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Piercing the corporate veil: Fraud and Paramount Equities

In its decision published on February 20, 2015 in Schlossberg v. Bell Builders Remodeling, Inc. et al., Maryland’s highest court has revisited the question of when the corporate shield may be disregarded and personal liability of a shareholder established.  Piercing the corporate veil occurs when an owner or shareholder of a corporation, which is considered a separate legal entity from those who own and operate it, is held personally liable for the corporation’s debts. 

The standard for piercing the corporate veil in Maryland has remained constant for some time. Except where it is necessary to prevent fraud or enforce a paramount equity, the corporate veil will not be pierced. Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc., 275 MD 295, 310 (1975). Although this standard appears on its face to present two separate circumstances for when the corporate veil may be pierced, the Court of Special Appeals in Serio v. Baystate Properties, LLC held that absent a finding of fraud, the corporate veil will not be pierced.  Specifically noted by the Court in Serio was the lack of precedent in Maryland case law where the corporate veil was pierced to remedy a paramount equity.  The Court of Special Appeals additionally noted that in all Maryland cases where alternate grounds for piercing the corporate veil were found, those grounds still included an element of fraud.   The Serio ruling reinforced the Maryland court’s aversion to piercing the corporate veil but left many confused as to the application of the Maryland standard. Many viewed the paramount equity language in Maryland’s standard as simply redundant in light of the ruling.    

Taking the issue up again in Schlossberg, the Court of Appeals has clarified the standard and once again holds, absent a finding of fraud the corporate veil may be pierced and personal liability established upon proof of a paramount equity.  In its attempt to clearly define and delineate the standard, the Court of Appeals cited the analysis of common factors considered in Hildreth v. Tidewater, 738 MD 724, 732-37 (2003), when determining in a specific circumstance whether the corporate veil should be pierced.  First and foremost, where the corporation is used as a mere shield for the perpetration of a fraud, the courts will disregard the fiction of separate corporate entity.  The courts may also disregard the corporate entity to prevent evasion of legal obligations and for the protection of third persons when the stockholders themselves, or a parent corporation fails to observe the corporation. The last two factors are considered as falling within the paramount equity category. Although Maryland courts have yet to find a paramount equity worth enforcing, Scholssberg confirms the remedy is still available.  

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