Publications

Illinois Bar Journal

The Magazine of Illinois Lawyers

July 2000Volume 88Number 7Page 398

July 2000 Illinois Bar Journal Cover Image

Corporations

The Undercapitalized Corporation and Illinois Corporate Veil-Piercing Law

By
Mark W. Page

One of the most litigated issues in corporate law is whether the corporate veil should be pierced to hold shareholders personally liable. In this article, the author examines undercapitalization law from Illinois and elsewhere and concludes that Illinois courts have not developed a coherent theory of undercapitalization as a justification for veil piercing.


In an article published in the Illinois Bar Journal more than 23 years ago, the author explores the defense of a disgruntled client sued personally on a corporate debt after being advised to incorporate his business to insulate himself from personal liability.1

Even more common for most lawyers is the disgruntled client who cannot collect her debt from an insolvent or bankrupt corporation and wants to look to the corporate shareholders whom she dealt with and trusted. As a result, questions of piercing the corporate veil to hold a shareholder personally liable frequently arise. In fact, a 1991 empirical study concludes that "[p]iercing the corporate veil is the most litigated issue in corporate law."2

Unfortunately for the lawyer counseling the disgruntled creditor, the corporate veil is relatively difficult to pierce in Illinois.3 At the outset, it should be understood that veil piercing is only a problem for shareholders of closely held corporations and for members of corporate groups (parent-subsidiary and other affiliated corporations).4

Illinois courts have consistently recognized the general rule of limited liability,5 a "bedrock principle" of corporate law.6 In Illinois, piercing the veil to hold a shareholder personally liable for corporate debts is an equitable doctrine that courts invoke "reluctantly," "with caution," and only after the creditor has met a "substantial burden."7

So when is the doctrine invoked? Despite its obvious importance to the corporate world, the thousands of cases on the issue, and steady commentary, this question continues to defy ready, coherent response.

Courts and commentators alike have lamented the confusion and imprecision surrounding the doctrine's application.8 Each case is decided on its peculiar facts. Except in straightforward cases, the tests and factors used by the courts do not really help practitioners predict when shareholders will be held personally liable for their corporation's debts. Far too often, courts simply list a lot of factors mechanically, see if they are present in the case, and rule accordingly. They never adequately explain how the various factors harmed the particular creditor to such an extent that forfeiture of limited liability is warranted.9 As a result, a coherent theory of veil piercing, rooted in the equities of specific recurring situations, is never developed.10

One area where Illinois courts seem particularly confused is in identifying the proper role of undercapitalization in veil-piercing jurisprudence. This confusion is surprising (and somewhat disturbing) given the frequent observation in Illinois case law that undercapitalization is a major consideration in determining whether to pierce the corporate veil.11 Generally speaking, the confusion stems from the Illinois courts' failure to understand the concept of undercapitalization and to evaluate it in terms of the harm it can cause creditors.

This article examines the proper role of undercapitalization in Illinois veil-piercing law. To get there, it first explains the nature and purpose of limited shareholder liability. Then it summarizes and analyzes the veil-piercing doctrine in Illinois. Here, it pauses to reiterate and join the universal plea of commentators that courts distinguish between tort and contract creditors.

After that, this article explains the concept of undercapitalization. What is it? How much capital is enough? When is it measured? When and why does it matter? With that as background, it looks at the approach to undercapitalization taken by Illinois courts. It concludes with a proposed framework for analysis of undercapitalization in the veil-piercing context.

I. Limited Liability for Shareholders

The rule of limited liability means that shareholders of a corporation are not personally liable for debts of the corporation. They stand to lose only the amount they invested in the corporation.12 Illinois courts have consistently acknowledged and endorsed the view that insulation from personal liability is a perfectly legitimate purpose of conducting business in the corporate form.13

The rule of limited liability is generally regarded as based on the entity theory of a corporation.14 In Illinois, a corporation is a legal entity separate and distinct from its shareholders and, generally, any parent or other affiliated corporation.15

Illinois courts have recognized it as such, and applied the rule of limited liability accordingly, in a variety of circumstances where the owners enjoyed extensive, even dominating, control over the corporation.

The separate identity of the corporation has been recognized in close corporations, where stock is held in a few hands or by a single shareholder.16 It also is recognized where one corporation wholly owns another and the two have mutual dealings.17

Corporations' separate identities are not disregarded even though they have the same shareholders, common officers and directors, and operate out of the same office space.18 Corporate separateness has been upheld where the sole shareholder of two corporations controlled and dominated them, supplied all of their equity financing, was the sole manager of each, and was even their landlord.19

The purpose of limited liability is to encourage investment in corporations and risk taking by entrepreneurs and others.20 As Justice Douglas eloquently put it, "[l]imited liability is the rule not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted."21

The consequence of limited shareholder liability is to shift some of the risks of a corporation's failure from shareholders to creditors.22 At its core, the equitable doctrine of veil piercing is concerned with identifying when it is unfair to require creditors to absorb such risks in the form of losses.23

II. Illinois Veil-piercing Law

In Illinois, courts have settled on the following test for piercing the corporate veil: "For a court to pierce the corporate veil, two principal requirements must be met: '(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.'"24

Unfortunately, this test is not particularly helpful. In the context of close corporations, the first prong of the test is easily met.25 Corporations are fictitious entities; they are necessarily controlled and dominated by people.26 Similarly, most veil-piercing cases involving parent-subsidiary and affiliated corporations concern closely held corporations controlled and dominated by the same shareholders.27

The second prong of the test, requiring fraud or the promotion of injustice or inequitable consequences, merely restates the starting point of the overall inquiry. It does not help to decide concrete cases.28

A. Focusing the Inquiry

The seventh circuit has derived some useful guidelines from Illinois precedent to flesh out the test. It has narrowed the inquiry from the usual laundry list of factors to four pertinent ones and focused their application on analysis of the first prong.

The factors are: "(1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own."29 Many courts and commentators would consider the last three factors as grounds for finding injustice, rather than control or domination.30

However, the seventh circuit has properly concluded that those factors are the proper focus of the first prong of the test. That prong is intended to identify undue and possibly harmful control or domination. Unlike many of the factors in the laundry lists, the last three factors provide the clearest, most concrete proof such control. The inquiry whether such control or domination was in fact abused and caused harm to creditors, which forms the heart of the veil-piercing inquiry, is what the second prong of the test is intended to address.

