Hobby Lobby and the Durability of the Corporate Veil

Daniel Whalen

I. Introduction

One of the most fundamental aspects of American corporate law is limited liability for the owners of corporations. Shareholders are able to invest in companies without putting their personal assets at risk in the event that the corporation is unable to pay its liabilities.[1] Academics have referred to this separation between the legal obligations of the corporation and the personal assets of shareholders as the “corporate veil.”[2]

However, there is a limit to corporate limited liability in rare circumstances. In cases where plaintiffs seek to recover damages from the assets of the owners of the defendant corporation, courts may decide to disregard, or “pierce,” the corporate veil and allow recovery. Although the criteria for veil piercing depends on the jurisdiction, courts will commonly consider whether the corporation was the alter ego of the owner, whether the owner dominated the corporation, and whether failing to pierce would result in injustice or unfairness.[3] Additionally, courts only take this measure for private, closely-held corporations.[4]

However, these factors are vague and open to interpretation, making it difficult to predict what facts will be dispositive.[5] Decisions regarding corporate rights during the Roberts Court have led to questions and debates about the separation between corporate entities and the shareholders.[6]

II. Veil Piercing

“Veil piercing” is an equitable remedy deriving from the common law.[7] Traditional factors courts examine in deciding whether to pierce include “the subsidiaries lack of independent existence; the fraudulent, inequitable, or wrongful use of the corporate form; and a causal relationship to the plaintiff’s loss.”[8] The terms “alter ego,” “dummy corporation,” and “instrumentality” are frequently used in veil piercing decisions, meant to convey that the owner, either a parent corporation or a natural person, has used the corporate form exclusively for the owner’s benefit and to shield the owner from personal liability, and therefore the corporation does not have an independent existence.[9]

When examining fraud or unfairness, courts do not mean common law fraud, but general unfairness.[10] “Wrong-doings” that could justify veil piercing include the transferring of assets between a parent company and a subsidiary in order to make one insolvent pending a lawsuit[11] or using an alter ego to avoid federal regulations.[12] However, barely meeting the statutory requirement for insurance has not been included as wrong doings.[13]

In Sea-Land Services v. Pepper Source, the Seventh Circuit held that an alter ego existed when an individual owner used corporate entities for the purpose of avoiding debt.[14] The owner of the defendant corporation used the business to order and receive shipments, but would move assets out of the corporation to avoid the bill.[15] The owner would frequently move money between his multiple corporations to avoid paying his creditors, as well as using company assets for personal expenses.[16] However, the circuit court remanded the case to determine if a “wrong” had been committed beyond just the plaintiff being unable to recover.[17] The court listed “wrongs” that would result in piercing:

[F]ormer partners would be permitted to skirt the legal rules concerning monetary obligations; a party would be unjustly enriched; a parent corporation that caused a sub’s liabilities and its inability to pay for them would escape those liabilities; or an intentional scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset-free corporation would be successful.[18]

III. Hobby Lobby and the Argument for Veil Piercing

In 2014, the Roberts Courts decided Burwell v. Hobby Lobby, ruling that a for-profit corporation can acquire a religious exemption to a contraceptive mandate authorized under the Affordable Care Act.[19] Hobby Lobby, a closely-held family-owned, was able to qualify for a religious exemption as an extension of the family’s beliefs.[20] The Court reasoned that recognizing the religious freedom of a corporate entity is a way of protecting the religious freedom of the owners.[21] By ruling that the religion of the owners can pass through to the corporate form, the Court seems to suggest that there is a unity of interest between the owners and the corporation.

Academics have criticized the ruling and claimed that the absence of the separation between the shareholders and the corporation has effectively removed the corporate veil for closely-held corporations.[22] For example, Catherine Hardee has criticized the Roberts Court for expanding the rights of corporations at the expense of governmental regulatory powers.[23] In order to correct this trend, Hardee suggests that “state corporate law doctrines like piercing the corporate veil provide an avenue for states to incrementally reassert their regulatory prerogatives[.]”[24] She argues that acquiring a legal exemption should show a unity of interest between corporation and owner, in at least certain cases where the plaintiff was harmed by a cause related to the exemption,[25] and that using such a corporation is akin to pursuing “purely personal ends” which should count against the owners in a veil piercing case.[26] Therefore, allowing characteristics of the owners to pass through to the corporation has been argued to support veil piercing in certain cases.

