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Piercing The Corporate Veil

We frequently get asked by new clients about piercing the corporate veil on owner-operated companies that go out of business owing money. Everyone's heard about someone else piercing the veil to create personal liability for business debts and getting paid. These 'stories' make it sound simple and a highly effective method for debt collection.

Unfortunately, this is more myth than reality. The truth is that it is so expensive and uncertain to pierce the corporate veil that our clients rarely try.

 One of the main reasons small business owners incorporate or form an LLC (limited liability company) is to protect their personal assets from the liabilities that their companies create. This legal structure creates an entity separate from the individual. However, if the owner co-mingles their personal financial transactions with their company transactions, then you can argue that the company is not truly separate from the individual. If you prevail in court with this argument, you have pierced the corporate veil and the owner is now personally liable for the money the business owes creditors.

Many (or most?) small business owners will pay some personal expenses from the corporate account since they are using pre-tax dollars and the expense reduces their tax burden. Meals, memberships, family cell phones and gasoline purchases, and subscriptions are common deductions. Others get more aggressive, paying home utilities, credit card bills, and other home improvement expenses from the business banking accounts. This may be by design to lower tax liabilities, or simply sloppiness where the owner treats the business checking account as if it was their personal money.

 The problem in piercing the corporate veil is we don't know to what extent this co-mingling has occurred without getting to review all of the company's financial transactions.  As described in this article by attorney Paul Porvaznik, we usually cannot know if there are grounds to pierce the corporate veil until after we have a judgment and it may even require a separate lawsuit. After getting a judgment, a debtor examination can be scheduled where we look for evidence of co-mingling.  This can be easy if the debtor’s check register is available and the payees on checks are indicative of personal expenses.

But, it is rarely this simple.  Individuals have to be personally served to appear at debtor exams.  This can be difficult, requiring multiple postponements and sometime expensive stakeouts.  They frequently miss the exams so they have to be rescheduled multiple times, each one requiring personal service to notify of the examination time.  They do not always bring all the documentation, requiring more rescheduling and appearances.  (See our 5 minute video on the judgment collection process for more information).

If the check register does not clearly show co-mingling transactions, further investigation is required.  All the company’s financial records need to be obtained.  A professional needs to be hired to review the information and identify violating transactions. This could cost as little as $2,000 or more than $25,000 for larger owner-operated businesses.  All too often this process is stymied by the debtor claiming the records no longer exist.

If we are successful in getting evidence of co-mingling, we need to get back in front of the judge.  The case needs to be made that the co-mingling is sufficient to pierce the veil and create personal liability.  This means more court fees, hearings, and attorney time.  And even if we are successful, we still do not know if the business owner has personal assets available to pay off the judgment.  If the business was their primary source of income, they may be under severe financial distress for many years and therefore your judgment will not get collected.

Many debt collection litigation attorneys will not want to take cases like this on a pure contingency basis unless there is strong evidence of eventual success.  They know a lot of time and effort will be required and only a very small percentage of cases will result in piercing the veil AND finding personal assets that can be seized to pay the judgment.

At our commercial collection agency, we advise clients that if they want to try to pierce the corporate veil on marginal or difficult cases, they should be ready to spend a minimum of $10,000 and it could easily run $25,000 to $75,000 in complex cases where the debtor clearly has other personal and business interests that they are trying to protect.  And there is no guaranty of success in piercing the veil and/or ultimately collecting any money. Thus, this investment can only be justified when very large amounts are owed, the individual has personal assets available to pay the debt, and we have strong anecdotal suspicion of significant co-mingling. Since all of these conditions are rarely met when we are asked about piercing the veil, our clients rarely attempt it.

Recently I wrote about a simple personal guaranty that has frequently saved our client from significant losses. Despite all you may have heard about piercing the corporate veil, if you don't get a personal guaranty in advance, you probably won’t attempt to pierce the veil due to the cost and uncertainty.  If you want the business owner’s personal assets as a secondary source of repayment, get a personal guaranty.

What Do The CFPB, Wild West, And House Of Representatives Have In Common?

There just might be a new Deputy in town! This past November, the House Financial Services Committee approved 6 bills that could possibly add sorely needed oversight and accountability to the Consumer Financial Protection Bureau (CFPB).

To date, it has been pretty much like the Wild West of regulation. The CFPB and its posse of 100s have been running roughshod from California to Florida to Maine, resembling a lynch mob looking for any culprit just happening to be in the financial services industry.

