of piercing cases(in Arkansas and elsewhere) still involve corporations, there are enough opinions dealing with other forms of enterprise, and thoseopinions are consistent enough, to be reasonably confident that the general principles ofpiercing apply to more than just the corporation. Second, there has never been a successful piercing case involving a publicly heldenterprise; all of the piercing cases talk aboutclosely held businesses, and usually a verysmall number of active owners (often a singleowner) are being pursued. Third, the doctrineof piercing can also be used to collapse related corporations and disregard the separateexistence of parent and subsidiaries or evensister corporations (this is sometimes calledtriangular piercing). Fourth, reverse piercing is also theoretically possible, where theseparate existence of the corporation or otherenterprise is to be disregarded in order to enable an owner’s creditors to recover againstenterprise assets or even to allow insiders todisregard the entity’s existence in a legal proceeding. Only in the case of reverse piercingdo you see attempts by insiders to disregardthe entity’s separate existence; traditionalpiercing was generally limited to outsiders.Thus, a corporate shareholder or directorcannot normally pierce the veil of his or hercorporation in order to have the courts disre-gard its legal existence, unless the doctrine ofreverse piercing is invoked. Presumably, thesame limitations would apply to members ormanagers of an LLC, or partners in an LLP,limited partnership, or LLLP.It is also worth emphasizing that piercing is not the only circumstance under whichthe owner of a limited liability business suchas a corporation, LLC, LLP, limited partnership (as to limited partners) or LLLP mightwind up being liable for a business debt. Inaddition to being liable if the veil of limitedliability is disregarded, business owners arealso liable for their promised contributions(provided that the promise to make the contribution is otherwise enforceable). Similarly,owners can be liable if they guarantee a debtof the business. Finally, owners are liable fortheir own conduct, and their status as ownerin a limited liability business will not shieldtheir personal assets from liability arisingout of their own misconduct.5 For example, ifthey act as agents of the business and in thecourse of so acting, they commit a tort, theywill be personally liable for any damage theyinflict. The business may also be liable, forexample under the doctrine of respondeat superior,6 but the fact that the individual actorsare corporate shareholders or LLC memberswill not insulate them from responsibilityfor their own malfeasance. Alternatively, if5. See Scott v. Central Arkansas Nursing Centers, Inc., 101 Ark. App. 424, 434, 278 S.W.3d 587, 595-96 (2008), noting that while shareholders are “not ordinarily liable for the acts of their corporation or LLC,” they “may be liable fortheir own acts or conduct.”6. The current Restatement of Agency specifies that “[a]n employer is subject to liability for torts committed by employees while acting within the scope of their employment.” Rest (3rd) Agency § 2.04. “Employer” and “employee” areterms of art, designed to replace the old fashioned language of “master and servant” that was found in earlier restatements of the law.18

A REVIEW OF PIERCING THE VEIL CASES IN ARKANSASthey act as agents for the business and failto fully disclose the existence and identity ofthe principal, they can be liable as agents foran unidentified principal under traditionalagency law rules.7The remainder of this note will provide alittle more detail about the current rules applicable to traditional piercing in the corporate context (whether to hold shareholders orrelated corporations liable), piercing the veilas to other forms of enterprise, and finally,the doctrine of reverse piercing in a distinct legal entity. The test for piercing in a corporate context has been formulated in a wide variety of ways, often askingwhether the business is so controlled by itsowners that it has become the mere alter egoor instrumentality of the owners. Of coursethose labels do not, in and of themselves, domuch to help one understand when the “corporate facade” is likely to be disregarded bythe courts.Unfortunately, it has always been extremely difficult (some would say impossible)to