cbareport-dec12 - page 5

December 2012 CBA REPORT
l
5
cover article
W
W
hy do business owners form
corporations or limited liabil-
ity companies (LLCs)? One of
the main reasons is the protection that
the liability shield provides. In general,
if a business owner uses one of these
entities, then she has limited personal li-
ability for the obligations of the business.
But this protection is not absolute.
When a business owner loses the liability
shield’s protection, a creditor or other
plaintiff can “pierce the corporate veil” to
recover from the business owner person-
ally.
The Liability Shield in Ohio
In Ohio, state statutes create the li-
ability shield for both corporations
1
and
LLCs,
2
but the state constitution also ex-
pressly recognizes the protection. Article
XIII, Section 3 of the Ohio Constitution
provides that “[d]ues from private corpo-
rations shall be secured by such means as
may be prescribed by law, but in no case
shall any stockholder be individually li-
able otherwise than for the unpaid stock
owned by him or her.” In 1983, the Ohio
Supreme Court made the broad applica-
tion of this provision clear in
South High
Development, Ltd. v. Weiner, Lippe &
Cromley Co.
3
The Test for Piercing theVeil in
Ohio:
Belvedere
Common law establishes the rules
that determine how the owners of a
corporation or LLC can lose this protec-
tion. In Ohio, the state supreme court
established the basic test for piercing
the corporate veil in a decision with
local Cincinnati roots,
Belvedere Condo-
minium Unit Owners’ Association. v. R.E.
Roark Companies
.
4
The Belvedere is a beautiful historic
building in the city’s North Avondale
neighborhood near Xavier Univer-
sity. When the building converted to
condominiums in the early 1980s, the
developer controlled the condo board
until a certain percentage of the units
were sold, and the developer “negotiated”
a very one-sided lease between itself and
the condo board for the commercial
space on the first floor of the building.
It also failed to disclose the terms of the
lease to condo owners and buyers. When
enough units had been sold, the own-
ers took control of the condo board and
sued the developer for self-dealing. The
developer was a limited partnership, and
its general partner and 20 percent owner
was a corporation — RERC — controlled
by a single shareholder — Ronald Roark.
The court remanded the issue of whether
RERC had done anything wrong, but it
dismissed all the personal and individual
claims against Roark on grounds that the
plaintiff could not pierce the corporate
veil to reach him.
Belvedere:
The First Prong
The test that the Ohio Supreme Court
established in
Belvedere
includes three
prongs, and all three must be satisfied to
enable a plaintiff to pierce the veil. The
first is what many people call the “alter
ego” doctrine: “control over the corpo-
ration by those to be held liable was so
complete that the corporation has no
separate mind, will, or existence of its
own.”
5
The basic idea is that the owner
had control over the corporation, and
that control was so complete that the cor-
poration was the alter ego of the owner,
an empty shell with no separate identity.
Control by itself is insufficient; that con-
trol must be total and complete.
To determine whether the control
has the necessary character, and there-
fore whether the first prong is satisfied,
courts in Ohio consider a number of
factors. The Sixth Circuit Court of Ap-
peals set out most of these factors in its
2007 decision in
Corrigan v. U.S. Steel
Corporation
.
6
Corrigan
’s facts were com-
plex, involving nine or more corporate
entities,
7
and the court determined that
the plaintiffs could not pierce the veil
to impose liability on the parent corpo-
rations for the alleged actions of their
subsidiaries.
The Sixth Circuit pointed to two
other decisions that it found embodied
Ohio law concerning the first prong
of the
Belvedere
test: an Ohio Court of
Appeals decision in
LeRoux’s Billyle Sup-
per Club v. Ma
,
8
and the Ohio Supreme
By Joseph Stewart-Pirone
Piercing the Veil in Ohio
for Corporations and LLCs
In Ohio, state statute creates the liability shield
for both corporations
1
and LLCs,
2
but the state
constitution also expressly recognizes it.
1,2,3,4 6,7,8,9,10,11,12,13,14,15,...36
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