Many of us have endured the nightmare of a disastrous home renovation or at least enjoyed Tom Hanks in The Money Pit (How long? Two weeks, of course). Well imagine spending half a million dollars, not for a new and improved home, but rather chasing your contractor for paid, but never completed, work.
That is exactly what happened to one homeowner, said the Delaware Chancery Court in Doberstein v. G-P Indus., Inc. In October 2012, Doberstein contracted with a building company on a significant home renovation project. Despite paying over $300,000, the project saw little progress over the next 14 months. When the company promised to complete the project in the next few weeks and asked for additional funds, Doberstein handed over an additional $150,000. Shortly thereafter, the company abandoned the project and ceased doing business, citing an inability to continue because of financial troubles.
It is blackletter law that owners are legally distinct from the corporation itself and that the corporate veil protects them from being personally responsible for the corporation’s liabilities; that is until the owner acts inappropriately and misuses the corporation. Under Delaware law, veil-piercing requires that “the corporation, through its alter-ego [(i.e., an owner)], has created a sham entity designed to defraud investors and creditors.” Factors courts consider in include:
(1) whether the company was adequately capitalized for the undertaking;
(2) whether the company was solvent;
(3) whether corporate formalities were observed;
(4) whether the dominant shareholder siphoned company funds; and
(5) whether, in general, the company simply functioned as a facade for the dominant shareholder.
No one factor is dispositive and “some combination of them, and an overall element of injustice or unfairness must always be present” before a court will piece the corporate veil.
Doberstein asserted that the contractor’s repeated false statements concerning the work being done at her property and her reliance on those statements to her detriment constituted the fraud necessary to pierce the veil. The Court disagreed, stating that it must consider “whether the individual defendant . . . abused the corporate form and, through that abuse, perpetrated fraud on an innocent third party.” In other words, the fraudulent conduct must be tied to a manipulation of the corporate form in order to pierce the corporate veil. Here, Doberstein did not allege that the owner used the corporate form to shield himself and any company funds he may have received from liability once the company went out of business. Accordingly, the Court dismissed the veil-piercing count in the lawsuit.