In Indiana, it is difficult to go after a business owner’s personal assets in a commercial setting, if the business owner has a properly formed corporation or company and properly limited his or her liability; it is difficult, but not impossible. A party seeking to pierce the corporate veil bears the burden of establishing that the corporation was so ignored, controlled or manipulated that it was merely the instrumentality of another, and that the misuse of the corporate form would constitute a fraud or promote injustice." Gurnik v. Lee, 587 N.E.2d 706, 710 (Ind.Ct.App.1992).
Likewise, Indiana courts are reluctant to disregard a separate corporate entity. Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d. 1228, 1232 (Ind. 1994); Oliver v. Pinnacle Homes, Inc. 769 N.E.2d. 1188, 1191 (Ind.Ct.App. 2002). The courts will disregard a corporate entity only to prevent fraud or unfairness to third parties. Id. The legal fiction of a corporation may be disregarded where one corporation is so organized that it is a mere instrumentality or adjunct of another corporation. Id; Smith v. McLeod Distributing, Inc., 744 N.E.2d. 459, 462 (Ind.Ct.App. 2000). Indiana courts may refuse to recognize corporations as separate entities where the facts establish that several corporations are acting as the same entity. Id.
Distinct corporations, even parent and subsidiary corporations, are presumed separate; to overcome this presumption, a plaintiff must show that one corporation dominated another to the extent that the subordinate was the mere instrumentality of the dominant corporation, that the dominant corporation employed the subordinate to perpetrate a fraud, or that the capital placed in the subordinate was illusory or trifling compared to the business to be done and the risks of loss, and also must demonstrate that the defalcation of the corporations, for example, fraud, was the proximate cause of the injury sustained. Smith v. McLeod Distributing, Inc., 744 N.E.2d 459,461 (Ind.Ct.App. 2000).
Liability Protection Under Indiana Law
The general rule in Indiana is that “[a] member, a manager, an agent, or an employee of a limited liability company is not personally liable for the debts, obligations, or liabilities of the limited liability company.” Ind. Code § 23-18-3-3(a). However, within that same statutory provision, the legislature codified an exception under which an individual member, manager, agent, or employee of an LLC may become personally liable through his “own acts or omissions.” Id. This exception is referred to as “piercing the corporate veil” because courts will remove the company’s veil of limited liability to hold its owners personally liable for the business’s debts or actions where the owners treat the LLC as their alter ego or use it to commit fraud or injustice.
The Aronson Test
Specifically, Indiana courts “will impose personal liability to protect innocent third parties from fraud or injustice” by piercing the corporate veil when (1) “the corporate form is so ignored, controlled or manipulated that it was merely the instrumentality of another” and (2) “misuse of the corporate form would constitute a fraud or promote injustice.” Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994) (emphasis added). This is known as the two-pronged “Aronson test,” and a plaintiff must establish not only both prongs but also “a causal connection” between the prongs to successfully pierce the corporate veil. Country Contrs., Inc. v. A Westside Storage of Indianapolis, Inc., 4 N.E.3d 677, 688 (Ind. Ct. App. 2014).
This is a fact-intensive, equitable inquiry that turns on the totality of the circumstances rather than any rigid formula. Reed v. Reid, 980 N.E.2d 277, 303 (Ind. 2012) (“The propriety of piercing the corporate veil is highly dependent on the equities of the situation, and the inquiry tends to be highly fact-driven.”) (citations omitted).
Factors Courts Consider
When deciding whether the pierce the corporate veil, courts consider a nonexclusive list of factors, including: “(1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.” Aronson, 644 N.E.2d at 867.
No single factor is dispositive, and a plaintiff need not establish all eight. Country Contrs., Inc., 4 N.E.3d at 688. Ultimately, veil piercing rests on principles of equity—where an individual has enjoyed the benefits of operating through a corporate form while disregarding its obligations, equity demands that the Court intervene.
When to Take Action
If you have been wronged by a home improvement or repair company, give us a call. We have more experience than any other law firm in Northeast Indiana, addressing the complicated statutes that govern home repairs and include every project undertaken at your home by a vendor which has a value of over $150.00.
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