PJC Business 2024

PJC 108.2

P IERCING THE C ORPORATE V EIL

PJC 108.2

Disregarding the Corporate Fiction in Contract-Related Cases (Comment)

The two standards. In 1986, the supreme court held that Texas common law per mits a claimant to pierce the corporate veil by proving constructive fraud. Castleberry v. Branscum , 721 S.W.2d 270, 273 (Tex. 1986). The legislature responded by enacting a statute that imposes a higher standard than Castleberry in certain contract-related cases. Willis v. Donnelly , 199 S.W.3d 262, 271–72 & n.12 (Tex. 2006); SSP Partners v. Gladstrong Investments (USA) Corp. , 275 S.W.3d 444, 455 (Tex. 2008). The instruc tions at PJC 108.3–108.8 contain alternative submissions reflecting the statutory and common-law standards. The statute’s scope and effect. In matters relating to “any contractual obligation of the corporation or any matter relating to or arising from the obligation,” Tex. Bus. Orgs. Code §21.223(b) requires claimants to prove that the shareholder “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the [claimant] primarily for the direct personal benefit” of the shareholder. Tex. Bus. Orgs. Code § 21.223(b) (formerly Tex. Bus. Corp. Act art. 2.21(A), expired Jan. 1, 2010). The statute originally did not apply to tort claims, but subsequent amendments extended it to all claims “relating to or arising from” a contractual obliga tion, including torts, and section 21.224 now preempts common-law veil-piercing the ories in cases governed by the statute. Menetti v. Chavers , 974 S.W.2d 168, 173–74 (Tex. App.—San Antonio 1998, no pet.) (statute applied when homeowner sued con tractor for breach of contract, fraud, Deceptive Trade Practices Act, and negligence). The statute further modifies Castleberry by eliminating the failure to observe corpo rate formalities as a consideration for piercing the corporate veil in all claims against holders, owners, subscribers, or affiliates. Tex. Bus. Orgs. Code §21.223(a)(3); see also Aluminum Chemicals (Bolivia), Inc. v. Bechtel Corp. , 28 S.W.3d 64, 67 n.3 (Tex. App.—Texarkana 2000, no pet.). Limited liability companies. Though section 21.223 refers to a “corporation,” a separate provision of the Business Organizations Code extends section 21.223 to lim ited liability companies and their members, owners, assignees, affiliates, and subscrib ers. Tex. Bus. Orgs. Code § 101.002. Determining whether section 21.223(a)(2) applies. [T]he following questions determine whether the general nonliability rule of Section 21.223(a)(2) applies: (1) is the plaintiff a corporation or LLC or its obligee, and is the defendant a shareholder in the entity or an affiliate of such a shareholder or of the entity; and (2) does the plaintiff’s claim (a) seek to recover for a contractual obligation of the entity or a matter relating to or arising from such an obligation and (b) seek to hold the defendant lia ble for that recovery on the basis of alter ego, actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory?

354