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PIERCING THE VEIL BETWEEN AFFILIATED CORPORATIONS – GUIDANCE FROM THE OREGON SUPREME COURT

By John L. Langslet and Justin M. Thorp

Oregon courts have applied the extraordinary remedy of piercing the corporate veil against corporate shareholders for certain wrongful acts of the shareholders to the detriment of the corporate debtors.  The remedy has not previously been applied by an Oregon appellate court to impose liability against affiliated corporations owned and controlled by a larger holding company.  The recent case of State ex rel Neidig v. Superior Nat. Ins. Co., 343 Or 434, 173 P3d 123 (2007), provides guidance into when veil piercing will be allowed in such cases.

A. The Amfac Foods Test For Piercing The Corporate Veil 

In order to understand affiliated corporate liability, it is essential to understand the basic elements of piercing the corporate veil in the general corporation-shareholder context. Under the equitable doctrine of piercing the corporate veil, the normal rule of limited shareholder liability may be disregarded in extraordinary circumstances.  Application of the doctrine is fact-intensive and according to the Oregon Supreme Court, decisions applying the doctrine have tended to describe “results more than rules” or substituted “a label for analysis.”  Amfac Foods, Inc. v. International Systems & Controls Corp., 294 Or 94, 104-5, 654 P2d 1092 (1982).  

In Amfac Foods, the Supreme Court attempted to make the test more predictable by articulating three elements that must be met in order to pierce a corporate veil:  (1) actual control by the shareholder; (2) improper conduct by the shareholder; and (3) a relationship between the improper conduct and the injury alleged.  Id. at 108-9.  The Court listed statutory violation, inadequate capitalization, milking, misrepresentation, commingling and holding out as examples of improper conduct, the second element.  Id. at 109-110.  Amfac Foods’ three-part test is substantially the same as that articulated by most courts.  See 1 Fletcher Cyclopedia on the law of Corporations § 41.10, at 143-46 (2006 revision).

In practice, corporate veil piercing has mostly been applied “vertically” against individual shareholders of closely held corporations, rather than “horizontally” against affiliated corporations owned and controlled by a holding company.  Robert B. Thompson, Piercing the Corporate Veil:  An Empirical Study, 76 Cornell L Rev 1036, 1047-56 (1991).  Oregon cases subsequent to Amfac Foods have also generally been limited to allegations that a shareholder milked or provided inadequate capitalization for the corporation.  See Vuylsteke v. Broan, 172 Or App 74, 17 P3d 1072 (2001); Klokke Corp. v. Classic Exposition, Inc., 139 Or App 399, 912 P2d 929 (1996); Rice v. Oriental Fireworks Co., 75 Or App 627, 707 P2d 1250 (1985).  

B. Veil Piercing Among Affiliated Corporations Under State ex rel Neidig v. Superior Nat. Ins. Co. 

The Oregon Supreme Court’s recent opinion in State ex rel Neidig v. Superior Nat. Ins. Co., 343 Or 434, 173 P3d 123 (2007), differs from the usual corporate veil piercing case.  Superior National upheld a piercing claim among corporate subsidiaries of a large corporate holding company, rather than a claim directly against a shareholder.  The two corporations, Superior National Insurance Company (SNIC), and Commercial Compensation Casualty Company (CCCC), were wholly-owned subsidiaries of a larger holding company, Superior National Insurance Group (Superior Group).  As Oregon workers’ compensation insurers, both insurers were required by statute to deposit with the Insurance Division securities in an amount calculated to pay their workers’ compensation insurance claims if they became insolvent.  ORS 731.628.  However, when the insurers were ordered into liquidation, SNIC had a $10.6 million statutory deposit although it wrote almost no Oregon policies.  In contrast, CCCC had nearly $8 million in Oregon workers’ compensation claims, but it had only deposited $100,000.  

