In Morrissey v. Krystopowicz, the Court of Appeals has held that where a plaintiff seeks to pierce the corporate veil, the causation-of-injury element can be satisfied by proof that an abuse of the corporate form has caused the plaintiff to be unable to recover for an underlying tort injury. The plaintiff need not show any causal connection between abuse of the corporate form and the tort itself.
In New Mexico, three elements are required to pierce the corporate veil. First, the subsidiary must be operated as a mere “instrumentality” of the dominant party. Second, the dominant party must have some “moral culpability,” “such as use of the subsidiary to perpetuate a fraud.” And third, there must be proximate causation of injury to the plaintiff.
In this case, the plaintiff sued several nursing home entities for the wrongful death of a nursing home resident and related claims. The nursing home entities failed to answer, and a default judgment was entered against them, and the district court ultimately awarded the plaintiff $4.8 million in damages.
Apparently unable to recover anything from the undercapitalized nursing home entities, the plaintiff sought to pierce the corporate veil to recover from an individual owner of those entities. The district court found that the owner had abused the corporate form, and thus the first two elements were established.
But the district court denied the plaintiff’s claim because there was no evidence that the owner’s abuse of the corporate form did anything to cause the wrongful death of the nursing home resident.
The Court of Appeals reversed. As Judge Bustamante explained, where the corporate form is abused in a way that makes the corporation unable to satisfy its obligations, the plaintiff’s “inability to recover” for his or her injuries “is itself a harm caused by … misuse and abuse of the corporate form.” “The district court’s concept of injury was” therefore “too narrow.” The owner of the nursing homes “failed to manage” them “in good faith to meet their legal obligations,” and thus piercing the corporate veil was justified.
The Court also acknowledged that “generally insolvency of a corporation alone is not a justification for piercing the corporate veil,” but the line between ordinary insolvency (which does not justify veil-piercing) and a lack of “good faith” in managing the corporate entity’s finances (which does) is not very clear, and one can expect plaintiffs to attempt to exploit it. Owners of corporations should therefore take measures to put themselves on the right side of the line, such as procuring adequate liability insurance.