The seventh circuit has emphasized that the second prong of the test must be met independently.31 It has correctly required that the wrong suffered be something more than the mere prospect of an unsatisfied judgment.32

Use of the corporate form to perpetrate a fraud clearly suffices; the promotion of "injustice" or "inequitable consequences" means something less than fraud; but how much less?33 Quoting established Illinois precedent, the seventh circuit has elaborated to some extent that the nature of what must be shown is "[s]ome element of unfairness, something akin to fraud or deception or the existence of a compelling public interest...."34

In addition, drawing on appellate court precedent, the seventh circuit has required, at least, a nexus between the abuses of the corporate form and the alleged fraud or injustice.35 This seems eminently reasonable. Veil piercing is an equitable doctrine. Before limited liability is deemed forfeited, it seems only fair that the fraud or injustice complained of actually have some discernible connection to the abuses of the corporate form cited as grounds for holding the shareholder personally liable.

B. Describing the Wrong

While the seventh circuit's guidelines help focus the inquiry, the all important question still remains: what kind of conduct constitutes injustice sufficient to warrant forfeiture of limited liability?36

Review of Illinois precedent suggests the cases fall broadly into three groups (in addition to cases of outright fraud).37 The first is made up of cases in which shareholders or affiliates deplete the corporation of assets when it is insolvent, in danger of becoming insolvent, or rendered insolvent by the depletion.38

A subset of this group consists of those cases involving unjust enrichment of the shareholder.39 As the cases cited here show, unjust enrichment is less egregious conduct than asset stripping or siphoning. But it is still wrongful in that the shareholder derives a personal benefit, either directly or indirectly, through manipulation of the corporate form while the creditor ends up getting stiffed by the shareholder's insolvent corporation.40

The second group consists of cases in which the shareholder or affiliate misleads the creditor about the corporation's financial strength and consequently into extending credit. (Not surprisingly, some cases involve asset depletion or unjust enrichment in addition to misleading of creditors.)41 This group can be subdivided into two subgroups.

The first involves cases where the shareholder or corporate group misled the creditor into believing that another or additional persons or corporations would be liable on the debt.42 This can occur purposefully or through the failure to adhere to the corporate form sufficient to avoid confusion among corporations.

The second subgroup consists of cases where the shareholder or affiliate induced the extension of credit when it knew (or at least should have known) that it would not be able to repay the debt.43

The third group is made up of those cases in which the corporate form is manipulated to evade a statutory duty or common law obligation or otherwise to defeat or circumvent the law.44

C. Tort v Contract Creditors

It is well beyond the scope of this article to attempt to add significantly to the scholarship and growing body of case law (none of it from Illinois, unfortunately) arguing persuasively that veil-piercing issues are different for contract than tort credi creditors.45

Quoting from an influential law review article, the 10th circuit has observed: "The issues of public policy raised by tort claims bear little relationship to the issues raised by a contract claim. It is astonishing to find that this fundamental distinction is only dimly perceived by many courts, which indiscriminately cite and purport to apply tort precedents in contract cases and vice versa."46

Simply stated, the difference is that contract creditors are voluntary creditors, able to protect against risk through negotiation or pricing, while tort creditors are involuntary creditors, without similar means to protect against risk.

A line of Illinois cases has implicitly recognized this distinction in refusing to find injustice under the second prong of the veil-piercing test when the creditor was not confused as to with whom it was doing business.47 A few Illinois cases have reached this holding when the creditor was aware of the financial condition of the corporation at the time of contracting or extending credit.48

III. Undercapitalization

As noted, Illinois courts have singled out undercapitalization as a factor whose presence weighs heavily in favor of piercing.49 The overall thrust of this inquiry is whether the shareholders ever created a financially responsible corporation in the first place.50

A. What is Undercapitalization?

The concept of undercapitalization generally refers to the insufficiency of capital contributions by shareholders to the corporation.51 Inadequate capitalization "means capitalization very small in relation to the nature of the business of the corporation and the risks the business necessarily entails."52

The focus is on the amount of the corporation's equity capital (also called paid-in capital or shareholder equity). Equity capital is the excess of total assets over total liabilities.53 Such excess serves as a cushion of protection for creditors.54

Equity capital should be distinguished from working capital. Working capital consists of assets that are in relatively liquid form; cash, accounts receivable, inventory, and the like. Net working capital is the excess of current assets over current (as opposed to long-term) liabilities. The amount of net working capital is a barometer of a corporation's ability to pay its debts as they come due.55

An adequately capitalized corporation can experience a cash flow shortage and not be able to pay its current liabilities as they come due. For example, the corporation might have significant assets, such as real estate, that are not presently generating cash. The ability of a corporation to borrow against its equity capital often serves as a basis for obtaining working capital.56

Conversely, an inadequately capitalized corporation can have plenty of cash and therefore be able to meet all short-term liabilities. It will, however, be unable to meet its long-term liabilities when they come due.57 By the same token, it might not be able to satisfy an unanticipated liability like a creditor's judgment against it.

Of course, a shortage of working capital often is a telling sign of undercapitalization. It might very well mean the corporation has inadequate equity capital to obtain a loan to use as working capital to pay creditors.58

The point is that it is equity capital that counts when assessing whether a corporation is undercapitalized. If the corporation has adequate equity capital, it should be able to satisfy its creditors' claims.

In close corporations, capital contributions can, and for tax reasons often do, take the form of shareholder loans. If the corporation fails, these loans are subordinated to the debt of other creditors. Such loans are properly considered capital contributions,59 unless the shareholder abuses the technique by paying herself a preference.60

B. How Much Equity Capital is Enough?

There is no rigid standard for determining whether a corporation is adequately capitalized. Illinois courts have held that adequacy of capital is to be measured by the nature and magnitude of the corporate undertaking.61 The level of capitalization should be commensurate to the reasonably foreseeable risks of the business venture.62

Accordingly, the amount of capital that is adequate will vary from business to business. For example, a demolition company will require more equity capital than a printing broker. The capitalization levels of other companies in the same or a similar line of business are useful benchmarks.63

C. When is Equity Capital Measured?

The overwhelming majority of courts hold that the adequacy of a corporation's capitalization is to be measured as of the time of formation of the corporation.64 A few courts have stated that shareholders have a continuing obligation to provide adequate capital.65

Most disagree. They emphasize that a company adequately capitalized at its inception can later become undercapitalized for any number of legitimate reasons.66

Requiring shareholders to pump funds into a failing business would unduly discourage entrepreneurs from entering the marketplace in the first place or later attempting to save what may be a salvageable business.67

However, if the corporation later changes or expands the nature or magnitude of its business to increase the reasonably foreseeable risks, the shareholders may be required to infuse additional capital.68

D. What is the Significance of Undercapitalization?

Undercapitalization (at the time of a corporation's inception) is strong evidence that the shareholders never set up a legitimate corporation.69 It justifies an inference that they deliberately or recklessly created a business that would not be able to pay its debts.70

Undercapitalization should be distinguished from the corporation's subsequent insolvency, a fact present in most veil-piercing actions. Proof insolvency does not establish undercapitalization.71 As noted, an initially adequately capitalized corporation may later become undercapitalized or insolvent for legitimate reasons.72

Undercapitalization alone does not justify piercing the veil, however.73 The second prong of the veil-piercing test, requiring fraud or the promotion of injustice or inequitable consequences as a result of the undercapitalization, must independently be met.

