When another business owes you money and you’ve exhausted all your collection options (such as offering payment arrangements, sending letters, even hiring a collection agency), what else can be done? What if the company closes its doors? Can its owners or officers be held personally liable for the debt that is owed to your business?
Sometimes, yes. Especially if it is determined by a court that an owner or officer(s) used the “veil” of the corporation structure to shield themselves from debt responsibility. When a court rules that such individuals are personally liable, it is called “piercing the corporate veil.”
A recent case in Louisiana illustrates this. In a February 22, 2011 decision by the U.S. Court of Appeals, Fifth Circuit (New Orleans, LA), the court affirmed a prior District Court’s decision which determined that a contract brokering company and its sole owner “were unjustly enriched at the expense of [another company]. In reaching this conclusion, the district court held that it was appropriate under Louisiana law to pierce the corporate veil because [the owner of the contract brokerage company] acted as the alter ego of [his] corporation and used [it] to practice fraud or deceit.”
At issue was the fact that the owner of the contract brokering company pocketed money in the form of unauthorized commissions, which he was sued for. Although he attempted to hide behind the corporate structure of his company, the court determined that there was no real distinction between it and him. The ruling ultimately left him personally liable for the debt owed to the company that hired his services.
If you’re attempting to collect money from a defunct company, you may be able to pierce its corporate veil by seeking a court judgment against its owners. In doing so, be aware that the court will look at the following factors before ruling in your favor:
- whether the company engaged in fraudulent behavior
- whether the company failed to follow corporate formalities
- whether the company was inadequately capitalized
- whether one person or a small group of closely related people were in complete control of the company
If you intend to seek a court order to pierce a corporate veil, it is critical to retain the services of an expert business attorney.
The Jayaram Law routinely and successfully assists its clients in their business-to-business (b2b) collection needs. We take pride in obtaining payment on accounts receivables without fracturing critical business relationships or engaging in time-consuming and costly litigation efforts.
If you need business debt collection services conducted in a professional manner, contact our B2B (business-to-business) debt collection law firm by calling 312.454.2859 or visiting www.jayaramlaw.com.