I’d say that they’ve found a culprit or 2 that needed to be lynched, but at what expense? How many people have been unnecessarily shot and wounded?  And, before the lynching, wouldn’t justice have been better served with a judge and/or a jury of some kind?

Well that may be a little facetious of a description, but maybe not.  Honestly, I feel certain that 98% of the people in the CFPB likely do a good job and try to do the right thing. That’s quite a coincidence, because 98% of the financial industry is also made up of good people that do a good job and try to do the right thing.

So thank goodness for consumers,  there is now a serious move to lasso some of the power from the CFPB and make sure it has appropriate oversight and accountability.

Out of the six bills passed, these three might be the most workable:

1. The Responsible Consumer Financial Protection Regulation Act of 2013. This bill would establish a five person decision making commission.
2. The Bureau of Consumer Financial Protection Accountability and Transparency Act of 2013. This bill would bring the responsibility of funding to Congress and away from the Federal Reserve.
3. The Consumer Financial Protection Safety and Soundness Improvement Act of 2013. This bill would allow The Financial Stability Oversight Council to overrule the CFPB with a majority vote.

My hope is that the CFPB will handcuff the financial industry culprits, dispense the posse to go back to herding cattle, and set up a structure where the financial services industry can wake up all of the sleepy towns in the Wild West, and all of America.

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Martin Sher, Co-CEO of AmSher Collection Agency and a past president of ACA International, is the author of the Collector’s Pledge. Hundreds of thousands of collectors all over the world have signed this unique document committing to treat people with dignity and respect. AmSher is known as the collection agency that collects with compassion.

KING CORDRAY OF CFPB–DON’T RESTRICT CREDIT TO PEOPLE WHO NEED IT MOST

This morning I watched the 4 hour semi-annual Consumer Financial Protection Bureau (CFPB) report to the House Financial Services Committee. The CFPB is by far the most powerful and least accountable federal agency in the history of the United States. The CFPB’s only responsibility is to give a report twice a year to the committee.  However, the Committee has no real power over the CFPB. Absolutely none!

Representative Jeb Hensarling is the residing chair of the House Financial Services Committee.  In his opening remarks, Rep. Hensarling insinuated that Richard Cordray, Director of the CFPB, is not accountable to anyone.  He’s not accountable to the President of the United States, unless there’s just cause.  He’s not accountable to Congress because Congress doesn’t appropriate funds to the CFPB.  And the CFPB’s not accountable to the court system because of wording in the Dodd-Frank Act that created this powerful bureau.

Chairman Hensarling highlighted the fact that the rules that Richard Cordray makes will be the rules of a ruler, not rules of law. I have not met Richard Cordray.  I am sure he’s a fine, well-intentioned human being and will be a great ruler. But do we really want to have an agency with the power of a king?

I’m particularly concerned about the availability and extension of credit to honest, well-intentioned, hard-working Americans with low to medium incomes. Who’s looking out for them?  They need cars for transportation to work, suitable places to live such as manufactured housing, basic kitchen appliances like refrigerators and washing machines, furniture, and the necessities of life. This well-meaning group of people many times isn’t blessed with any savings. They often run into a problem and need a short-term loan to survive and pay critical bills.

I hope and pray that the CFPB, by its actions and rules, do not impede this group of worthy Americans access to credit.  I spent a good bit of my adult life servicing this group of people in a family furniture business.  Our target market was people with a lack of or damaged credit.  We extended them credit when no one else would.  We counseled with them, encouraged them, and helped them establish or reestablish their credit.

This improved their credit scores and opened up more credit alternatives for them.  It also helped them raise their standard of living. Who’s going to watch out and service this very large segment of the US population? Will Richard Cordray and his bureau overreact from the past financial fiasco and make it impossible for millions of Americans to have access to credit?  I hope not.

Rep. Hensarling set up a place on his website where people can go to share their negative experiences with the actions of the CFPB. I am very appreciative of this.

Unfortunately, the low or moderate income individuals and families who have or will be denied credit won’t be aware of why their credit is being denied. And most likely, they won’t be aware of this website.  That’s very unfortunate.

I encourage you to have your voice heard on how the CFPB has affected you or your business and visit The Committee of Financial Services website here to share your story.

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Martin Sher, Co-CEO of AmSher Collection Agency and a past president of ACA International, is the author of the Collector’s Pledge. Hundreds of thousands of collectors all over the world have signed this unique document committing to treat people with dignity and respect. AmSher is known as the collection agency that collects with compassion.