Most employers are corporations and not partnerships or sole proprietorships. A corporation is a legal form of business commonly used because of its limited liability properties. Usually, when legal claims are asserted against a corporation, the owners and officers of the corporation may not be held personally liable for those claims; instead, only the corporation itself may be held legally liable for those claims. Some specific statutes (such as some employment statutes) extend under certain circumstances legal liability for corporate acts to the owners and/or officers of a corporation. In the absence of such a specific applicable statute, the general common-law rule remains that the owners and officers of a corporation may not be held personally liable for corporate acts or claims against the corporation. When a claimant seeks to place liability for corporate acts on the owners or officers of a corporation (such as when the corporation itself has no money or is bankrupt), the claimant is said to seek to "pierce the corporate veil."

     In Theberge v. Darbro, Inc., -- A.2d -- (Me. October 30, 1996), the Maine Law Court rejected an attempt by the creditors of a corporation to "pierce the corporate veil" and place liability on the owners of the corporation. The case involved claims arising out of real estate debts, but it is instructive for employers in Maine because (1) it clarifies the standards applicable to attempts to pierce the corporate veil, and (2) it strongly reaffirms the limited liability benefits of a corporation. The Law Court summarized the law concerning the limited liability of corporations as this:

"It is well established that corporations are separate legal entities with limited liability. A principal benefit of the corporate form is limited liability for shareholders. Although the corporate entity may be pierced if it is merely the alter ego of an individual or other corporation, we will disregard the legal entity of a corporation with caution and only when necessary in the interest of justice. When the plaintiff attempts, in the context of a contractual dispute, to pierce the corporate veil, courts generally apply more stringent standards because the party seeking relief in a contract case is presumed to have voluntarily and knowingly entered into an agreement with a corporate entity, and is expected to suffer the consequences of the limited liability associated with the corporate business form." (reformatted with citations omitted).

     In the Theberge case the Court found that the corporate entity had no offices, employees, or utilities, kept no corporate records or books, co-mingled its business with that of its owners, and had not observed corporate formalities. The Court also found, however, that the owners of the corporation had not engaged in any fraud or illegal conduct, and that the claimants knowingly had refrained from obtaining the owners' personal guarantees of corporate debts when the claimants had the opportunity to do so. Under these circumstances, the Court refused to pierce the corporate veil. The absence of fraud and illegality, and the claimants' knowing choice to contract with a corporation, outweighed the evidence showing that the corporation lacked any true separate existence.

     To the extent that employers in Maine may continue to be the targets of many different types of lawsuits, the Theberge case will strongly assist corporate employers in resisting attempts to pierce their corporate veils.

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Dated: February, 2000