Occasionally, individual defendants try to hide assets by placing them in a corporation. In such cases, the attorney is forced to attempt to “pierce the corporate veil”. The rule at common law was that, “officers, directors or shareholders of a corporation are not personally liable for the tortious conduct of the corporation or its other agents, unless there can be found some active or passive participation in such wrongful conduct by such persons.” Cahill v. Hawaiian Paradise Park Corp., 56 Haw. 522, 526 (1975). However, in 1973, the Hawaii Supreme Court held that a “corporate entity should be disregarded because of circumstances that reveal that the shareholders treated and regarded the corporation as their alter ego.” Kahili, Inc. v. Yamamoto, 54 Haw. 267, 271 (1973). This exception has since been called the “piercing the corporate veil” doctrine because it permits officers, directors, or shareholder to be found personally liable for their actions regardless of the general rule at common law.
There are two overarching elements required by most jurisdictions (including Hawai’i) to pierce the corporate veil. Id. First, there must be evidence that an individual in a corporation “treated and regarded the corporation” as his/her “alter ego”, and “using the corporation as an agency or instrumentality or a conduit through which they were conducted his/her personal business.” Kahili, Inc. at 271. Second, the circumstances must indicate that “recognition of the fictional corporation” would sanction a fraud or promote “injustice and inequity”. Id.
There are many factors to consider in determining whether “the separate personalities of the corporation and the individual no longer exist” thus satisfying the first element of piercing the corporate veil. Associated Vendors, Inc. v. Oakland Meat Co., Inc., 26 Cal.Rptr. 806, 813-815 (Cal., 1962) cited by Murdock v. Ventures Trident II (Not Reported in Cal.Rptr.2d) 2003 WL 21246596. Generally, courts in Hawai’i have allowed for piercing of the corporate veil when there are enough factors satisfied to show that there were no separate identities between the corporation and an individual. For example, the Hawaii Supreme Court allowed for the “piercing of the corporate veil” when; (1) two shareholders owned all stock, (2) corporation was undercapitalized, and (3) shareholders’ behavior in lease negotiations suggested they were acting for their behalf rather than for the corporation. Kahili, Inc. at 269-272.
As mentioned, it is important to also provide evidence that will convince the court that if it does not pierce the corporate veil, inequity and injustice or fraud will prevail. For example, if there is evidence that an individual was “manipulating the corporation” to “foster” her individual interests to the disadvantage of other members of her corporation, then it is only fair that she be found liable (personally) for her actions rather than the corporation. Riddle at 112. Furthermore, the Hawaii Supreme Court held that evidence that an individual used the corporation to commit fraud or another illegal act constitutes promoting inequity and injustice therefore justifies piercing of the corporate veil. Chung v Animal Clinic Inc., 63 Haw. 642, 646-647 (1981). Finally, actual fraud does not need to be shown, just that by “piercing of the corporate veil” the Court will prevent fraud or injustice. Associated Vendors, Inc. at 813.