Did Hobby Lobby pierce its own corporate veil?

By: BW Ellis
Originally Published: July, 17th 2014

I love my liberal friends. The really intelligent people too far to the left to be represented by anything close to American political parties yet centrist enough and educated enough to be able to function in our capitalistic world.

I had lunch with one such friend and he brought up a really different and potentially game changing point that he is both excited and cautious about bringing into the public consciousness. He is a lawyer, a very successful record breaking lawyer who teaches, lectures, and practices law in several states and when we get together we always discuss politics and I always learn something new about the American legal system and how it works.

To get to the “aha” moment I will need to cover some ground that I hope people understand but realistically think is too much “inside baseball” information for people to have at the ready. 

The reason most people form a corporation to begin with is to erect a corporate veil. A liability shield that allows the officers of the company to operate their business without putting themselves in harm’s way for litigation.

For an attorney looking to sue a company they must pierce the corporate veil in order to have access to the personal financial holdings of the owners of the company. Typically if a corporation is going to be sued the officers will remove any assets from the business so that if a lawsuit is successful there is nothing the plaintiff can take, all the assets are in the name of the officers who are protected by the veil.

Now we get into the new information that I learned over burgers with my friend. Traditionally the way to pierce the corporate veil is to present the “alter ego” concept of corporate existence. 

The idea that a corporation is not just a separate entity that is remotely controlled for the purposes of business administration, but that the business is being used to promote and extend the personal identification of the person or persons that are operating it. 

That the motivations of the corporation and the officer of that company are one in the same and therefore there is no difference between the company and the person behind the curtain.

It seems to my friend and I that the distinction between the two are now being blurred with the application of a personal religious ideology operated as policy for the corporation. That the owners of the closely held companies out there who seek to use this new found connection to their corporate figurehead also bind themselves to their alter ego like conjoined twins.

A long established principle in the law is that if a connection operates in one direction, then it automatically operates in the opposite direction as well. The equal protection clause in the 14th amendment comes to mind as do several other elements of jurisprudence dating back to the Magna Carta.

So, does this mean that if someone were to trip and fall in a Hobby Lobby location, if an employee was to be injured or discriminated against, if a location catches fire and burns other locations in the area, are the owners of Hobby Lobby now financially liable for that damage, personally?

If the family has associated themselves to the company with religious fervor and righteous indignation, then they have cemented themselves to the corporation and made it into an alter ego. Therefore the veil that usually protects them from liability could be thrown out and the assets of both the company and the owners be attached in litigation.

Like any liberal I like to test out the theories and put them through “what if” scenarios to try to bust up the concept, but with this one I am finding that all the thought experiments and alternate perspectives seem to back up my friend’s original thought, that Hobby Lobby just became the alter ego of its ownership and those people are now liable to be named individually in a lawsuit that will take their entire personal fortunes, if the offense is egregious enough.

I invite others to pose hypotheticals to try to support or break this line of logic, here are a few I have come up with that I feel support the question:

  1. If Hobby Lobby was sold to a secular company, the religious ideology that caused this decision to be made would disappear. They may choose to keep the restriction on contraception coverage as a method of cutting costs but the religious basis for the argument would no longer be applicable and, by the Supreme Court’s own ruling, would be open to discrimination lawsuits and for criminal prosecution for violating the mandate from the ACA.

    Therefore the corporation is no longer the alter ego of the people owning it and the veil would then be applicable again. Since the alter ego state of the connection between the ownership and the corporate entity alters to prohibit the religious exemption from being used, the nature of that relationship also dictates whether or not the corporation is acting in the best interests of the business or the personal interests of the people who own it.
  2. The Supreme Court has limited their definition of this religious right to contraception to avoid the catastrophe of allowing other parts of our healthcare to become subject to the whims of religious ideology. That definition also limits the way a corporation can be used as the alter ego of the ownership of the company. It is stating that the mandates for healthcare still exist in 99% of the coverage offered, that only this 1% can and should be left to the decision making personal religious acumen of the officers of the company.

