Virginia has a strong policy in favor of recognizing the corporate entity as separate and distinct from its members. The corporate form protects the owners of a corporation from liability in a lawsuit against the corporation. “Piercing the corporate veil” is a phrase that describes a situation in which the corporation’s limited liability protections are set aside, and individual owners are held liable.
The Eastern District of Virginia’s recent decision in Shandong Reltex v. Ison International shows how difficult it is to pierce the corporate veil under Virginia Law. Shandong Reltex Leihua Co. v. Ison International LLC., 2023 WL 5662563 (E.D.Va. 2023). Philip Ison is the owner and CEO of both Ison International and Ison Furniture. Plaintiff, Shandong Reltex entered into a warehousing and distribution agreement with Ison International to store 200,000 tarps. Shortly thereafter, Philip Ison, acting in his official capacity as CEO of Ison Furniture offered to sell these tarps to customers in the US. About a month later, Philip Ison, reverting to communicating as CEO of Ison International, informed Shandong Reltex that he sold the tarps. Ison agreed to wire $4,830,000 to Shandong Reltex, but then requested that they submit invoices. Ison made some payments, however, an unpaid balance remained.
Shandong Reltex filed this lawsuit for breach of contract against Ison Furniture, Ison International, and Philip Ison in his individual capacity. Philip Ison filed a motion to dismiss the breach of contract claim. The question before the court was whether Shandong Reltex’s complaint was sufficient to justify piercing the corporate veil. To survive a motion to dismiss the complaint must “state a claim to relief that’s plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). However, the court is not bound to accept conclusory legal conclusions couched as factual allegations. Papasan v. Allarin, 478 U.S 265, 286 (1986).
In Virginia, courts are hesitant to disregard the corporate entity and hold an individual personally liable. Dana v. 313 Freemason, 587 S.E.2d 548, 554–55 (Va. 2003). Courts undertake a discretionary case-specific inquiry. Id. Piercing the corporate veil may be appropriate where an individual used the corporate entity to “evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage” or where “the separate personalities of the corporation and the individual[s] no longer exist and to adhere to that separateness would work an injustice.” Dana, 587 S.E.2d at 554 (quoting O’Hazza v. Executive Credit Corp., 431 S.E.2d 318, 320–21 (Va. 1993))
Shandong Reltex argued that Ison failed to operate his companies as separate entities. They point to his use of email addresses for both Ison Furniture and Ison International, as well as the use of “we” and “our” without delineating between entities. The court stated that although this may show a close relationship between the two companies, it does not demonstrate that there is no separation between the companies and the individual. Further, it is unclear what injustice would be caused by continuing to recognize these as separate entities. The court found that this evidence does not meet the standard required to pierce the corporate veil.
As a second argument for piercing the corporate veil, Shandong Reltex’s complaint stated that Philip Ison used these companies to “evade obligations to third parties and commit injustice.” This is the language used by the Virginia Supreme Court to describe a situation where piercing the corporate veil may be appropriate. However, the complaint offered no facts, evidence, or specifics to support this claim. Therefore, the court considered this to be the type of “bare recitation of the elements and conclusions that the Supreme Court deemed insufficient.” Shandong Reltex, 2023 WL 5662563 at *9 (citing Twombly, 550 U.S. at 555). The Court found that this conclusory pleading did not justify piercing the corporate veil.
Although Shandong Reltex was not able to hold Philip Ison individually liable, they are still able to pursue their claims against Ison Furniture and Ison International. This case highlights two important principles. First, the corporate entity offers protection for an individual operating a business because the corporate form shields an individual from personal liability. Second, piercing the corporate veil is an exceptional remedy. Piercing the corporate veil typically requires strong evidence of fraud, deception, or evasion of personal obligations that cause an injustice. This standard is not easily overcome and again shows how the corporate form offers liability protection for individuals.
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