Veil Piercing and Choice of Law

Keith Paul Bishop:

The internal affairs doctrine is a conflict of laws principle that recognizes that only one state should have the authority to regulate a corporation’s internal affairs.   Under the internal affairs doctrine, that special state is the state of incorporation.  But what exactly constitutes a corporation’s ”internal affairs”?  Many lawyers, particularly those in Delaware, take a broad view of what constitutes an internal affair.  However, the U.S. Supreme Court has actually enunciated a rather narrow view: “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders”.  Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). 

One might assume that the liability of shareholders for corporate obligations is an internal affair.  However, the Nevada Supreme Court has permitted piercing the corporate veil of a Washington corporation.  McCleary Cattle Co. v. Sewell, 317 P.2d 957 (Nev. 1957).  In Plotkin v. Nat’l Lead Co., 482 P.2d 323 (1971), the Supreme Court assumed that the alter ego doctrine could be applied to a Wisconsin corporation (although it declined to conclude that the owners were in the alter ego). 

I discuss this issue in Corporation Law, in which I explain that: New York law is instructive on this score, not least because that state seems to generate more veil piercing cases than any other. New York relies on a choice of law rule known as the paramount interest test, under which “the law of the jurisdiction having the greatest interest in the litigation will be applied and . . . the facts or contacts which obtain significance are those which relate to the purpose of the particular law in conflict.”[1] A number of federal decisions applying the New York standard have held that the state of incorporation (of the corporation whose veil is to be pierced) has the paramount interest with respect to veil piercing claims and, accordingly, applied that state’s law.[2] The state of incorporation’s interest derives from the fact that it is that state whose law confers limited liability on the enterprise in the first place.[3]

Surprisingly, Delaware courts do not always apply the law of the state of incorporation. Where a Delaware parent corporation is to be held liable for the acts of a nonDelaware subsidiary (i.e., the subsidiary’s corporate veil is to be pierced), Delaware courts have applied Delaware law.[4] On the other hand, where it is a Delaware corporation whose veil is to be pierced, Delaware courts do apply their state’s law.[5] Maybe the Delaware rule is just to apply Delaware law!

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[1] Intercontinental Planning, Ltd. v. Daystrom, 248 N.E.2d 576, 582 (N.Y. 1969) (internal quotation marks omitted).

[2] See, e.g., Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995); Soviet Pan Am Travel Effort v. Travel Committee, Inc., 756 F. Supp. 126, 131 (S.D.N.Y. 1991). An interesting wrinkle on the choice of law problem is presented when the veil piercing claim arises under a federal statute. In U.S. v. Bestfoods, 524 U.S. 51 (1998), the Supreme Court noted the “significant disagreement among courts and commentators over whether, in enforcing CERCLA’s indirect liability, courts should borrow state law, or instead apply a federal common law of veil piercing.” Id. at 63 n.9. Unfortunately for those who like doctrinal closure, the court declined to resolve that disagreement. Id.

[3] Soviet Pan Am Travel Effort v. Travel Committee, Inc., 756 F. Supp. 126, 131 (S.D.N.Y. 1991).

[4] Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F. Supp. 831, 840 n.17 (D. Del. 1978).

[5] Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 267 (D. Del. 1989).