However, since undercapitalization guts the corporation's ability from its inception to generate the working capital necessary to satisfy its debts, establishing undercapitalization makes it much easier for a creditor to show injustice.

Here again, the distinction between tort and contract creditors should be drawn. Numerous courts have refused to pierce the veil for contract creditors who knew or had the ability to find out about the corporation's undercapitalization.74 Similar concerns do not exist for tort creditors.75

Finally, since undercapitalization focuses on ensuring that corporations are financially responsible, shareholders can buy insurance as a viable substitute for equity capital.76

IV. Illinois Courts and Undercapitalization

Aside from implicitly recognizing that undercapitalization, in and of itself, does not justify veil piercing, Illinois courts have not followed the above majority approach when confronted with allegations of undercapitalization. Nor have they adopted any other approach. Consequently, no coherent view of undercapitalization has been developed.

For example, the court in People v V & M Industries77 analyzes undercapitalization in terms of whether the corporation had assets to perform at the time of contracting; which was six years after the corporation was incorporated. The real issue here was whether the state reasonably assumed the corporation had adequate assets to perform and whether injustice really existed, given that the state did not bother to get a guaranty from the shareholder.

Another example is the leading case on undercapitalization of Gallagher v Reconco Builders,78 where to show the requisite injustice, the court explained that the construction company's shareholder had defrauded the homeowner by submitting false affidavits to obtain draws from a construction escrow. This injustice, however, had nothing to do with the corporation's undercapitalization (or for that matter with any other abuse of the corporate form).

Perhaps the court believed the defrauded homeowner was a tort creditor who should not bear the risk of the corporation's undercapitalization. Its otherwise inapposite emphasis of fraud unrelated to undercapitalization (and the other abuses of the corporate form) certainly suggests it felt this way.

But if that was really what compelled the court to hold forfeiture of limited liability was warranted, it should have said so, making the necessary distinction between tort and contract creditors, instead of confusing its analysis by relying on an injustice (the shareholder's fraud) with no other nexus to the described undercapitalization.

A final example is Fentress v Triple Mining.79 There, the creditor contracted to provide trucking services and loaned the corporation funds at its inception to get off the ground. The shareholders argued that the creditor was not misled about their corporation's lack of assets. The court rejected the argument on the grounds that the creditor could reasonably have relied on the corporation having at least some paid-in capital with which to work.

But the creditor surely must have realized that the corporation had no money. Otherwise, why were its shareholders asking him for money? It seems that the creditor got exactly what he bargained for and should not have been permitted to pierce the veil.80

V. Conclusion

In assessing undercapitalization, Illinois courts should follow the guidelines set forth above. They should (i) determine how much equity capital the corporation had at the time it began doing business, (ii) determine how much was necessary for the business to meet its reasonably foreseeable risks, and (iii) identify whether any undercapitalization actually harmed the creditor's interests, taking into account whether the creditor is a tort or contract creditor.


1. See Ronald J. Broida, The History of the Development of the Remedy of "Piercing the Corporate Veil," 65 Ill B J 522 (1977).

2. Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L Rev 1036, 1036 (1991).

3. Stephen B. Presser, Piercing the Corporate Veil § 2.14 (West Group, 1999) (summarizing and analyzing Illinois veil piercing law).

4. See, e.g., Thompson, 76 Cornell L Rev at 1047. In his comprehensive empirical study, Professor Thompson found only nine veil piercing cases involving publicly held corporations; in none of them did the court decide to pierce. Id n71.

5. See, e.g., Main Bank of Chicago v Baker, 86 Ill 2d 188, 427 NE2d 94, 101 (1981) (affiliates); Loewenthal Secs. Co. v White Paving Co., 351 Ill 285, 184 NE 310, 313-14 (1932) (same); Superior Coal Co. v Department of Finance, 377 Ill 282, 36 NE2d 354, 358 (1941) (parent-subsidiary); Divco-Wayne Sales Fin. Corp. v Martin Vehicle Sales, Inc., 45 Ill App 2d 192, 195 NE2d 287, 289 (1st D 1963) (same); In re Estate of Wallen, 262 Ill App 3d 61, 633 NE2d 1350, 1357 (2d D 1994) (closely held corporation); Maguire v Holcomb, 169 Ill App 3d 238, 523 NE2d 688, 693 (5th D 1988) (same). See also In re Rehabilitation of Centaur Ins. Co., 158 Ill 2d 166, 632 NE2d 1015, 1018 (1994) (subsidiary cannot pierce its own veil to hold its parent liable for its obligations).

6. United States v Bestfoods, 524 US 51, 118 S Ct 1876, 1884-85 (1998).

7. See, e.g., Wallen, 633 NE2d at 1357 ("reluctantly"); Superior Coal, 36 NE2d at 360 ("with caution"); Kelsey Axle & Brake Div. v Presco Plastics, Inc., 187 Ill App 3d 393, 543 NE2d 239, 243 (1st D 1989) ("substantial burden"); Main Bank, 427 NE2d a at 102 ("equitable doctrine"); Macaluso v Jenkins, 95 Ill App 3d 461, 420 NE2d 251, 255 (2d D 1981) ("equitable remedy").

8. See, e.g., Berkey v Third Ave. Ry. Co., 244 NY 84, 155 NE 58, 61 (1926) (Cardozo, J.) (problem "is one that is still enveloped in the mists of metaphor"); Robert W. Hamilton, The Corporate Entity, 49 Texas L Rev 979, 979 (1971) ("A systematic analysis… is not readily discernible in the cases, and many courts continue to rely on metaphors to explain their results."); and Franklin A. Gevurtz, Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate Veil, 76 Oregon L Rev 853, 853 (1997) ("one of the most befuddled" areas of corporate law). See generally Harry G. Henn and John R. Alexander, Laws of Corporations § 146, at 344 n 2 (West Publishing Co., 3d ed 1983). But see Frank H. Easterbrook and Daniel R. Fischel, Limited Liability and the Corporation, 52 U Chi L Rev 89, 89 (1985) (arguing that, although piercing seems to happen "freakishly" and like "lightning"to be "rare, severe, and unprincipled," economic analysis explains the legal treatment of limited liability and veil piercing).

9. See Gevurtz, 76 Oregon L Rev at 855-58. See, e.g., People v V & M Indus., Inc., 298 Ill App 3d 733, 700 NE2d 746, 751-53 (5th D 1998).

