Veil Piercing, Revisited

In 2020, when we last blogged on corporate veil piercing in Tennessee, we matter-of-factly said, “[t]he law in Tennessee on ‘piercing the corporate veil’ has not substantially changed” since previous blogs.[1]  Well, that’s no longer the case.  In Youree v. Recovery House of East Tennessee, LLC, 705 S.W.3d 193 (2025), the Tennessee Supreme Court clarified applicable law concerning veil piercing.

There is a “broad consensus” that the doctrine of piercing the corporate veil is “among the most confusing in corporate law.” Id. at 208. It is also “the most litigated issue in corporate law.” Id.  (citing Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1036 (1991)).

Tennessee Courts presume corporate debt is the debt of the entity, and not that of the owners and managers.  Youree, 705 S.W.3d at 207. Courts have struggled to clearly set the facts and circumstances where the presumption is overcome and the individuals become personally liable for the obligations of the entity. Id. at 208. In any case, to make the corporate debt of the entity the debt of the individuals (or entities) behind the corporation, a plaintiff must pierce the corporate veil. Id.

Nearly fifty years ago, in Continental Bankers, the Tennessee Supreme Court held that piercing the corporate veil required proof of these elements:

1. The parent corporation exercises complete dominion over the subsidiary;
2. Such control must be utilized to commit fraud; and
3. The control and breach of duty must have caused the injury.

See Contl. Bankers Life Ins. Co. of the S. v. Bank of Alamo, 578 S.W.2d 625, 632 (Tenn. 1979).

Five years later, in Allen, the federal court in East Tennessee cited Continental Bankers with approval, but listed eleven factors to be considered (the “Allen factors”):

1. Failure to collect paid-in capital;
2. Gross undercapitalization;
3. Failure to issue stock certificates;
4. Sole-ownership of stock;
5. Use of some offices or business locations;
6. Employment of some employees or attorneys;
7. Use of corporation as an incommutability or conduit for another corporation;
8. Division or manipulation of assets;
9. Use of corporation as subterfuge in illegal transactions;
10. Formation of the corporation to transfer liabilities to it, and
11. Failure to maintain arms-length relationships.

See Fed. Deposit Ins. Corp. v. Allen, 584 F. Supp. 386, 397 (E.D. Tenn. 1984).

In the following years, confusion developed over the interplay of the two cases, which the Youree Court admitted had not been resolved. Youree, 705 S.W.3d at 210. Seizing the opportunity to clarify the confusion, this year in Youree, the Tennessee Supreme Court held that piercing the corporate veil requires proof of three elements:

(1) Control over the entity, not only of finances, but of policy and business practice in respect to the transaction under attack, so that the entity, as to that transaction, had no separate mind, will, or existence of its own;

(2) The control must have been used to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of a third party’s rights; and

(3) The control and fraud, wrong, violation, or injustice must have proximately caused the injury or unjust loss complained of.

Id. at 211. The Continental Bankers elements were thus reaffirmed.  The Allen factors may still be considered, but “do not constitute a separate list.” Id. Rather, the Allen factors represent circumstances that may inform whether the three Continental Bankers elements are present. Id. Further, not every circumstance represented in the Allen factors needs to “be present to establish the three elements, not will any single circumstance be conclusive.” Id. Rather, the “unique circumstances” of each individual case will be considered. Id. at 211-12.

The Court’s reaffirmation of the three Continental Bankers elements for veil piercing will likely narrow the inquiry of whether any given circumstances warrant veil-piercing. Even though the Court will still consider circumstances like those addressed in the Allen factors, the Youree ruling provides clarity on what elements are needed—and what are not—in order to pierce the corporate veil.

The clearest takeaway from this recent ruling is that the Supreme Court in no way left the door open for veil piercing absent some fraud or fraud-like activity. To avoid the corporate shield, plaintiffs must allege (and prove) that the control an individual[2] has over the subject entity and the fraudulent conduct directly or “proximately” caused the harm suffered. As to the second element, the mere fact of an “injustice” because a defendant breached a contract (Id. at 213) or is unable to pay back its debts (Id. at 214) will not, in and of itself, satisfy the “fraudulent” element in order to pierce the veil.

On balance, this new ruling will likely make it more challenging for a plaintiff to pierce the corporate veil because not only will Tennessee courts require a showing of the standard elements of fraud and control, but the plaintiff must also trace a direct line between the shielded individual or entity’s control over the subject corporation, the fraudulent conduct, and the plaintiff’s harm suffered. Technical violations or questionable business practices (such as those listed in the Allen factors) are not enough on their own to remove the protections afforded by the corporate shield. Thus, defendants seeking refuge in the corporate shield may fight veil piercing claims by targeting the lack of relatedness or disconnect between their alleged control of the entity, their alleged fraud, and the alleged harm suffered by the plaintiff.

[1] O’Bryan, Bill, Veil Piercing Redux, BizLitNews Blog (April 7, 2020), https://www.butlersnow.com/news-and-events/veil-piercing-redux. See also O’Bryan, Bill, Yes, Virginia … You Can Pierce Your Own Corporation’s Veil, BizLitNews Blog (August 7, 2018), https://www.butlersnow.com/news-and-events/yes-virginia-you-can-pierce-your-own-corporations-veil.

[2] The Youree Court preemptively clarified in reaffirming the three-element framework that it will apply to all piercing the corporate veil cases, “whether involving a parent-subsidiary relationship or a corporation-shareholder relationship.” Youree, 705 S.W.3d at 216.