Piercing the Corporate Veil: Ohio Supreme Court Broadens The Personal Liability of Shareholder/Owners for Corporate Liabilities
In a decision that lacks the clarity that is needed in this area of the law, the Ohio Supreme Court seems to have expanded the potential for shareholder liability for corporate obligations by expanding the category of wrongs which may cause a Court to disregard the corporate form.
On September 30, 2008, the Ohio Supreme Court issued its decision in Dombroski v. Wellpoint, Inc. This case gave the Court the opportunity to refine its earlier holdings on the subject of “piercing the corporate veil,” - in other words, assessing liability against individual shareholders for the debts or damages caused by the corporation. “Piercing the corporate veil” is the exception to the general rule that individual shareholders are not liable for the debts of the corporation in which they own stock. The case came before the Court because different Appellate Courts had differently interpreted prior Supreme Court cases as to what types of acts would justify “piercing the corporate veil” and holding individual shareholders liable.
In the beginning of its decision in Dombroski, the Ohio Supreme Court asserted that it “continued to adhere to the principle that limited shareholder liability is the rule, and that piercing the corporate veil is the ‘rare exception’ that should only be applied in the case of fraud or other exceptional circumstances.” Nevertheless, later in the opinion, the Court also expressed its view that it believed its prior pronouncements on this subject were too limiting to protect potential injured parties from a “wide variety of egregious shareholder misdeeds that may occur.” It therefore modified its previous decisions to hold that shareholders may be held individually liable for debts or damages of the corporations that they own when a shareholder exercised control over the corporation in such a manner so as to commit fraud, an illegal act, or a similarly unlawful act It is this last phrase - “similarly unlawful act” - that is new and that was not defined by the Ohio Supreme Court. This phrase is likely to be the subject of future litigation.
Our firm has had experience on both sides of this issue. It is clear that desired certainty in this area of the law is still lacking, and that the owners of corporate entities still face risks of being held personally liable for corporate debts despite the general rule to the contrary. The owners of small and medium sized businesses should be wary and should consider those steps needed to lessen this risk. Our attorneys are well versed in this subject and can help assess and lessen your risks.
Ohio Amends Exemption Statute Affecting Bankruptcy
The phrase “exemption” when used in bankruptcy refers to that property that a bankrupt debtor may keep even though he/she is going through bankruptcy. The property is thus “exempt” from the claims of creditors.
Ohio is an “opt-out” state with respect to exemptions available for persons filing bankruptcy. Ohio has chosen not to use the federal exemptions but instead adopts its own. On September 30, 2008, new legislation took effect that increased the amount of certain types of properties that debtors may retain even though they are going through bankruptcy. These changes in the law are prospective only and will apply only to bankruptcy cases filed on and after October 1, 2008.
The new law affects many exemptions. Among the most notable is the increase in the homestead exemption from $5,000 to $20,200, and an increase in the motor vehicle exemption from $1,000 to $3,225. For bankruptcy debtors, the exemption generally known as the “wild card” has increased from $400 to $1,075. The statute also exempts payments that a debtor receives for the child care tax credit and earned income credit.
The new law also provides that exemption amounts will be automatically adjusted every three years to accommodate changes in the consumer price index.
Our experienced bankruptcy attorneys can assist you in understanding the new exemption limits as they may effect bankruptcy or other debt relief alternatives.
New Commercial Court
Cuyahoga County will participate in an Ohio Supreme Court pilot program creating a commercial court. This will be a specialized court for the resolution of commercial disputes that is designed to avoid many of the practical difficulties faced by commercial entities in the Common Pleas Court system.
It is believed that two of the thirty six judges who now sit on the general division bench of the Common Pleas Court will become the commercial docket judges. Temporary rules that have been issued by the Common Pleas Court will govern the pilot program.
The temporary rules that will govern the Commercial Court defines the kinds of cases that will be heard by this Court. The rule lists many types of such cases that are too numerous to recite here. Employment and personal injury cases involving businesses will not be heard by the Commercial Court. The majority of other types of disputes that lay persons would think of as being “commercial” in nature will likely fall under the jurisdiction of this new court division. Only new cases filed on or after February 2, 2009 will be available for inclusion on this docket. Judges who will sit on the Commercial Court will receive special training under the supervision of the Ohio Supreme Court.
The rules aspire to the resolution of all commercial cases within 18 months of the date when the case was filed. More generally, it is hoped that the Commercial Court will reduce if not eliminate many of the frustrations encountered by commercial entities involved in litigation in the Common Pleas Court. These frustrations are primarily the result of incessant delays due to busy criminal dockets and lack of certainty, predictability, and consistency of results. The Commercial Court was designed with just these frustrations in mind.
