Successor Liability and Piercing the Corporate Veil:

Protect Your Assets

We have had several meetings recently with new clients who are either purchasing the assets of an existing business, or are beginning a new company.    When we are in these meetings, we will often stress the importance of separation between the business assets and those assets that belong to the individual owners of the business.   In addition, when a business is purchasing the assets of a former business, it is important to structure the transaction such that the business buying the assets can limit or eliminate any obligations for debts owed by the selling business.

These meetings have brought to mind a previous post concerning the same issues, including the factors that a court will examine when determining whether or not to hold an individual liable for a corporation’s debts period.

While the Ziese case discussed in that previous post was more focused on “successor liability”, another important decision from the Indiana Court of Appeals around that same time held that in addition to the elements discussed in the Ziese case concerning whether or not a court should consider “piercing the corporate veil,” (and thereby hold the individual shareholders liable for the debts of the corporation), a plaintiff seeking to do so must also show a causal connection between the fraud or injustice alleged by the party seeking to pierce the corporate veil and the harm that that party complains of.   In other words, it is not enough to prove that the defendant corporation did not follow corporate formalities or otherwise misused the corporate form.   Rather, the plaintiff must be able to demonstrate that misuse actually caused the damages that the plaintiff is complaining about.   The Indiana Court of Appeals also confirmed what has been discussed in numerous other instances in this blog that these types of cases, as well as many others, are highly fact sensitive, and it is difficult to draw perfect analogies from one case to the next.

In summary, the Indiana courts will be very reluctant to pierce a corporate veil, and are more reluctant to do so than to impose successor liability as the Court of Appeals did in Ziese.    A detailed review of the facts of each case will be necessary in order to attempt to determine how a court may view a particular situation, understanding that the hurdle will be quite high to clear in order to create personal liability for the shareholder of a corporation in Indiana.