One of the primary reasons for forming a corporation or limited liability company is to insulate the individual shareholder or officers from liability. Corporations and limited liability companies are separate legal entities which are organized to do business in their own right. These entities have legal rights and liabilities distinct from their shareholders or officers. Therefore, the individual corporate officers normally are not personally liable for the debts and actions of the corporation or limited liability company simply by reason of being a shareholder or officer of such entity.
There are some circumstances under which the corporate form will be disregarded and the corporate veil will be pierced to hold individual officers or shareholders personally liable for the conduct or debts of the entity. Dietel v. Day, 492 P.2d 455 (Ariz. 1972). When a person or entity “so dominates and controls another as to make that other simply instrumentality or adjunct to it, the courts will look beyond the legal fiction of distinct corporate existence.” Gatecliff v. Great Republic Life Ins. Co., 170 Ariz. 34, 37, 821 P.2d 725, 728 (1991) quoting Walker v. Southwest Mines Dev. Co., 52 Ariz. 403, 414-415, 81 P.2d 90, 95 (1938). This same theory piercing the veil has also been applied to limited liability companies. Great American Duck Races, Inc. v. Intellectual Solutions, Inc., 2:12-cv-00436, 2013 U.S. Dist. LEXIS 36190 (D. Ariz. March 15, 2013) (“concluding that the rationale behind piercing the veil of a corporation would also apply to an LLC given the similar liability shields that are provided by corporations and LLCs to their respective owners”) citing NetsJets Aviation, Inc. v. LHC Communications, LLC,
537 F.3d 168 (2d Cir. 2008).
The “corporate fiction will be disregarded when the corporation is the alter ego or business conduit of a person,” and when observance of the corporate form would work an injustice. Dietel v. Day, 492 P.2d at 455. “The alter ego status is said to exist when there is such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist.” Dietel v. Day, 492 P.2d at 455 citing Employer’s Liability Assurance Corp., Ltd. v. Barr, 82 Ariz. 320, 313 P.2d 393 (1957).
To establish an alter ego theory of liability and pierce the corporate veil in Arizona, the proponent of the theory must establish (1) unity of control and (2) that observance of corporate form would sanction a fraud or promote injustice. Pimal Property, Inc. v. Capital Ins. Group, Inc., 2012 U.S. Dist. LEXIS 24172 (D. Ariz. February 27, 2012). These are both highly fact-based determinations requiring consideration of the totality of the circumstances. Pimal Property, Inc. v. Capital Ins. Group, Inc., 2012 U.S. Dist. LEXIS 24172 (D. Ariz. February 27, 2012) quoting Legacy Wireless Services, Inc. v. Human Capital, LLC, 314 F. Supp.2d 1045, 1058 (D. Or. 2004).
A. Unity of Control
Unity of control exists when a parent corporation or individual exercises “substantially total control over the management and activities” of the entity. Gatecliff, 170 Ariz. at 37, 821 P.2d at 728. Courts look to numerous factors to determine whether the individuality or separateness of the entity has ceased to exist. Id.
Some factors which may be considered include: common ownership, common office space, financing of the entity by the parent corporation or individual, intermingling of funds, payment of salaries and other expenses of the entity by the parent or individual, failure of the entity to maintain formalities of separate corporate existence, and the plaintiff’s lack of knowledge of the entities separate corporate existence. Id.; see also Dietel v. Day,
492 P.2d 455.
B. Observance of Corporate Form Would Promote Fraud or Injustice
In addition to establishing ‘unity of control,’ a plaintiff must also demonstrate that fraud or injustice will result if the veil is not pierced. While one consideration is whether the entity was formed to perpetrate a fraud or is being used for fraudulent purposes, this is not the only way to establish injustice or inequity. For example, in Gatecliff, the court held “observance of the corporate form could permit the two corporations to confuse plaintiffs and frustrate their efforts to protect their rights” while allowing the responsible party to “evade liability.” 170 Ariz. at 38, 821 P.2d at 729. Accordingly, the totality of the circumstances must demonstrate an “overall element of injustice or unfairness.” NetsJets Aviation, Inc., 537 F.3d at 176.
In sum, courts will not easily disregard the corporate form because this would defeat one of the primary purposes of incorporation. See Dietel v. Day, 492 P.2d 455. However, the corporate veil can be pierced to hold individuals or parent companies personally liable when there is such unity of control that the separate personality of the corporation ceases to exist and such unification of interest results in the promotion of fraud or injustice.