10. See Secon Serv. Sys., Inc. v St. Joseph Bank & Tr. Co., 855 F2d 406, 414 (7th Cir 1988), in which Judge Easterbrook rightly complains: "Such an approach, requiring courts to balance many imponderables, all important but none dispositive and frequently lacking a common metric to boot, is quite difficult to apply because it avoids formulating a real rule of decision. This keeps people in the dark about the legal consequences of their acts, a result that is bad enough in one-of-a-kind fact situations like torts but that is surely worse in situations like this, where the unknowable 'rule' may affect every contract any Indiana corporation may undertake."

11. See, e.g., Jacobson v Buffalo Rock Shooters Supply, Inc., 278 Ill App 3d 1084, 664 NE2d 328, 332 (3d D 1996); Wallen, 633 NE2d at 1359; McCracken v Olson Cos., 149 Ill App 3d 104, 500 NE2d 487, 492 (1st D 1986); Gallagher v Reconco Builders, Inc., 91 Ill App 3d 999, 415 NE2d 560, 564 (1st D 1980); Amsted Indus., Inc. v Pollak Indus., Inc., 65 Ill App 3d 545, 382 NE2d 393, 399 (1st D 1978).

12. See Easterbrook and Fischel, 52 U Chi L Rev at 89-90; Thompson, 76 Cornell L Rev at 1039; Matter of Kaiser, 791 F2d 73, 75 (7th Cir 1986).

13. See, e.g., Wallen, 633 NE2d at 1357; Ted Harrison Oil Co. v Dokka, 247 Ill App 3d 791, 617 NE2d 898, 901 (4th D 1993); Maguire, 523 NE2d at 693.

14. See Henn and Alexander, Corporations § 146, at 345; 1 Fletcher Cyc Corp § 14 (West Group, 1999); Cathy S. Krendl and James R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Denver L J 1, 1 (1978); McCracken, 500 NE2d at 490; Davis v Haas & Haas Inc., 296 Ill App 3d 369, 694 NE2d 588, 590 (3d D 1998).

15. Centaur Ins., 632 NE2d at 1017.

16. See, e.g., Alpert v Bertsch, 235 Ill App 3d 452, 601 NE2d 1031, 1036 (1st D 1992); Amsted Indus., 382 NE2d at 396-97. See also Galler v Galler, 32 Ill 2d 16, 203 NE2d 577, 583-84 (1964) (sanctioning close corporations). Effective as of January 1, 1991, Illinois enacted the amendatory Close Corporation Act of 1990, 805 ILCS 5/2A.05 to 5/2A.60, which expressly sanctions close corporations and such practices as management of the corporation by the shareholders rather than a board of directors, id § 5/2A.45.

17. See Centaur Ins., 632 NE2d at 1017, citing Dregne v Five Cent Cab Co., 381 Ill 594, 46 NE2d 386, 391 (1943). See, e.g., Divco-Wayne Sales, 195 NE2d at 289-90; Logal v Inland Steel Indus., Inc., 209 Ill App 3d 304, 568 NE2d 152, 156-57 (1st D 1991); People v Parsons Co., 122 Ill App 3d 590, 461 NE2d 658, 664 (2d D 1984).

18. See Main Bank, 427 NE2d at 101, citing Superior Coal, 36 NE2d 354. See, e.g., Pederson v Paragon Pool Enters., 214 Ill App 3d 815, 574 NE2d 165, 168-70 (1st D 1991); Kelsey Axle, 543 NE2d at 241, 244-45; Sumner Realty Co. v Willcott, 148 Ill App 3d 497, 499 NE2d 554, 557 (5th D 1986). Main Bank, 427 NE2d at 101 (citation omitted), explains that such "practices are common and exist in most parent-subsidiary relationships."

19. See Amsted Indus., 382 NE2d at 397-99. See also Torco Oil Co. v Innovative Thermal Corp., 763 F Supp 1445, 1451 (ND Ill 1991), in which Judge Posner, sitting as a district judge, observes that it would place an undue burden on entrepreneurship to require shareholders of small start-up companies to adhere to the corporate form at the risk of forfeiting the invaluable privilege of limited liability, without which much entrepreneurship would be too risky to undertake in the first place.

20. See David H. Barber, Piercing the Corporate Veil, 17 Willamette L Rev 371, 371 (1981); Thompson, 76 Cornell L Rev at 1039; William P. Hackney and Tracey G. Benson, Shareholder Liability for Inadequate Capital, 43 U Pitt L Rev 837, 840-41 (1982); Easterbrook and Fischel, 52 U Chi L Rev at 97; Presser, Piercing the Corporate Veil § 1.03[1], at 1-16 to 1-17; Browning-Ferris Indus. of Illinois, Inc. v Ter Maat, 195 F3d 953, 959 (7th Cir 1999); Kaiser, 791 F2d at 75.

21. Anderson v Abbott, 321 US 349, 362 (1944).

22. See Easterbrook and Fischel, 52 U Chi L Rev at 103-04; Thompson, 76 Cornell L Rev at 1039-40; Hamilton, 49 Texas L Rev at 982; Presser, Piercing the Corporate Veil § 1.06, at 1-73. Some commentators refer to the shifting of risk from shareholder to creditor as "externalization of risk." See, e.g., Easterbrook and Fischel, 52 U Chi L Rev at 104.

23. See Barber, 17 Willamette L Rev at 371-72; Hamilton, 49 Texas L Rev at 982-85. See also William O. Douglas and Carrol M. Shanks, Insulation From Liability Through Subsidiary Corporations, 39 Yale L J 193, 195 (1929) ("On analysis the problem resolves itself into one of allocation of losses. The issue is whether the loss resulting from a contract or tort claim against the subsidiary will be placed on it or on the parent."). For a somewhat different perspective, see Easterbrook and Fischel, 52 U Chi L Rev at 109, in which the authors argue that veil piercing "cases may be understood, at least roughly, as attempts to balance the benefits of limited liability against its costs. Courts are more likely to allow creditors to reach the assets of shareholders where limited liability provides minimal gains from improved liquidity and diversification, while creating a high probability that a firm will engage in a socially excessive level of risk taking."

24. Wallen, 633 NE2d at 1357. Accord V & M Indus., 700 NE2d at 750; Jacobson, 664 NE2d at 331. The Seventh Circuit employs a nearly identical test when applying Illinois law. See, e.g., Hystro Prods., Inc. v MNP Corp., 18 F3d 1384, 1388-89 (7th Cir 1994), quoting Van Dorn Co. v Future Chem. & Oil Corp., 753 F2d 565, 569-70 (7th Cir 1985). Both Main Bank, 427 NE2d at 101, and Centaur Insurance, 632 NE2d at 1017-1018, in the context of affiliated and parent-subsidiary corporations, use slightly different formulations, whose differences are not substantive. See, e.g., Main Bank's formulation: "Generally, before the separate corporate identity of one corporation will be disregarded and treated as the alter ego of another, it must be shown that it is so controlled and its affairs so conducted that it is a mere instrumentality of another, and it must further appear that observance of the fiction of a separate corporate existence would, under the circumstances, sanction a fraud or promote injustice."