    This also could mean that if the owner of a company like Hobby Lobby chooses to use this 1% exemption they do so at their own peril because it establishes an alter ego connection between the corporation and the people who run it. If any other form of connection cannot be made due to the limitations of the law, and this one connection can be made, then through this one connection they have established themselves as the embodiment of the corporation, inseparable and complete.

    The mountain of case law out there directing that connection to be two way is what will pierce the veil and allow liability to enter the realm of personal holdings like never before.
  3. In researching the legal language around the alter ego tactic a few issues seem to come up prominently since the very point of forming a corporation is to provide this protection. First is there a sufficient unity of interest between the owner/owners of the company and the corporation itself.

    I addressed this in the first example but a segment of this bears re-visitation. The sufficient unity discussion seems to revolve around the housekeeping chores of the corporation like taking down the minutes of the board meetings and whether the CEO, president, and principle share holder are the same person. Without knowing the inside structure of Hobby Lobby I am going to operate under the assumption that they maintain a clean house. They are crafters after all.

    No the segment of this I find interesting is the question of whether or not the transactions are being handled at the appropriate distance. Since this decision effects every woman who works for the company we are talking about thousands of transactions, and there can be no closer association between a decision and a religious ideology that is the given reasoning for that decision.

    So the question becomes “are the owners of Hobby Lobby using their company to further a personal religious agenda?” I submit that they are, and that the choice to use that personal agenda as the guiding principle for their business decisions codifies the fact that they are not operating transactions at any distance. That they are using their position to enforce a religious ideology upon their employees.

    Whether or not you see this as a first amendment issue or not is irrelevant, by doing this they have just pierced their own corporate veil voluntarily and opened themselves to a landslide of personal litigation.
  4. Burden of proof also becomes a part of this discussion but only a small one since Hobby Lobby went through the trouble of going to the Supreme Court to establish that this is indeed what they are doing. They wanted the whole world to know that they are using their religious ideology to create this situation, therefore they also in the same breath informed the world that they are using their corporation to enact personal goals motivated by the personal choice they freely took to believe in whatever it is they believe.

    This is their hole and they dug it all by themselves.

  5. I found this little gem and thought it bears a little exploration: The courts have ruled that the corporate form will not be recognized if to do so would “sanction a fraud or promote injustice.” (See Webber v. Inland Empire Investments, Inc., 74 Cal. App. 4th 884, 900 (1999).)

    Aside from the personal relief I feel from a statements like this I am also thinking that these numerous examples of corporate limitation grants an avenue for piercing the veil where “fraud or injustice” are the result. Interesting.

    Since the decision the right wing has been going nuts trying to use this for everything from the right to discriminate against the LGBT community (both injustice and a violation of the law) to excusing all manner of religious observance and freedoms (which I feel are fraudulent since their origins cannot be proven, but that may just be because I am an atheist).

    Will the corporate veil protect a devout Muslim corporation when it arranges the under aged marriage of one it’s employees? They are exercising their religious freedoms, aren’t they? If the father of the employee wants to sue, can he pierce the corporate veil due to this religious connection between the business and the people who own it?

There is no doubt that this decision will have consequences that echo out much further that the 5 Justices who voted for it intended, but in this case I feel they have bitten off far more than even they can chew.

By creating the circumstance for the religiously minded business owners to attach their personal beliefs to their corporations, these men of the court may have just included the punishment to go along with that decision. If you try to enforce personal religious ideology upon anyone using the Hobby Lobby decision, then you will forfeit the veil of protection that you formed the corporation for to begin with.

My friend and I eagerly await the first law suit against Hobby Lobby to claim the alter ego tactic as a method for attaching personal assets in a claim. Let’s see just how much skin the ownership of these corporations are willing to put in the game in exchange for their “freedom” to withhold vital medical requirements for their female employees. In my experience, money trumps faith and the ardent supporters in the good times rarely have the courage of their convictions during the hard times.

Credit to the Daily Journal for a very informative, if not dry, article on the subject. I found it very useful and pulled quotes from it for this piece. See it here: https://www.dailyjournal.com/cle.cfm?show=CLEDisplayArticle&qVersionID=270&eid=897501&evid=1