The Law School Magazine  ·  Spring 2009 :

Ohio Supreme Court Modifies Belvedere Test for Piercing Corporate Veil

By - Spring 2009
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Last fall, the Ohio Supreme Court modified the three-prong Belvedere test for piercing the corporate veil in Ohio. While the decision did expand the type of behavior that will allow the corporate veil to be pierced, it is not nearly as broad as many Ohio District Court of Appeals’ earlier interpretations.

In Dombroski v. WellPoint, Inc (119 Ohio St. 3d 506), the plaintiff sued her health insurance company, Community Insurance Company (“Community”), for denying coverage of a cochlear implant, which is 90 percent effective in restoring hearing in the specific type of deafness suffered by the plaintiff. Community claimed the use of these implants is considered investigational.

Anthem UM Services is an affiliate of Community and participated in the administration of the plaintiff’s policy, as did Anthem Insurance Company. WellPoint Inc. is a publicly traded company on the New York Stock Exchange and owns 100 percent of all three of these companies. The plaintiff filed suit against Community, Anthem UM Services, Anthem Insurance Company, and WellPoint, Inc., for breach of contract and acting in bad faith in processing and repeatedly denying her claims. The plaintiff claimed WellPoint’s corporate medical policies resulted in her denial.

The trial court dismissed the case against Anthem Insurance Company and WellPoint pursuant to Civ. R. 12 (B)(6). The appellate court reversed.

Under the test set forth in Belvedere Condominium Unit Owners’ Assn. v R.E. Roark Cos., Inc. (67 Ohio St.3d 274 (1993)), shareholders of a corporation may be held liable for wrongs committed by the corporation when:

  1.  control over the corporation by those to be held liable was 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 was exercised in such a manner as to commit fraud or an illegal act against a person seeking to disregard the corporate entity; and
  3. injury or unjust loss resulted to the plaintiff from such control and wrong.

The trial court dismissed the plaintiff’s claims against WellPoint and Anthem Insurance Company because the second prong of the Belvedere test was not met. The Ohio Seventh District Court of Appeals reversed.

Prior the Supreme Court’s decision, the Third, Seventh, Tenth, Eleventh and Twelfth District Court of Appeals in Ohio had liberally construed the second prong of Belvedere to allow other forms of misconduct beyond fraud and illegal acts, including unjust or inequitable acts.  In Robert A. Saurber Gen. Contr. v. McAndrews, (Bulter App. No. CA2003-09-239, 2004-Ohio-6927), the court asked: “The true question to be asked is whether it would be unjust under the circumstances of each case not to pierce the corporate veil.”

The Sixth District Court of Appeals had narrowly interpreted Belvedere to apply acts that are illegal or constitute actual fraud.

Chief Justice Thomas J. Moyer ’64, writing the majority opinion, rejected the appeals courts’ liberal interpretation, stating it was in conflict with the purpose of limited shareholder liability in the corporate structure and that piercing the corporate veil should be a “rare exception.”  Moyer argued that expanding liability to all unjust or inequitable actions would virtually allow every shareholder of a close corporation to be sued because close corporations are by definition controlled by a small group of shareholders.

The opinion, however, did expand Belvedere somewhat. The Court held that to fulfill the second prong of the Belvedere test, the plaintiff must demonstrate 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. The term “similarly unlawful act” was added to the second prong of the Belvedere test. Moyer advised that “courts should apply this limited expansion cautiously toward the goal of piercing the corporate veil only in instances of extreme shareholder misconduct.” The Court did not find that the plaintiff met the new standard in this case.

Justice Paul E. Pfeifer ’66, dissenting, found the majority opinion inconsistent with Bucyrus-Erie Co. v Gen. Prods. Corp (643 F.2d 413 (1981)), which Belvedere extensively cites and praises. In Bucyrus-Erie, the second prong of the test is written as “that domination and control was used to commit fraud or wrong or other dishonest or unjust act.” Justice Pfeifer found the majority opinion abrogates the Court’s previous reliance on Bucyrus-Erie and installed a much more restrictive test than it originally set forth in Belvedere.

Justice Pfeifer also found the addition of the language “or a similarly unlawful act” redundant and useless. In addition, he stated that he believed that even under the majority’s new rigid rule, insurer bad faith is an exceptional wrong that breaches a legal duty owed to the insured, and, therefore, the plaintiff should have prevailed.

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