Lightning Strikes: The North Carolina Supreme Court Rules In A Piercing The Corporate Veil Case

Today, the Supreme Court ruled in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that a claim for piercing the corporate veil could proceed against the individual shareholders of the corporate defendant.

The opinion makes clear the standard that North Carolina applies in such cases, but more significantly resolves an question on the interplay between alter ego claims and the statute of limitations.  The holding is that the filing of a complaint against the corporation will toll the time for bringing claims against the individuals or entities which might be subject to a veil piercing claim.

Ridgeway was in the business of manufacturing cigarettes in North Carolina.  It was not a party to the Master Settlement Agreement entered into by the major tobacco manufacturers, and therefore had the statutory obligation to pay a tax based on each cigarette it sold. When the company sold nearly 90  million cigarettes, and didn't pay more than a million dollars in tax, the Attorney General pursued not only the company but also its individual shareholders. 

The trial judge had dismissed the alter ego claim.  The Court of Appeals had reversed, but found one of the alter ego claims to be barred by the statute of limitations.  The Supreme Court affirmed the Court of Appeals on the viability of the alter ego claims, ruling that sufficient facts had been alleged to warrant a disregard of the corporate entity.  It stated that the defendants had made a:

considered decision not to fulfill their statutory obligations in North Carolina.     Among the allegations against defendants are charges that they deliberately and purposefully chose to line their personal pockets by pricing cigarettes at a level that would increase their market share--to the detriment of their competitors who opted to function in a manner that would permit them to perform their statutory obligations. Defendant shareholders further chose to ignore the admonitions and warnings of their own experienced manager that their operational plan did not allow them to fulfill their statutory obligations. Defendant shareholders, including Heflin, also made a considered decision to pay their obligations in their home state of Kentucky while ignoring their obligations to North Carolina. Defendants further channeled corporate funds into unknown entities they controlled, leaving Ridgeway behind as a hollow shell from which plaintiff could not expect to recover anything.

Taking these allegations as true, it would be inequitable to permit defendants to shelter behind the corporate identity of the very entity they drained in the course of their actions. Given this, we hold that in light of our opinions in Henderson and Glenn, plaintiff has made the necessary showings at the pleading stage to establish that defendant Ridgeway was operated as a mere instrumentality of defendant Heflin.

The opinion is for the most part a straightforward application of the "instrumentality rule" adopted in Glenn v. Wagner, 313 N.C. 450, 329 S.E.2d 326 (1985), which requires a showing of three elements (1) stockholders' control of the corporation amounting to “complete domination” with respect to the transaction at issue; (2) stockholders' use of this control to commit a wrong, or to violate a statutory or other duty in contravention of the other party's rights; and (3) this wrong or breach of duty must be the proximate cause of the injury to the other party."

The novel issue in this case was the interplay between an alter ego claim and the statute of limitations, and that's where the Supreme Court reversed the Court of Appeals. The original complaint was filed in May 2004.  That complaint made claims only against the manufacturing company, and made no alter ego claims against its shareholders.  Over a year later, in October 2005, the State amended to add the veil piercing claims. Although the Court of Appeals agreed that those claims could go forward, it found that one of those claims against one of the defendants was by then barred by the statute of limitations, even though it had been timely made against the corporation.  The Court held that the alter ego claim could not relate back because the individual defendant would be a new party. 

The Supreme Court reversed, and held that "North Carolina follows the same rule as most other jurisdictions that have considered the issue: the principle that initiating a suit against a corporation tolls the statute of limitations with respect to its alter egos."

The opinion makes the not surprising observation that whether to pierce the corporate veil is "among the most confusing in corporate law" and "enveloped in the mists of metaphor." 

Why a picture of a lightning strike?  In the course of her opinion, Judge Timmons-Goodson quoted from Judge Easterbrook that "proceeding beyond the corporate form is a strong step: 'Like lightning, it is rare [and] severe[.]'" 

Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.ncbusinesslitigationreport.com/admin/trackback/84634
Comments (0) Read through and enter the discussion with the form at the end
Post A Comment / Question Use this form to add a comment to this entry.







Remember personal info?
Send To A Friend Use this form to send this entry to a friend via email.