biz org class 5

piercing the corporate veil
matters of equity and fairness.

is there a lack of corporate formatives?
have the shareholders comingled funds and assets?
under capitalization?

if a shareholder doesn't observe the separate existence of
the corp, why should creditors?
shareholders have to act in a way that respects separate identity of
(who??)

unity of interest & ownership

lack of corporate formalities;
commingling of funds and assets;
under-capitalization;
use by one corporation of the assets of another.

sea-land v. pepper source
             M                   A
              l                     l
---------------------------------------------
I        I         I         I          I             I
SL    PS      J         S-C    CC         T-N

markesee and pepper source: PS was under capitalized,
shuffled money back and forth under the different corps,
but sea-land is unable to pierce the corp veil because
didn't show fraud or injustice and didn't show that the
judgment would be unsatisfied. the court's reasoning is that
1. the petitioner will always have an unsatisfied judgment in
this type of case and 2. this is a two part test to show fraud
and unity in ownership.

what's the difference between carlton and pepper source/marcasee?
why was there an injustice in the sea-land case?

remember that the purpose of corp is to max shareholder wealth, so
shareholders get to take money out of the corp.

marcasee has been saying to sea-land that it will pay, while all the
while, he has been removing and comingling pepper source funds
for his own personal use. the court requires sea-land to establish
fraud and injustice, but it does seem that the very facts of co-mingling
are the same factors under unity and ownership: the test is not clearly
bisected.

when we do piercing doctrine, recognize that it's not neatly set up.
a strong case of unity of interest/ownership may overcome a weak
case of injustice or vice versa.

as a practical matter: if you have shareholders that are ignoring the
separate existence of the corporation, that in and of itself is unfair.
it's circular reasoning, which is problematic of students of the law
but makes the matter arguable.

see p. 200 q. 2.
why is not the owner of a corp who's escaped liability for its debts
not unjustly enriched? an unsatisfied judgment is not enough to
attack the shareholders personally. here, even though marchese acts to
establish that there's unity of interest and ownership, there still begs the
question of where fraud and injustice exists?

what is the difference between the sea-land and BMS (silicone) case?
- sea-land could have contracted for a personal guarantee
- sea-land could have done due diligence to investigate assets
- sea-land could have contracted for assets and solvency

contract creditors assume the risk when they enter the contract that the
entity with which they contract will not be able to pay back. but with respect
to tort creditors, there's not that opportunity.

carlton: the court says that it's okay that carlton was unjustly enriched
and the legis should change the minimum coverage required
BMS: contract v. tort creditors, the question of fraud is much more
important to a contract creditor because it will make it difficult for the
contractor to do due diligence.

next question is whether the company has failed to do corporate formalities.
because if it has, then the contractor creditor has no way to know what
the stability of the business is.

a tort creditor will argue under-capitalization - whether the company is
adequately funded. not something that a contract creditor will want to
emphasize because the capitalization is something the creditor could have
investigated.

analysis #1. once the plaintiff has pierced veil to expose liability of marchese,
it put a levy on stock he owned. what would be gained by reverse piercing
other corporate veils.

reverse piercing: must show same analysis as piercing but the starting point
and ultimate conclusion is different. if sea land reaches marchese, it gets a
judgment of his funds and shares of his other corporate holdings. but you don't
want to be a shareholder in his other companies -- bond and note holders stand
before share holders and equity holders in getting repaid, so you would still not
be holding anything if the companies aren't profitable. if you want to reach the
assets of the companies, you would have to reverse pierce after piercing.

so -- after marchese becomes personally liable from the piercing, the reverse
piercing would hold marchese wholly liable to sea-land via all its subsidiaries such
that other creditors stand in line behind it/don't have priority over it. must show
whether there's unity of interest & ownership between marchese and his other
companies and that it would failing to pierce sanction fraud or promote injustice.
reverse piercing then will allow sea-land to reach the other assets of the companies.

