Ohio Supreme Court Modifies Test for Piercing the Corporate Veil

Anne Marie Sferra
James P. Schuck
Lana K. Guthrie
Bricker & Eckler LLP
October 2008

Full text of the Court's opinion

On September 30, 2008, the Ohio Supreme Court ruled that to "pierce the corporate veil," a plaintiff must show that the "defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act." Dombroski v. WellPoint, Inc., Slip Opinion No. 2008-Ohio-4827 (emphasis added).

In Dombroski, the plaintiff was a deaf woman who, after receiving a cochlear implant, largely regained her hearing in one ear. Dombroski's doctor subsequently determined that a cochlear implant in her other ear was medically necessary to further improve her hearing. However, her new health insurance provider, Community Insurance Company ("CIC"), denied coverage based on its classification of bilateral cochlear implantation as an "experimental" procedure. Dombroski sued CIC and its parent company, WellPoint, Inc. ("WellPoint"), for bad faith denial of coverage. WellPoint sought dismissal of Dombroski's claims on the basis that her insurance contract was with CIC and therefore she lacked privity of contract with WellPoint. WellPoint further asserted that Dombroski could not pierce the corporate veil to hold WellPoint liable as the sole shareholder of CIC. The trial court agreed, but the Seventh District Court of Appeals reversed, holding that there were sufficient facts to proceed with piercing the corporate veil under the three-part test set forth in Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075.

The Belvedere three-part test provides that the corporate form may be disregarded when: 1) control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own; 2) control over the corporation by those to be held liable is exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and 3) injury or unjust loss resulted to the plaintiff from such control and wrong.

The Ohio Supreme Court accepted jurisdiction to resolve a conflict in the appellate courts regarding the second prong of Belvedere's three-part test for piercing the corporate veil. The second prong of Belvedere requires a plaintiff to demonstrate that the shareholders exercised control over the corporation to be pierced "in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity." Several courts of appeal, including the Seventh District Court of Appeals in Dombroski, construed this provision broadly to include "unjust or inequitable acts." In contrast, the Sixth District Court of Appeals adopted a narrow application of Belvedere which specifically required fraud or an illegal act before piercing the corporate veil.

The Ohio Supreme Court rejected the broad reading of Belvedere, noting that limited liability for shareholders remains the rule, whereas piercing the corporate veil remains the "rare exception." Although the Court recognized that a broader view of Belvedere would have the benefit of holding more individuals accountable for their actions, the pitfalls would be too great: "Were we to allow piercing every time a corporation under the complete control of a shareholder committed an unjust or inequitable act, virtually every close corporation could be pierced when sued." The Court also recognized that relaxing the requirements for piercing would negatively affect controlling shareholders in publicly traded companies.

The Court did, however, modify the second prong of the Belvedere test to allow for piercing the corporate veil when shareholders commit "egregious wrongs." Specifically, the Court cautiously expanded Belvedere's second prong to include not only fraud and illegal acts, but also "similarly unlawful acts." Despite this expansion, the Court concluded that Dombroski's claim did not satisfy the second prong of the Belvedere test because an insurer bad faith claim, the Court held, is a "straightforward tort" and is not "the type of exceptional wrong that piercing is designed to remedy."

As a result, the Supreme Court reversed the Seventh District Court of Appeals. The Court expanded the definition of "fraud and illegal acts" to include "similarly unlawful acts," but it clearly rejected the majority appellate court view that "fraud and illegal acts" also includes "unjust or inequitable acts."

Justice Pfeifer was the only member of the Court who dissented. He wrote that the majority's modification of the Belvedere test "adds words to the test but no clarification." Justice Pfeifer noted that the Belvedere test was based on the Sixth Circuit decision in Bucyrus-Erie Co. v. Gen. Prods. Corp. (C.A.6, 1981), 643 F.2d 413. In Bucyrus-Erie, the Sixth Circuit specifically allowed for claims based on "other dishonest or unjust acts" and nothing in Belvedere was meant to restrict that view. While the majority believes that it expanded the second prong requirement of "fraud or an illegal act" by adding "or a similarly unlawful act," Justice Pfeifer questioned whether there is any notable distinction between an "illegal act" and an "unlawful act." As a result of the majority's holding, Justice Pfeifer argued that Ohio is now one of the most difficult jurisdictions for proving a case of piercing the corporate veil.