articulate an accurate and predictive testfor when the veil of limited liability will bepierced.8 We are left with the task of searching through cases to see how similar situations have been handled in the past, and thistask is hampered by the facts that many ofthe written opinions offer only conclusory observations rather than a helpful recital of theactual facts.Commentators have been very active inthis area, attempting to analyze and dissect the existing case law. One of the mostinfluential and frequently cited articles waspublished by Professor Robert Thompson in1991, after an exhaustive review of more than1600 reported piercing decisions.9 ProfessorThompson listed the following factors as beingII. Traditional Piercing of the Corporate VeilAs alluded to in the introductory section ofthis note, piercing the veil is a judicially-created and defined doctrine that allows courtsto disregard statutorily authorized limitedliability in business enterprises in order toallow persons who are ostensibly creditorsof the business to access assets of owners orsometimes related entities. Originally developed and applied in the corporate context,the rule allowed courts to pierce the veil oflimited liability traditionally available to corporate shareholders when the shareholdersthemselves failed to respect the enterprise7. See, e.g., Oliver v. Eureka Springs Sales Co., 222 Ark. 94, 95, 257 S.W.2d 367, 368 (1953), applying the doctrinebut using the phrase “partially identified principal,” which was the language of the earlier restatements rather thanthe current Restatement (3rd) of Agency. In Beech v. Crawford, Not Reported in S.W.3d, 1999 WL 1031310 (Ark. App.1999), the Arkansas Court of Appeals applied these principles without referring to the restatement or its terminology.The court stated: “It is the agent’s duty to disclose his capacity as agent of a corporation if he is to escape personal liability for contracts made by him, and the agent bears the burden of proving that he was acting in his corporate, ratherthan individual, capacity.” Id., citing 19 C.J.S. Corporations § 540 (1990). Liability was imposed because there was noevidence showing that the agent told the third party “that he was contracting on behalf of the corporation.”8. Frank Easterbrook and Daniel Fischel declared in the mid-1980s that veil piercing “[s]eems to happen freakishly.Like lightning, it is rare, severe, and unprincipled.” Frank H. Easterbrook & Daniel R. Fischel, Limited Liability andthe Corporation, 52 U. Chi. L. Rev. 89, 89 (1985). Stephen Bainbridge once complained that its use is “rare, unprincipled, and arbitrary,” and completely lacking in “bright-line rules for deciding when courts will pierce the corporateveil.” Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. Corp. L. 479, 535, 513 (2001).9.Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1063 (1991).19

ARKANSAS LAW NOTES 2011most frequently cited by the courts when theywere deciding whether to pierce the corporateveil: lack of meaningful separation betweenthe shareholders and their corporation, commingling of corporate and individual assets,inadequate (or grossly inadequate) capitalization of the corporation, failure to observecorporate formalities, shareholder domination and control of the corporation, and overlap of corporate personnel and management(when multiple corporations are involved).10The author of an earlier treatise listedthese eleven factors as being the most important in determining whether, in the contextof subsidiary corporations, the parent hadimproperly dominated the subsidiary so asto justify piercing: (1) the parent corporationowned all or substantially all of the subsidiary’s stock; (2) the parent and subsidiaryhad common directors or officers; (3) the parent financed the operations of subsidiary; (4)the parent caused the subsidiary to have beenincorporated; (5) the subsidiary was grosslyinadequately capitalized; (6) the parent paidthe salaries, expenses and losses of the subsidiary; (7) the subsidiary’s assets came solelyfrom the parent, and the subsidiary conducted business only with the parent; (8) the parent’s records referred to the subsidiary as adepartment or division of the parent, and theparent’s records reflected the subsidiary’sbusiness as its own; (9) the parent used theproperty of the subsidiary as its own; (10)the directors or