Piercing the Corporate Veil in Tennessee – When Can a Judgment Against a Corporation be the Personal Responsibility of the Shareholders?

The Tennessee Court of Appeals recently decided a case (F&M Marketing Services, Inc. v. Christenberry Trucking and Farm, Inc., E2016-00205-COA-R3-CV, 2017 WL 417223_(Tenn. Ct. App. 2017)) involving a request to pierce the corporate veil of a Defendant after the Plaintiff got a substantial judgment against that Defendant for breach of contract.  The total judgment in this case was $375,524.29.  After the initial judgment was entered, the Plaintiff learned that the Defendant had no assets to satisfy the judgment.  As a result, the Plaintiff petitioned the trial to hold the primary shareholder of the Defendant personally liable for the judgment against the Defendant corporation.  The Tennessee Court of Appeals did a good job discussing the circumstances when an individual shareholder can be found personally responsible for a judgment against a corporation in Tennessee. 

The Court noted that the most important case outlining when it is appropriate to pierce the corporate veil in Tennessee is the FDIC v. Allen, 584 F. Supp. 386 (E.D. Tenn. 1984) decision.  The Court noted that numerous Tennessee Court of Appeals and the Tennessee Supreme Court have nearly uniformly considered the “Allen factors” that were outlined in this case many years ago.  The factors to be considered when determining whether to allow a judgment to be against individual shareholders and simply disregarding the corporate veil include the following:

Factors to be considered in determining whether to disregard the corporate veil include not only whether the entity has been used to work a fraud or injustice in contravention of public policy, but also: (1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities.

F&M Marketing at 3 (quoting Rogers v. Louisville Land Company, 367 S.W. 3d 196 (Tenn. 2012)) .  The Court noted that usually a shareholder is not personally liable for the acts of a corporation.  The Rogers case is one of the more recent Tennessee Supreme Court cases on this issue and that Court observed that “the party seeking to pierce the corporate veil has the burden of presenting facts demonstrating that it is entitled to relief. To pierce the corporate veil, the proof must show that the separate corporate entity is a sham or a dummy or that disregarding the separate corporate entity is necessary to accomplish justice. The question of whether the corporation's separate identity should be disregarded is dependent on the specific circumstances of the case and is a matter particularly within the province of the trial court.” Rogers at 215.  This shows that a decision for a Tennessee court to allow the piercing of the corporate is not to be taken lightly.  The Rogers court went on to state that “in all events, the equities must substantially favor the party requesting relief, and the presumption of the corporation's separate identity should be set aside only with great caution and not precipitately.”  Rogers at 215.

In this particular case, the court found the trial court determined that only two out of the eleven Allen factors weighed “ever so slightly” in favor of piercing the corporate veil.  The Court went on and analyzed each of these factors and this decision is a good decision to review to determine how the Allen factors are applied.  Regardless, at the end of the review of the trial court’s decision, the appellate court found that the trial court decided correctly and that the equities did not substantially favor piercing the corporate veil in this circumstance.  This case shows that it can be very difficult to pierce a corporate veil and the trial court and appellate courts will look very carefully at the Allen factors to determine whether it is appropriate.