Veil

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Abolishing Veil Piercing Stephen M. Bainbridge
*

“I weigh my words when I say that in my judgment the limited liability corporation is the greatest single discovery of modern times . . . . Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it.” –President Nicholas Murray of Columbia University (1911)1 I. INTRODUCTION ........................................................................................................ 480 II. THINKING ABOUT LIMITED LIABILITY ..................................................................... 482 A. The Classic Case: Walkovszky v. Carlton ........................................................ 482 B. Limited Liability and the Contractarian Model................................................. 484 III. JUSTIFYING LIMITED LIABILITY ............................................................................... 487 A. Contract Creditors of Public Corporations....................................................... 488 B. Tort Creditors of Public Corporations .............................................................. 494 C. Contract Creditors of Close Corporations........................................................ 500 D. Tort Creditors of Close Corporations............................................................... 503 IV. VEIL PIERCING: A DYSFUNCTIONAL DOCTRINE ...................................................... 506 A. The Standards.................................................................................................... 506 B. The Laundry List ............................................................................................... 509 C. Summation......................................................................................................... 513 V. RETHINKING VEIL PIERCING .................................................................................... 514 A. Contract Creditors and Other Bargain Settings................................................ 517 1. Commercial Misrepresentation.................................................................... 517 2. Ex post Undercapitalization......................................................................... 519 B. Tort Creditors.................................................................................................... 523 C. Enterprise Liability and Parent-Subsidiary Corporations ................................ 526 1. Veil Piercing vs. Enterprise Liability in Corporate Groups ........................ 526 2. The Law of Enterprise Liability.................................................................... 527 3. Limited Liability in Corporate Groups ........................................................ 528 VI. CONCLUSION............................................................................................................ 534

* Professor, UCLA School of Law; Joseph Flom Visiting Professor of Law and Business, Harvard Law School (2000-01). Subject to the usual disclaimers, I thank Mitu Gulati, Bill Klein, Jack Jacobs, Lynn LoPucki, Stephen Presser, Bob Thompson, and Elliot Weiss. This article is based on a chapter of my forthcoming text, CORPORATION LAW, to be published by Foundation Press in 2002. 1. Quoted in William P. Hackney & Tracey G. Benson, Shareholder Liability for Inadequate Capital, 43 U. PITT. L. REV. 837, 841 (1982) (footnotes omitted).

480

The Journal of Corporation Law I. INTRODUCTION

[Spring

Limited liability means that shareholders of a corporation are not personally liable for debts incurred or torts committed by the firm. If the firm fails, a shareholder’s losses thus are limited to the amount the shareholder has invested in the firm—the amount the shareholder initially paid to purchase his or her stock. Model Business Corporation Act (MBCA) section 6.22(b) offers a typical statutory formulation of the doctrine: “Unless otherwise provided...
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