Holding A Corporation’s Owners Personally Liable – Piercing the Corporate Veil in an Iowa Corporation

Piercing the corporate veil is an equitable remedy employed by Iowa courts “to further the public convenience, cure wrongs, protect against fraud, and advance the ends of justice …”  HOK Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 935 (8th Cir. 2007). To this end, Iowa courts may hold a corporation’s owner(s) liable if equity requires.

The Eighth Circuit Court of Appeals thoroughly explained the theory of piercing the corporate veil in HOK Sport, Inc., stating in part:

Under Iowa law, disregarding an entity’s corporate form by piercing the corporate veil is appropriate if ‘the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.’

 

Id. at 935 (internal citations omitted).

The court continued its analysis, explaining that the corporate form may be disregarded if one of six different factors is established:

[M]ere identity of … ownership and corporate management is not alone sufficient to permit a piercing of the corporate veil … An abuse of the corporate privilege may justify piercing the corporate veil as to persons who actively participate in the conduct of corporate affairs and have provided inadequate capitalization … The corporate form can be disregarded if (1) the corporation is undercapitalized, (2) without separate books, (3) its finances are not kept separate from individual finances, individual obligations are paid by the corporation, (4) the corporation is used to promote fraud or illegality, (5) corporate formalities are not followed[,] or (6) the corporation is merely a sham.

 

Id. at 936 (internal citations omitted).  A litigant that is seeking to apply the doctrine and hold individuals personally liable is not required to prove all six factors.  For example, proving fraud may be sufficient, but it is not a prerequisite for piercing the corporate veil in all circumstances.  See Adam v. Mount Pleasant Bank & Trust Co., 355 N.W.2d 868, 872 (Iowa 1984) (“Fraud is not a prerequisite for piercing the corporate veil.”); State ex rel. Miller v. Internal Energy Mgmt. Corp., 324 N.W.2d 707, 715 (Iowa 1982) (“[F]raud constitutes a sufficient basis for piercing the corporate veil.”); see also Team Cent., 271 N.W.2d at 923.

The HOK Sport, Inc. opinion contains a wealth of information on this subject along with multiple citations to other helpful legal authorities.  While the opinion relates to a non-profit corporation, the court repeatedly states the same law would apply to a for-profit corporation.  HOK Sport, Inc., at 935-6.

The HOK Sport, Inc. opinion was filed in August 2007 and addresses piercing the corporate veil as that theory is applied to corporations.  What is currently unknown, however, is how an Iowa court would apply the reasoning of HOK Sport, Inc. to a limited liability company, especially considering the statutory protections that apply to limited liability companies in Iowa as explained in this post.

For more information on Iowa law regarding piercing the corporate veil, or about how owners of Iowa corporations may be held liable for certain actions and/or inactions, you should consider contacting a licensed attorney.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
This entry was posted in Business Owner, Director, Intra-corporate dispute, Litigation, Manager, Member, Officer, Shareholder and tagged , , , , , , , , , . Bookmark the permalink.

2 Responses to Holding A Corporation’s Owners Personally Liable – Piercing the Corporate Veil in an Iowa Corporation

  1. Pingback: Are Shareholders in Small Family Businesses Personally Liable for Business Debts and Liabilities? | Business and Corporate Disputes

  2. Pingback: As an Owner, Am I Liable for the Debts of my Iowa Limited Liability Company? | Business and Corporate Disputes

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