what about tie-net, where marchese only owns 50%? why shouldn't tie-net be
reverse pierced for sea-land? even with respect to tie-net, there's comingling and
lack of corporate formalities and under capitalization. but there can't be a unity of
interest and ownership as a factual matter, because only 50% is owned, but as a
legal matter, this is instead up to the court that all four factors apply to tie-net.

roman catholic arch diocese of SF. dude sues everybody.
this case clarifies PCV and who is laible under the theory.
if a parent corp has 2+ subs, then piercing the sub will allow you to reach the
parent but not to reach the assests of the other subs. that must be done through
reverse piercing.

even if the plaintiff could pierce the monestary's veil, he could arguably
reach the vatican and pope's assets but couldn't reach the other churches
such as the archbishop and archbishop of SF. to do so, plaintiff would
have to show enterprise liability or reverse pierce. enterprise liability
could potentially work but reverse piercing wouldn't.

piercing maybe reaches parent assets. but plaintiff doesn't then get to reach
assets of other companies under parent org. only other recourse is
reverse or enterprise liability. it simply was inconvenient for the plaintiff
to go after the switzerland monastery. the point is that piercing only
destroys vertical boundaries, not horizontal boundaries, which are destroyed
through enterprise liability or maybe reverse piercing. under enterprise,
all the subs could be liable if they engaged in a common enterprise. if the
plaintiff is able to show that there's no separate identity between the
companies, then there's enterprise liability.

why isn't piercing effective here?
- sovereign immunities
- the churches don't all sell dogs

In re silicone.
BMS owns 100% of the subsidiary MEC.
the question is how can tort creditor plaintiffs reach the assets
of the parent company BMS who is the sole shareholder of
MEC?

good arguments that PCV should be allowed:
- BMS negotiated the purchase of 2 corps in MEC's name.
- MEC went for long periods of time without board meetings.
   in fact, 2 of the 3 MEC directors were BMS officers.
- BMS made MEC's financial decisions.

BMS' help for MEC cause BMS problems:
- affiliated corps distrib. MEC implants without a charging fee.
   (lack of corp formality)
- BMS helped MEC conduct market studies and product tests.
- BMS house counsel and PR staff worked for MEC
- BMS bought insurance for MEC

BMS went too far and so there's lack of separation and lack of formality.
the plaintiffs could have established that MEC was BMS alter ego.

this case is also different from sea-land because the court says that
plaintiffs in this kind of case do not need ot show fraud -- these are
tort victims who want to pierce the corp veil to reach the parent company
and the court says taht fraud is not required because htey are tort creditors.
what tort creditors care about is capitalization. the fact MEC manufactured
breast implants and was under cap'd when implants can malfunction, that in
and of itself is unjust -- not fair to deal in a risky business and not be
adequately capitalized.

BMS was doing everything it could to ensure MEC could be financially
healthy and successful. courts and commentators don't follow this case because
many feel that BMS didn't do anything wrong here -- didn't commit fraud and
the fact that BMS didn't get dividends from MEC and worked for free established
that it was not acting unjustly.

however, these creditors decided to get implants. though they were harmed, they
dealt with parties who made decisions of what to implants to get/give.

NYS requires showing of fraud in tort and contract creditor cases.

so long as you observe corp formalities, you get to enjoy the benefits of being
inc'd.

see p. 208 for factors that are regular for parent subsidiary relationship that
encourages PCV.
the sub operates with grossly inadequate capital -- that looks bad
parent uses sub property as its own
parent doesn't observe basic corp formalities

sub is a separate entity and the parent shouldn't be paying the expenses,
using the subs property, comingling, maintaining the sub's records and meetings,
etc.

see p. 210 q. 4: if you had been BMS counsel, what advice would have given
if asked to avoid MEC deaths liability? bear in mind the imporance for BMS to
exercise control over MEC in a practical matter.

pettifogging -- looking at just minute details

run MEC in a way that established and observes its separateness and identity.
see the notes above. n.b -- clients will push back on that, but it's up to the att
to not back down