IV. Hobby Lobby and the Corporate Veil

Despite the academic coverage of Hobby Lobby, the decision likely does not intersect with the doctrines of piercing the corporate as laid out in different jurisdictions. Despite the broad and conclusory phrasing of the various factors—alter ego, unity of interest, and general unfairness—a closer examinations reveals that cases like Hobby Lobby likely do not satisfy these conditions. The most coherent meaning of “alter ego” seems to refer to times when the corporation was not created to serve a legitimate business interest. Therefore, for a corporation to satisfy this condition, the creditor would have to demonstrate that the corporation was created for the purpose of gaining an exemption and allowing the owners to exercise their religious beliefs. Unlike in Sea-Land Services,[27] a religious exemption would not necessarily point to the corporation being devoid of

By a similar reasoning, creditors will be unable to satisfy the factor for fraud. Because fraud refers not to common law fraud,[29] this prong can be nebulous. However, Walkovsky[30] sets a high standard. Neither barely meeting the insurance requirement nor structuring businesses to avoid a higher requirement for insurance was not considered an injustice.[31] The court considered these issues problems for the legislature, with legislation determining the limits needed for public policy.[32] In Hobby Lobby, while the corporation did acquire an exemption to avoid a generally applicable law,[33] religious exemptions were part of the Affordable Care Act. The corporation has gained approval to be exempt from the law, and therefore, it is not general unfairness for the corporation to act on that exemption. By the reasoning in Walkovsky, questions of exemptions are for the legislature; therefore, the exemption should not be a factor in favor of piercing the corporate veil.

V. Conclusion

Corporate limited liability is not itself unlimited. When there is a lack of separation between the owners of a closely-held corporation and the corporate entity, and when fraud is being perpetuated, courts may impose the corporation’s liabilities on the owners. Although scholars have questioned the impact the Hobby Lobby decision may have on state corporate law, religious exemptions are likely not enough to factor in to decisions to pierce the corporate veil.

[1] See David K. Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability, 56 Emory L.J. 1305, 1309 (2007).

[2] Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 109 (1985).

[3] Peter B. Oh, Veil-Piercing, 89 Tex. L. Rev. 81, 136 tbl.13 (2010).

[4] Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1047 (1991) (“In the entire data set, piercing did not occur in a publicly held corporation.”).

[5] See Easterbrook & Fischel, supra note 2, at 89.

[6] See, e.g., Catherine A. Hardee, Veil Piercing and the Untapped Power of State Courts, 94 Wash. L. Rev. 217 (2019).

[7] Daniel J. Morrissey, Piercing All the Veils: Applying an Established Doctrine to a New Business Order, 32 J. of Corp. L. 529, 541 (2007).

[8] Phillip Blumberg, The Transformation of Modern Corporation Law: The law of Corporate Groups, 37 Conn. L. Rev. 605, 610 (2005).

[9] See Clipper Wonsild Tankers Holding v. Biodiesel Ventures, LLC., 851 F. Supp. 2d 504 (S.D.N.Y 2012); Millon, supra note 1 at 1331 (“Rather than an independent, autonomous ‘person’ acting on its own and pursuing its own interests, the corporation is . . . manipulated by [the shareholders] to promote their own advantages at others’ expense.”).

[10] Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1044–45 n. 53 (1991).

[11] See CBF Industria de Gusa v. AMCI Holdings, Inc., 316 F. Supp. 3d. 635, 649 (S.D.N.Y. 2018) (“Defendants, acting on behalf of SBT, sought to make SBT judgment proof as a means of evading its obligations under the Contracts.”).

[12] See Campo v. 1st Nationwide Bank, 857 F. Supp. 264, 271 (S.D.N.Y. 1994) (finding that the “plaintiff’s allegation that [defendant] created a network of subsidiary corporations for the purpose of avoiding federal regulation is sufficient to establish the fraud or wrong requirement.”).

[13] Walkovsky v. Carlton, 223 N.E.2d 6, 9 (N.Y. 1966).

[14] Sea-Land Services v. Pepper Source, 941 F. 2d 519, 525 (7th Cir. 1991).

[15] Id. at 519–20.

[16] Id. at 521.

[17] Id. at 524.

[18] Id.

[19] Burwell v. Hobby Lobby, 573 U.S. 682 (2014).

[20] The court references evidence of the sincerity of the religious beliefs of the owning family, including Hobby Lobby’s statement of purpose mandating that the business follow “Biblical principles,” the family signing a pledge to support Christian ministries, closing the store on Sundays, not selling alcohol, and buying religious advertisements in newspapers. Id. at 703.

[21] Id. at 683–84.

[22] See Robert P. Bartlett III et al., Hobby Lobby and Closely Held Corporations, CLS Blue Sky Blog (Oct. 13, 2014), https://clsbluesky.law.columbia.edu/2014/10/13/hobby-lobby-and-closely-held-corporations/ (Reproduction of text of the letter).

[23] See Catherine Hardee, Veil Piercing and the Untapped Power of State Courts, 94 Wash. L. Rev. 217, 218–220 (2019).

[24] Id. at 219.

[25] Hardee offers the hypothetical example of a company that has a religious exemption for a contraception mandate, but which engages in sex-based discrimination on the grounds of the religious beliefs of the owners. Id. at 267.

[26] Id. at 222.

[27] Sea-Land Serivces v. Pepper Source, 941 F. 2d 519 (7th Cir. 1991).

[28] The owner in Sea-Land Services did not hold meetings or issue bylaws for his own businesses. He additional used corporate funds for his own personal expenses. Id. at 521.

[29] Millon, supra note 1, at 1334.

[30] See Walkovsky v. Carlton, 223 N.E.2d 6, 10 (N.Y. 1966).

[31] Id.

[32] Id. at 9. [Is this correct? 420 seems like it might be outside of the Walkovsky case page range]

[33] Hardee, supra note 23, at 222.