MIAMI BUSINESS LITIGATION: SHAREHOLDER LIABILITY FOR CORPORATE ACTS

A corporation is a legal fiction because it can enter contracts and conduct business on its own behalf even though the corporation needs people to act for it. The purpose of the fiction is to limit the liability of the corporation’s shareholders, whether they are individuals or other companies. Roberts’ Fish Farm v. Spencer, 153 So. 2d 718 (Fla. 1963) (A corporation’s “purpose is generally to limit liability and serve a business convenience.”). Florida believes the separation between a corporation and its shareholders is useful to commerce. Florida courts will not, therefore, easily disregard the corporation’s legal fiction and impose liability on a corporation’s shareholders for corporate acts. However, Florida courts will disregard the legal fiction under certain circumstances discussed below.

In Florida, a court may disregard the corporate fiction and hold the corporation’s shareholders liable for corporate acts when:

(1) the shareholder(s) dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;

(2) the corporate form was used for a fraudulent or improper purpose; and

(3) the fraudulent or improper use of the corporate form caused injury to the claimant.

Gasparini v. Pordomingo, 972 So. 2d 1053 (Fla. 3rd DCA  2008). Florida courts often focus on the fraudulent purpose factor when deciding whether to pierce the corporate veil. This is due to the rationale for incorporation. As discussed above, shareholders incorporate to limit their liability by creating a separate entity that is “apart from its stockholders.” Dania Jai–Alai Palace, Inc., v. Sykes, 450 So. 2d 1114 (Fla. 1984). Courts will not ignore this separate entity when the stockholders make “proper use” of the corporate legal fiction. However, shareholders cannot hide behind the corporate fiction to defraud creditors or commit other improper acts. Therefore, courts may peel back the corporate veil and hold a corporation’s owners responsible for the corporation’s debts when shareholders improperly disregard corporate identities.

Defrauding creditors is one example of an improper purpose that allows courts to pierce the corporate veil and impose liability on the corporation’s shareholders. Lipsig v. Ramlawi, 760 So. 2d 170 (Fla. 3d DCA 2000) (A “subterfuge to mislead or defraud creditors, to hide assets, to evade the requirements of a statute or some analogous betrayal of trust.”). For instance, in W.P. Productions, Inc. v. Tramontina U.S.A., Inc., 101 F. 4th 787 (11th Cir. 2024), the court pierced the corporate veil because the shareholders distributed the company’s assets to themselves to prevent the company’s creditors from seizing those asserts. W.P. Productions, Inc., 101 F. 4th 787 (“When a shareholder knows a company has dissolved and continues to move corporate money around, the shareholder, by default, is using the corporate form for the improper purpose of violating Florida’s Rule of Priorities.”).

Piercing the corporate veil is generally limited to imposing liability on corporate shareholders and parent companies. E.g., McCormack v. Ribbeck, 702 So. 2d 271 (Fla. 1st DCA 1997); 17315 Collins Ave., LLC v. Fortune Dev. Sales Corp., 34 So.3d 166 168 (Fla. 3d DCA 2010). However, some have attempted to pierce the corporate veil to impose liability on non-shareholders. In Walton v. Tomax Corp., 632 So. 2d 178 (Fla. 5th DCA 1994) the court pierced the corporate veil and imposed liability on the shareholder’s spouse. Thereafter, a litigant in a different lawsuit attempted to expand Walton v. Tomax Corp., to impose liability on a corporate director who was not a shareholder. The court rejected the argument because it believed Florida law would not permit veil piercing against a non-shareholder. The court explained that the plaintiff should have sued the non-shareholder directly instead of trying impose liability indirectly through veil piercing.