executives of the subsidiaryacted on behalf of the parent rather than independently in the interest of the subsidiary,and (11) corporate formalities for the subsidiary were not observed.11 The author of thattreatise also suggested that it was necessaryto show some sort of impropriety in order tojustify piercing, and listed these seven possibilities as bases for demonstrating suchwrong-doing: (1) actual fraud; (2) violation ofa statute; (3) stripping the subsidiary of itsassets; (4) misrepresentation; (5) estoppel;(6) torts; or (7) other cases of wrong or injustice.12There are a number of piercing cases inArkansas. Most of them have involved situations where a third party sought to piercethe veil of a corporation to reach assets of either individuals or distinct corporate entities,generally on the theory that as a result of theshareholder’s control over the corporationsor the manner of operating the businessesin question, the shareholders or related corporations should also be held responsible.Arkansas courts typically state that theyare “quite liberal” in protecting the limitedliability of corporate shareholders, but commentators do not always agree with this assessment.1310. Id. Two good, albeit older, articles with a listing of factors in other kinds of piercing cases (i.e., not necessarily involving parent-subsidiaries) are Cathy S. Krendl & James R. Krendl, Piercing the Corporate Veil: Focusing theInquiry, 55 Denv. U. L. Rev. 1, 16-17 (1978); and David H. Barber, Piercing the Corporate Veil, 17 Willamette L. Rev.371, 374-75 (1980).11.Frederick J. Powell, Parent and Subsidiary Corporations § 6 (1931).12. Id. For a more recent consideration of piercing particularly in the context of parent-subsidiaries, see John H.Matheson, The Modern Law of Corporate Groups: an Empirical Study of Piercing the Corporate Veil in the Parentsubsidiary Context, 87 N.C. L. Rev. 1091 (2009).13. For example, one study found that in 1990 Arkansas courts pierced the veil in nearly 40% of the reported cases(or in 9 of the 23 reported cases where piercing was sought). Robert B. Thompson, Piercing the Corporate Veil: AnEmpirical Study, 76 Cornell L. Rev. 1036, 1039 (1991). A more recent study placed the percent at over 56%. Peter Oh,Veil Piercing, 89 Tex. L. Rev. 81, 115 (2010). Another commentator concluded that while Arkansas generally followstraditional rules governing piercing, the rules are applied so that the veil of limited liability has actually been piercedmore easily here and that “it is particularly dangerous to fail to adhere to corporate formalities in Arkansas.” StephenB. Presser, Piercing the Corporate Veil, § 2:4. Arkansas.20

A REVIEW OF PIERCING THE VEIL CASES IN ARKANSASEarly Arkansas cases suggested thatpiercing should only occur if “the privilegeof transacting business was illegally abusedto the injury of a third party.”14 Gradually,Arkansas courts began to use other languageto describe piercing factors.Perhaps the most liberal example ofpiercing to date can be found in a 1981 opinion from the Arkansas Court of Appeals,Humphries v. Bray.15 In that case, the Courtof Appeals pierced the veil of limited liability to hold a sole shareholder liable underthe Arkansas Workers Compensation Act,apparently without any evidence of illegalityor wrongdoing on the part of the sole shareholder. Technically, that Act applies only tobusinesses with five or more employees andthe corporation in question had fewer employees. However, the sole shareholder alsoowned and operated two sole proprietorships,and if the businesses were considered together, there were more than five employees. Thecourt found that none of the three businesseshad more than two employees and that separate records were maintained for each of thethree businesses; in its opinion it cited noevidence of any intent to circumvent application of the Workers Compensation Act. Thecourt did note that one bookkeeper kept accounts for all three businesses, that it wassometimes difficult to distinguish betweenthe businesses, that the businesses wereall in the same building with a single sign,that the businesses had a shared listing inthe phone book, that some funds were movedbetween businesses to meet payroll, and thatemployee W-2 forms did not always use thecorrect business names.16 Although the courtin Humphries cited language to the effectthat piercing should be