25. Hamilton, 49 Texas L Rev at 983.

26. Gevurtz, 76 Oregon L Rev at 862-64. The prong is useful only in the sense that it excludes passive, minority shareholders from liability. Id at 866.

27. See cases cited in notes 17 and 18, supra. See also Holland v Joy Candy Mfg. Corp., 14 Ill App 2d 531, 145 NE2d 101 (1st D 1957); Ampex Corp. v Office Elecs., Inc., 24 Ill App 3d 21, 320 NE2d 486 (1st D 1974); Hutchinson v Brotman-Sherman Theatres, Inc., 94 Ill App 3d 1066, 419 NE2d 530 (1st D 1981).

28. See Hamilton, 49 Texas L Rev at 983; Gevurtz, 76 Oregon L Rev at 862.

29. Van Dorn, 753 F2d at 570, followed on this point in Sea-Land Servs., Inc. v Pepper Source, 941 F2d 519, 521 (7th Cir 1991), and Hystro Prods., 18 F3d at 1389. While the first factor is of debatable significance (see criticisms in Gevurtz, 76 Oreg Oregon L Rev at 866-70), the other three are not. Illinois cases likewise focusing on the four factors or some close variant include: Snyder v Dunn, 265 Ill App 3d 891, 638 NE2d 744, 748 (1st D 1994); Melko v Dionisio, 219 Ill App 3d 1048, 580 NE2d 586, 595 (2d D 1991); McCracken, 500 NE2d at 491; Logal, 568 NE2d at 156; Pederson, 574 NE2d at 168; Stap v Chicago Aces Tennis Team, Inc., 63 Ill App 3d 23, 379 NE2d 1298, 1302 (1st D 1978). Other Illinois courts have continued to utilize laundry lists. See, e.g., V & M Indus., 700 NE2d at 751; Jacobson, 664 NE2d at 331; Wallen, 633 NE2d at 1357-58; Hills of Palos Condo. Ass'n v I-Del, Inc., 255 Ill App 3d 448, 626 NE2d 1311, 1333 (1st D 1993).

30. See, e.g., Gevurtz, 76 Oregon L Rev at 864-65 (criticizing Sea-Land Services court for using above four factors to determine control and domination).

31. Sea-Land Servs., 941 F2d at 522-25, followed in Hystro Prods., 18 F3d at 1390, and Liberty Mut. Ins. Co. v M & O Springfield Co., 1998 WL 894654, at *3 (7th Cir).

32. Hystro Prods., 18 F3d at 1390, following Sea-Land Servs., 941 F2d at 522-23.

33. Sea-Land Servs., 941 F2d at 522.

34. Sea-Land Servs., 941 F2d at 523, and Hystro Prods., 18 F3d at 1390, both quoting Pederson, 574 NE2d at 169. Accord V & M Indus., 700 NE2d at 751; Wallen, 633 NE2d at 1357.

35. See Van Dorn, 753 F2d at 570, citing Macaluso, 420 NE2d at 256-57, for the proposition that: "The separate corporate identities will be disregarded only if the condition claimed to be unjust to creditors is a result of the abuses of the corporate form"; and Sea-Land Servs., Inc. v Pepper Source, 993 F2d 1309, 1313 (7th Cir 1993), citing South Side Bank v T.S.B. Corp., 94 Ill App 3d 1006, 419 NE2d 477, 480 (1st D 1981), in recognizing a "requirement that a nexus exist between [the creditor's] injuries and the fraud or injustice committed by [shareholder]." In Macaluso, 420 NE2d at 257, the court refused to pierce the veil to hold an officer of the corporation liable when any commingling on her part only increased the corporation's assets. Accord Froehlich v J.R. Froehlich Mfg. Co., 93 Ill App 3d 179, 416 NE2d 1134, 1137-38 (1st D 1981) (no injustice from sole shareholder using his extensive authority over corporation to dispose of checks payable to corporation as he deemed fit, where no indication he used checks for own purposes). See also Browning-Ferris, 195 F3d at 960-61, holding failure to keep corporate minutes did not warrant forfeiture of limited liability because "penalties should be proportioned to the gravity of the misconduct being penalized." The Illinois Supreme Court's analysis in Centaur Insurance, 632 NE2d at 1017-18, also supports a nexus requirement as it emphasizes that persons seeking to pierce the corporate veil must have been "injured due to their reliance on the existence of a distinct corporate entity."

36. The Seventh Circuit has set forth the following illustrative cases where failure to pierce would: "unfairly enrich one of the parties; allow a parent corporation, that had created a subsidiary's liabilities and was the cause of the subsidiary's inability to meet them, to escape responsibility; allow former partners to ignore obligations; or uphold a corporate arrangement to keep assets in a liability-free corporation while placing liabilities on an asset-free corporation" Hystro Prods., 18 F3d at 1390 (citations omitted). It has also observed, "Stock control and the existence of common officers and directors are generally prerequisites to the piercing of the corporate veil although these factors alone will not suffice." Id at 1389 (citation omitted). As a general rule, the veil piercing doctrine will not be applied to benefit a shareholder or affiliate. See, e.g., Centaur Ins., 632 NE2d at 1018; Superior Coal, 36 NE2d at 360.

37. For a case involving outright fraud, see the oft-cited Gallagher v Reconco Builders, 415 NE2d at 565. Gallagher is analytically unsatisfying in that the fraud (falsely swearing on contractor's affidavits to obtain release of funds and lying to the other party to obtain further payments) is unrelated to an abuse of the corporate form. (Veil piercing seems justified in Gallagher, though, in that the corporation was unable to satisfy the plaintiff's claims, yet the sole shareholder had repeatedly withdrawn funds from the corporation for his personal use at a time when the corporation had significantly expanded the magnitude of its business and needed additional capital.) A better example is People v Pintozzi, 50 Ill 2d 115, 277 NE2d 844, 853 (1971), which upheld shareholder liability based on the finding that the shareholders used the corporate structure as a device to commit tax fraud. Another good example is Hutchinson v Brotman-Sherman Theatres, Inc., 94 Ill App 3d 1066, 419 NE2d 530, 536, 538-39 (1st D 1981), where a corporation was set up and maintained as an asset-less front to insulate its affiliate from contractual liability, while the affiliate took over the contract and reaped all its benefits. To similar effect, see Holland v Joy Candy Mfg., 145 NE2d at 103. See also Federal Ins. Co. v Maritime Shipping Agencies, Inc., 64 Ill App 3d 19, 380 NE2d 873, 881 (1st D 1978) (shareholders created new corporation to take over business and assets of old corporation to avoid creditors of old corporation's bankrupt principal).