The Oregon Insurance Guaranty Association (OIGA), which had assumed responsibility for paying CCCC’s workers’ compensation claims, intervened in the ancillary liquidations of CCCC and SNIC.  The OIGA claimed that SNIC’s security deposit should be available to pay CCCC’s claims.  After a bench trial in January, 2004, Judge Paul J. Lipscomb held that the OIGA was entitled to pierce SNIC’s corporate veil and to use its deposit to pay CCCC’s claims.  The Court of Appeals reversed.  208 Or App 1, 144 P3d 1030 (2006).  In a lengthy opinion, the Supreme Court reversed the Court of Appeals and reinstated the trial court’s judgment.  .  The Supreme Court’s opinion clarifies what circumstances may allow piercing the corporate veil outside of the more common case involving individual shareholders of a small corporation.  

1. Combining the operations of corporate subsidiaries may establish “actual control.”

Superior Group operated all of its subsidiaries at the holding company level.  SNIC and CCCC had identical officers and directors, pooled their insurance liabilities, and were “operationally a single company for all practical purposes.”  Id. at 456.  The Supreme Court found that this combination of operations satisfied the “actual control” element of Amfac Foods.  It rejected the argument that it was “necessary for SNIC itself, rather than the ultimate parent (Superior Group), to have ‘controlled’ CCCC.”  Id.  Rather, the Court explained that “actual control” existed because “the two corporations were under actual common control and were operated so that the improper use of corporate structures caused harm to a third party.”  Id.  

2. Compliance with corporate formalities does not, by itself, defeat veil piercing.

The Court pierced the corporate veil notwithstanding the fact that Superior Group complied with corporate formalities with respect to its subsidiaries.  The fact that it operated its subsidiaries at the holding company level was not itself illegal or even unusual in the industry.  Nonetheless, the Court explained that, because “the corporate veil can be pierced only when the additional elements of improper conduct and causation are met, . . . [nothing] affects the ability of insurance holding companies or other corporations to structure their operations in ways that allow them to take full advantage of the limited liability and other benefits of the corporate structure.”  Id. at 457-58. 

3. “Improper conduct” requires some form of moral culpability. 

Superior National also differs from the typical veil-piercing case in that the alleged improper conduct consisted of statutory violations rather than inadequate capitalization or milking of corporate assets.  Specifically, CCCC failed to make the statutory deposit required under Oregon law prior to its insolvency, and neither company timely made the required regulatory filings which would have revealed the deficiency.  The companies’ financial officers were aware that CCCC’s deposit was deficient by millions of dollars but continued to write new insurance policies in Oregon which increased CCCC’s unsecured liabilities.  The same officers subsequently made the required filing for SNIC, asking for a refund of the $10.6 million deposit, without making the same filing for CCCC so as to avoid revealing CCCC’s deposit deficiency.  343 Or at 462-63.   

The main difference between the analysis of the Supreme Court and the Court of Appeals was whether this conduct constituted “improper conduct,” the second element of the Amfac Foods test.  The Court of Appeals analyzed each corporate action independently and held that, “standing alone,” CCCC's failure to make the required deposit was "not the type of conduct that would justify the extraordinary remedy of piercing the corporate veil,"  208 Or App at 17.  The Supreme Court held that the Court of Appeals “erred in examining those aspects of defendants’ conduct ‘standing alone.’”  Id. at 463 n. 18.  In combination with the companies’ other deceitful conduct, CCCC’s failure to make the deposit was indeed “improper.”  The Court explained that “CCCC and SNIC, and the individuals who controlled both of those companies, took actions to evade government regulation and deceive” the regulatory agencies.  Id. at 462.  

The Supreme Court agreed with the Court of Appeals that the element of “improper conduct” requires “some form of moral culpability.”  The Supreme Court explained that “moral culpability,” as used in this context, “refers less to abstract notions of morality and more to dishonest or deceitful conduct intended to harm a third party, whether or not that conduct violates a statute or other legal obligation.  . . . .  [T]he use of the corporate form to frustrate state or federal regulation can be sufficiently improper conduct, even when there is nothing unlawful about the conduct itself.”  Id. at 459.  Thus, in cases involving improper conduct other than inadequate capitalization or milking, it may be necessary to show “dishonest or deceitful conduct” on the part of the corporation or its shareholder.

C. Conclusion 

The Superior National decision provides guidance for Oregon attorneys and courts in applying the extraordinary remedy of piercing the corporate veil in the corporation-subsidary relationship.  Additionally, the decision provides some insight into what the Court will consider in analyzing violation of statute as a basis to pierce the veil in the traditional piercing the veil claim. .