applied based on thecircumstances of each case “when the factswarrant its application to prevent an injustice,” it offered no explanation of how piercingthe veil would in fact “prevent an injustice.”Instead, the court merely offered its conclusion that “application [of the doctrine] in theinstant case was warranted.”17One commentator has suggested that theresult in Humphries “may be to allow piercing the veil simply on the basis of a failure toadhere to corporate formalities, and withoutany evidence whatsoever on the part of thesole shareholder of an intent to perpetratean injustice, wrongful act, or fraud.”18 Thiswould be consistent with statements made incases like Woodyard v. Ark. Diversified Ins.Co.,19 where the court stated that the veil ofcorporate liability could be pierced and thecorporate form ignored “where fairness demands it.”2014. Rounds & Porter Lumber Co. v. Burns, 216 Ark. 288, 290, 225 S.W.2d 1, 2-3 (1949); Neal v. Oliver, 246 Ark. 377,391, 438 S.W.2d 313, 320 (1969) (describing piercing as a method of avoiding “putting fiction above right and justice”);Banks v. Jones, 239 Ark. 396, 399, 390 S.W.2d 108, 110 (1965) (refusing to pierce because of lack of evidence to support a finding of illegal abuse of the corporate form to the injury of the appellant); Winchel v. Craig, 55 Ark. App. 373,380-82, 934 S.W.2d 946, 950-51 (1996) (tracing the progression of piercing law in Arkansas through 1996).15. 271 Ark. 962, 611 S.W.2d 791 (Ark. App. 1981). Humphries has been an influential case on Arkansas law withregard to piercing. See, e.g., Epps v. Stewart Information Services Corp., 327 F.3d 642, 649 (8th Cir. 2003).16.Humphries, 271 Ark. at 965, 611 S.W.2d at 793.17.Humphries, 271 Ark. at 966, 611 S.W.2d at 793.18.Stephen B. Presser, Piercing the Corporate Veil, § 2:4. Arkansas.19. 268 Ark. 94, 594 S.W.2d 13 (1980).20.Woodyard, 268 Ark. at 99, 594 S.W.2d at 17 (1980).21

ARKANSAS LAW NOTES 2011More recently, the Arkansas SupremeCourt stated in Arkansas Bank & Trust Co.v. Douglass,21 that fraud or illegal acts neednot be alleged; mere allegation of wrongdoing should be enough to pierce.22 The courtin Douglass ignored the corporate form of asubsidiary on the grounds that it was a “meretool” of the parent corporation, after concluding that there was sufficient evidence thatthe subsidiary had been established to do indirectly what the parent company could notdo directly under statute.On the other hand, there are recent piercing cases in Arkansas that suggest that fraud,illegality, or injustice is an element of piercingin Arkansas. Perhaps the leading Arkansascase suggesting that fraud or illegality is necessary in order to support an order of piercingis Anderson v. Stewart.23 Citing two earlieropinions,24 the Arkansas Supreme Court noted that “[i]n special circumstances, the courtwill disregard the corporate facade when thecorporate form has been illegally abused tothe injury of a third party.”25 The Andersoncourt then cited a legal treatise listing the following five common grounds for disregardingthe corporate existence, all of which includesome sort of fraud or other wrongdoing: 1) thecorporate form is used to evade the paymentof income taxes; 2) it is used to hinder, delay,and defraud creditors; 3) it is used to evadea contract or tort obligation; 4) it is used toevade the obligations of a federal or statestatute; or 5) it is used to perpetrate fraudand injustice generally.26 The Anderson courtalso bluntly claimed that “Arkansas casesin which the corporate veil has been piercedhave generally involved some fraud or deception.”27One of the cases cited in Anderson,EnviroClean, Inc. v. Arkansas PollutionControl and Ecology Com’n,28 ordered piercing on the grounds that there was abuse ofthe corporate facade in order to circumventregulatory limitations on the transfer of certain facilities. While it did not specifically holdthat fraud was required, it did cite the samelanguage that was relied upon in Anderson,to the effect that “in special circumstancesthe court will disregard the corporate facadewhen the form has been illegally abused.”29Some opinions from the Arkansas Courtof Appeals have apparently embraced thenotion that fraud or illegality should be re-21. 318 Ark. 457, 885 S.W.2d 863 (1994).22.Douglass, 318 Ark. at 470, 885 S.W.2d at 870.23. 366 Ark. 203, 234 S.W.3d 295 (2006). Technically, And