38. See, e.g., Dokka, 617 NE2d at 902; People v Progressive Gen. Ins. Co., 44 Ill 2d 392, 256 NE2d 338, 342 (1969); Macaluso, 420 NE2d at 256 (defendant Jenkins); Loy v Booth, 16 Ill App 3d 1077, 307 NE2d 414, 417 (2d D 1974). See also Van Dorn, 753 F2d at 572; Central States, Southeast and Southwest Areas Pension Fund v Gaylur Prods., Inc., 66 Ill App 3d 709, 384 NE2d 123, 128 (1st D 1978) (veil piercing claim stated). Hutchinson, 419 NE2d 530, also involved an element of asset stripping, if not outright fraud on the creditor. Other cases, in refusing to pierce, have emphasized that the shareholder did not "minimize its assets to the detriment of his creditors." Wallen, 633 NE2d at 1359 (shareholder infused cash into corporation). Accord Froehlich, 416 NE2d at 1138; Macaluso, 420 NE2d at 257 (commingling by defendant Zecca increased corporation's assets); Kelsey Axle, 543 NE2d at 245.

39. See, e.g., McCracken, 500 NE2d at 492 (undercapitalized corporation stiffed its attorney, but shareholder personally reaped benefit of attorney's services); B. Kreisman & Co. v First Arlington Nat'l Bank, 91 Ill App 3d 847, 415 NE2d 1070, 1073 (2d D 1980) (corporation stiffed creditor for equipment, but shareholder reaped benefit of equipment through sale of corporation including equipment); State Bank of Cerro Gordo v Benton, 22 Ill App 3d 1007, 317 NE2d 578, 580 (4th D 1974) (shareholder of undercapitalized corporation preferred himself over other creditors); Finazzo v Mid-States Fin. Co., 63 Ill App 2d 161, 211 NE2d 290, 296-97, 298 (5th D 1965) (shareholder manipulated corporation's accounting to minimize bonus payable to manager and after manager left dispersed corporation's assets to shareholder's other corporations). See also Sea-Land, 993 F2d at 1312.

40. The seventh circuit has described unjust enrichment in this context as "the receipt of money or its equivalent under circumstances that, in equity and good conscience, suggest that it ought not to be retained because it belongs to someone else." Sea-Land, 993 F2d at 1312. There is typically an element of unfair self-dealing by the shareholder in the cases finding injustice based on unjust enrichment.

41. See, e.g., Berlinger's, Inc. v Beef's Finest, Inc., 57 Ill App 3d 319, 372 NE2d 1043, 1048, 1049 (1st D 1978) (asset stripping plus inability to repay debt at time of contracting); V & M Indus., 700 NE2d at 751-53 (same); Eastern Seafood Co. v Barone, 252 Ill App 3d 871, 625 NE2d 664, 666-67, 670 (1st D 1993) (asset siphoning plus confusion between shareholder and corporation); B. Kreisman, 415 NE2d at 1073 (unjust enrichment plus confusion and opportunistic switching between individual and corporate status). See also Snyder, 638 NE2d at 748 (veil piercing claim stated based on allegations of asset siphoning plus confusion between shareholder and corporation). Hutchinson v Brotman-Sherman Theatres, 419 NE2d 530, to the extent it falls short of being a case of outright fraud, could also be placed in this category.

42. See, e.g., Ampex Corp. 320 NE2d at 487-88, 489; Wikelund Wholesale Co. v Tile World Factory Tile Warehouse, 57 Ill App 3d 269, 372 NE2d 1022, 1024 (1st D 1978). Holland v Joy Candy, 145 NE2d 101, to the extent it did not rise to the level of a fraud case, could be classified in this category. See also FMC Fin. Corp. v Murphree, 632 F2d 413, 423-24 (5th Cir 1980) (Illinois law); Torco Oil, 763 F Supp at 1451-52.

43. See Fentress v Triple Mining, Inc., 261 Ill App 3d 930, 635 NE2d 102, 108 (4th D 1994). See also Hystro Prods., 18 F3d at 1392.

44. See, e.g., Gromer, Wittenstrom & Meyer, P.C. v Strom, 140 Ill App 3d 349, 489 NE2d 370, 374 (2d D 1986) (improper use of corporation to circumvent law restricting ability to obtain judgments by confession); People v Illinois State Troopers Lodge No. 41, 7 Ill App 3d 98, 286 NE2d 524, 526-27 (4th D 1972) (improper formation of corporation to evade laws and regulations prohibiting state troopers from soliciting or collecting contributions); Geittmann v Geittmann, 126 Ill App 3d 470, 467 NE2d 297, 301-02 (5th D 1984) (improper manipulation of corporation to avoid payment of maintenance).

45. The scholarship is summarized and analyzed in Phillip I. Blumberg, The Law of Corporate Groups: Tort, Contract, and other Common Law Problems in the Substantive Law of Parent and Subsidiary Corporations §§ 4.03.1, 6.01 (Little, Brown & Co., 1987) (hereinafter Law of Corporate Groups: Substantive Law), and Presser, Piercing the Corporate Veil § 1.05[3]. Notable cases include, to name only a few: Co-Ex Plastics, Inc. v Alapak, Inc., 536 S2d 37, 39 (Ala 1988); Laya v Erin Homes, Inc., 177 W Va 343, 352 SE2d 93, 100 (1986); Lucas v Texas Indus., Inc., 696 SW2d 372, 375 (Tex 1984); G.G.C. Co. v First Nat'l Bank of St. Paul, 287 NW2d 378, 384 (Minn 1979); Browning-Ferris, 195 F3d at 959-60 (Illinois law); Perpetual Real Estate Servs., Inc. v Michaelson Properties, Inc., 974 F2d 545, 550 (4th Cir 1992); Secon Serv., 855 F2d at 413-14; Edwards Co. v Monogram Indus., Inc., 730 F2d 977, 981-84 (5th Cir 1984); J-R Grain Co. v FAC, Inc., 627 F2d 129, 135 n 13 (8th Cir 1980). Cf Consumer's Co-op v Olsen, 142 Wis 2d 465, 419 NW2d 211, 216-17, 221-23 (1988). But see Labadie Coal Co. v Black, 672 F2d 92, 100 (DC Cir 1982); Kinney Shoe Corp. v Polan, 939 F2d 209, 212-13 (4th Cir 1991); S.A.M. Elecs., Inc. v Osaraprasop, 1998 WL 122989, at *8 (ND Ill) (Illinois law).

