On September 30, the Supreme Court of Ohio modified the test for corporate veil piercing in Dombroski v. WellPoint, Inc., ___ Ohio St.3d ___, 2008-Ohio-4827 (Slip. Op. Sept. 30, 2008). In a 6-1 decision, the Court altered the 15-year-old test announced in Belvedere Condominium Owners’ Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274. Belvedere announced a test requiring a litigant to show, (1) complete control over the corporation by those to be held liable, (2) that control over the corporation was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) that injury or unjust loss resulted from such control and wrong.
The Dombroski decision did not address elements one or three of the Belvedere test. Indeed, the Court commented that those elements were “not affected” by the decision, but remained necessary conditions for a successful veil-piercing claim. Therefore, the common inquiries about whether corporate formalities were observed, whether corporate records were kept, whether corporate funds were commingled with personal funds, and whether corporate property was used for a personal purpose remain part of Ohio veil-piercing law. The pending Ohio Supreme Court appeal of Minno v. Pro-Fab, Inc. may further address this part of the test.
Although the Court in Dombroski expanded the “fraud or illegal act” language in Belvedere to include “similarly unlawful acts,” the Court also highlighted the Belvedere language requiring those who would pierce corporate veils to show that the controlling shareholders controlled the corporation “in such a manner” as to commit fraud or an illegal or unlawful act. Specifically, the Court held that allegations of insurer bad faith do not “represent the type of exceptional wrong that piercing is designed to remedy.”
In reaching that result, the Court observed that limiting veil piercing to cases where the controlling shareholders use their control to “commit specific egregious acts” prevents every lawsuit against a corporation from stating a claim for veil piercing.
The Court’s holding in Dombroski provides needed guidance to Ohio courts and litigants. Going forward veil-piercing litigation should focus on whether shareholders used their control to wrong a litigant, not on whether a litigant was harmed by a corporation in a way independent of wrongful shareholder control.