46. Cascade Energy & Metals Corp. v Banks, 896 F2d 1557, 1577 (10th Cir 1990), quoting Hamilton, 49 Tex L Rev at 984-85.

47. See Loewenthal Secs., 184 NE at 313-14; John Sexton & Co. v Library Plaza Hotel Corp., 270 Ill App 107, 110-11 (1st D 1933); Divco-Wayne Sales, 195 NE2d at 290; Flight Kitchen, Inc. v Chicago Seven-Up Bottling Co., 22 Ill App 3d 558, 317 NE2d 663, 668-69 (1st D 1974); Amsted Indus., 382 NE2d at 398; Bankers Tr. Co. v Chicago Title & Tr. Co., 89 Ill App 3d 1014, 412 NE2d 660, 665 (1st D 1980); Main Bank, 427 NE2d at 102. See also C M Corp. v Oberer Dev. Co., 631 F2d 536, 540 (7th Cir 1980).

48. See Macaluso, 420 NE2d at 257; Maguire, 523 NE2d at 690, 693.

49. Professor Thompson's study suggests that undercapitalization has played a relatively modest role in veil piercing law, but that when present, piercing often occurs. Thompson, 76 Cornell L Rev at 1065-67.

50. See Radaszewski v Telecom Corp., 981 F2d 305, 308-09 (8th Cir 1992). Accord 1 Fletcher Cyc Corp § 41.33, at 648-49 & n 2 (citing cases).

51. Matter of Fabricators, Inc., 926 F2d 1458, 1469 (5th Cir 1991). Fabricators is a bankruptcy case addressing whether an insider loan should be equitably subordinated to general unsecured claims because the debtor corporation was undercapitalized. That inquiry is very similar to whether the corporate veil should be pierced because of undercapitalization, and the general discussion of undercapitalization principles is equally applicable. Consumer's Co-op, 419 NW2d at 215.

52. J-R Grain, 627 F2d at 135, quoting Hamilton, 49 Tex L Rev at 985-86. Accord 1 Fletcher Cyc Corp § 41.33, at 652 & n 7 (citing cases).

53. Matter of Lifschultz Fast Freight, 132 F3d 339, 350 (7th Cir 1997) (bankruptcy case addressing equitable subordination of shareholder loan because of undercapitalization).

54. Id. See also Gallagher, 415 NE2d at 565; Pierson v Jones, 102 Idaho 82, 625 P2d 1085, 1087 (1981). See generally Hackney and Benson, 43 U Pitt L Rev at 890-91.

55. Lifschultz Fast Freight, 132 F3d at 350.

56. Id.

57. Id.

58. Id.

59. O'Hazza v Executive Credit Corp., 246 Va 111, 431 SE2d 318, 321 (1993); Hickman v Hyzer, 261 Ga 38, 401 SE2d 738, 740 (1991). Accord 1 Fletcher Cyc Corp § 41.33, at 651-52. See also Alpert, 601 NE2d at 1033-34, 1036 (counting shareholder's subordinated debt as capital).

60. Hickman, 401 SE2d at 740. See, e.g., State Bank, 317 NE2d at 580.

61. See Jacobson, 664 NE2d at 332, quoting Gallagher, 415 NE2d at 564.

62. In re Silicone Gel Breast Implants Prods. Liability Litigation (MDL 926), 837 F Supp 1128, 1137-38 (ND Ala 1993); Labadie Coal, 672 F2d at 99. Accord 1 Fletcher Cyc Corp § 41.33, at 650. See generally Hackney and Benson, 43 U Pitt L Rev at 891-898. See also Gevurtz, 76 Oregon L Rev at 890-96 (setting forth approach focusing on requiring adequate working capital to pay short-term creditors and adequate insurance to pay tort creditors).

63. Laya, 352 SE2d at 101. Accord Easterbrook and Fischel, 52 U Chi L Rev at 113. See generally Barber, 17 Willamette L Rev at 392-94.

64. See, e.g., J-R Grain, 627 F2d at 135; Secon Serv., 855 F2d at 416; Birbara v Locke, 99 F3d 1233, 1241 (1st Cir 1996); Consumer's Co-op, 419 NW2d at 218-19; Pierson, 625 P2d at 1087; O'Hazza, 431 SE2d at 321; Real Colors, Inc. v Patel, 39 F Supp 2d 978, 993 (ND Ill 1999) (Illinois law). Accord Hackney and Benson, 43 U Pitt L Rev at 898-99; Hamilton, 49 Texas L Rev at 986; 1 Fletcher Cyc Corp § 41.33, at 652 & n 8 (citing cases). This point is treated somewhat differently in the equitable subordination context where the question is the proper treatment of insider claims against the bankrupt corporation, not whether the insiders will be held personally liable for corporate debt. See Lifschultz Fast Freight, 132 F3d at 351-52.

65. See DeWitt Truck Brokers, Inc. v W. Ray Flemming Fruit Co., 540 F2d 681, 686 (4th Cir 1976); Laya, 352 SE2d at 101. Accord Barber, 17 Willamette L Rev at 396; Gevurtz, 76 Oregon L Rev at 893-94.

66. See Pierson, 625 P2d at 1087. See, e.g., Scott v AZL Resources, Inc., 107 NM 118, 753 P2d 897, 901 (1988) (operation of business at loss); Norris Chem. Co. v Ingram, 139 Ariz 544, 679 P2d 567, 570, 571 (App Ct 1984); Birbara, 99 F3d at 1241 (change in tax laws); United States v Fidelity Capital Corp., 920 F2d 827, 839 (11th Cir 1991) (poor investment decisions). Accord Blumberg, Law of Corporate Groups: Substantive Law § 11.12, § 19.12, at 471; 1 Fletcher Cyc Corp § 41.33, at 652 & n 9 (citing cases).

67. See Secon Serv., 855 F2d at 416. Cf Torco Oil, 763 F Supp at 1451. See also Blumberg, Law of Corporate Groups: Substantive Law § 19.12, at 471.

68. Consumer's Co-op, 419 NW2d at 219. Accord 1 Fletcher Cyc Corp § 41.33, at 652-53. See, e.g., Gallagher, 415 NE2d at 565. Conversely, a corporation initially undercapitalized may later become adequately capitalized through business successes or additional infusions of capital. Hackney and Benson, 43 U Pitt L Rev at 898. For obvious reasons, this issue does not come up much.

69. See Browning-Ferris, 195 F3d at 961 ("The cases in which undercapitalization has figured in the decision to pierce the corporate veil are ones in which the corporation had so little money that it could not and did not actually operate its nominal business on its own."); Chicago Dist. Council of Carpenters Pension Fund v Ceiling Wall Sys., Inc., 1998 WL 773993, at *9 (ND Ill) (Illinois law), quoting Heyman v Beatrice Co., 1995 WL 151872, at *8 (ND Ill); O'Hazza, 431 SE2d at 321. Accord Blumberg, Law of Corporate Groups: Substantive Law § 20.10, at 525. See also Gallagher, 415 NE2d at 564 ("A corporation's capitalization is a major consideration in determining whether a legitimate separate corporate entity was maintained."). Cf In re Vermont Toy Works, Inc., 135 BR 762, 771 (D Vt 1991) (adequate capitalization required to prevent "implicit misrepresentation that the corporation has funds for creditors"); Blumberg, supra, § 19.12, at 472, § 20.10, at 524-25 (undercapitalization can also be viewed as form of deceptive conduct misleading creditors).

70. Radaszewski, 981 F2d at 308; Browning-Ferris, 195 F3d at 961.

71. Scott, 753 P2d at 901; Norris Chem., 679 P2d at 571. Accord Blumberg, Law of Corporate Groups: Substantive Law § 19.12, at 471, § 19.13. The point of insolvency has independent significance, however. Close to or at this point, insider transactions are subject to close scrutiny, and shareholder officers and directors are generally regarded as owing fiduciary duties of some sort to creditors. See Hickman, 401 SE2d at 740. See also Technic Eng'g, Ltd. v Basic Envirotech, Inc., 53 F Supp 2d 1007, 1010-11 (ND Ill 1999) (discussing fiduciary duties that officers and directors of insolvent Illinois corporation owe to creditors); In re Reuscher, 169 BR 398, 402 (BR SD Ill 1994). See generally In re Ben Franklin Retail Stores, Inc., 225 BR 646, 652-56 (BR ND Ill 1998) (excellent discussion of fiduciary duty issue), recommendation accepted, 2000 WL 28266 (ND Ill).

72. See note 66, supra. However, asset stripping rendering the corporation undercapitalized or insolvent should result in veil piercing. Blumberg, Law of Corporate Groups: Substantive Law § 10.07, § 19.09.1, § 19.12, at 471-72.

73. See, e.g., Gallagher, 415 NE2d at 564 (some element of injustice, fraud, or fundamental unfairness also required); Browning-Ferris, 195 F3d at 961 ("Undercapitalization is rarely if ever the sole factor in a decision to pierce the corporate veil, and we think it best regarded simply as a factor helpful in identifying a corporation as a pure shell…."); Secon Serv., 855 F2d at 416; DeWitt Truck, 540 F2d at 687; Hornsby v Hornsby's Stores, Inc., 734 F Supp 302, 308 (ND Ill 1990) (Illinois law); Hickman, 401 SE2d at 740; Paul Steelman, Ltd. v Omni Realty, 110 Nev 1223, 885 P2d 549, 550 (Nev 1994); Vermont Toy Works, 135 BR at 771. Accord Hackney and Benson, 43 U Pitt L Rev at 883-90; Gevurtz, 76 Oregon L Rev at 881-87; Presser, Piercing the Corporate Veil § 1.05[2].

74. See, e.g., Macaluso, 420 NE2d at 257; Browning-Ferris, 195 F3d at 960 (Illinois law); Brunswick Corp. v Waxman, 599 F2d 34, 36 (2d Cir 1979); Becherer v Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 F3d 1054, 1064 (6th Cir 1995); Fisser v Int'l Bank, 282 F2d 231, 239-40 (2d Cir 1960); Paul Steelman, Ltd., 885 P2d at 551; LaSalle Bank Northbrook v American Speedy Printing Ctrs., Inc., 1992 WL 208975, at *5 (ND Ill) (Illinois law); Union Pac. R.R. Co. v Midland Equities Inc., 45 F Supp 2d 701, 709 (ED Mo 1999). See also Bostwick-Braun Co. v Szews, 645 F Supp 221, 226-27 (WD Wis 1986), and Consumer's Co-op, 419 NW2d at 216, 221-23, which find waiver and estoppel in such circumstances; HystroProds., 18 F3d at 1393, questions whether Illinois courts would recognize such an approach. But see Fentress, 635 NE2d at 108 (contract creditor entitled to rely on corporation having at least some equity capital); Kinney Shoe, 939 F2d at 212-13 (any requirement contract creditors investigate corporation's capitalization not applicable when shareholder sets up shell corporation and invests nothing in it); DeWitt Truck Brokers, 540 F2d at 686 n13 (any such requirement inapplicable when creditor does not rely on corporation's capitalization but receives assurance from shareholder of personal liability); Minnesota Power v Armco, Inc., 937 F2d 1363, 1368 (8th Cir 1991) (in certain circumstances shareholders with special knowledge may have duty to disclose financial condition of corporation); Labadie Coal, 672 F2d at 100 (unsophisticated contract creditors not presumed to have knowingly assumed risk of corporation's undercapitalization); Laya, 352 SE2d at 100 (same); Easterbrook and Fischel, 52 U Chi L Rev at 113 (in small credit transactions corporation should have duty to notify creditors of any unusual capitalization).

75. See Cascade Energy, 896 F2d at 1577; United States v Jon-T Chems., Inc., 768 F2d 686, 693 (5th Cir 1985). Accord Hamilton, 49 Tex L Rev at 988; Easterbrook and Fischel, 52 U Chi L Rev at 113.

76. Radaszewski, 981 F2d at 308-09. See also Dregne, 46 NE2d at 392 (cab company's compliance with statutory requirement of minimum insurance coverage defeated claim of injustice from company's undercapitalization); Browning-Ferris, 195 F3d at 960 (potential victims of corporation's hazardous activities can be protected by requiring corporation to post bond). Cf Jacobson, 664 NE2d at 332 (lack of insurance not sufficient basis for piercing). See generally Barber, 17 Willamette L Rev at 394-95; Easterbrook and Fischel, 52 U Chi L Rev at 107-09; Gevurtz, 76 Oregon L Rev at 892-96.

77. 700 NE2d at 751.

78. 415 NE2d at 564-65. For an explanation why veil piercing was appropriate in Gallagher, see note 37, supra.

79. 635 NE2d at 107-08.

80. Although the court states that the shareholders tried to obtain repayment in their own names of other monies owed the corporation, id at 108, there is no indication in the opinion that the shareholders obtained repayment or that the creditor was harmed in any way by their attempt.



ABOUT THE AUTHOR

Mark W. Page <Mark_Page@em.fcnbd.com> is an attorney in the law department of Bank One, NA. He is a former law clerk to the Hon. Bohdan A. Futey, United States Court of Federal Claims (1992-92), and to the Hon. S. Martin Teel, Jr., U.S. Bankruptcy Court for the District of Columbia (1992-93). He is a 1991 cum laude graduate of the University of Minnesota Law School, where he eas an editor of the Minnesota Law Review, and a 1986 graduate of South Carolina College, the honors college of the University of South Carolina. The views expressed in this article are his and not necessarily those of his employer.


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