Hobby Lobby and the Corporate Veil
When I first heard the decision in the Hobby Lobby case (Burwell v. Hobby Lobby), I was angry and disappointed for the same reason that most people were: because it allows employers to insert their religious views into their employees’ personal medical decisions, which I think is wrong. But then, as an attorney, another thought crossed my mind. What effect would this decision have on the “corporate veil”? It just so happens that a few days after the decision came down, I attended a wedding where I got into a conversation with another attorney, who asked me what I thought of the case. When I said “there’s an aspect of this case that I haven’t seen mentioned in the press”, he replied “The corporate veil, right? We were all talking about that yesterday at my firm”. Then last week I saw Burt Neuborne, Esq. (Professor of Civil Liberties at the New York University School of Law) on television talking about the same thing. Apparently, this is now a hot topic among lawyers, especially those who practice corporate litigation.
A little background for non-lawyers: the corporate veil is a legal construct that separates individuals from the corporations they own, thereby providing (at times) some tax advantages, but most importantly, insulating a corporation’s owners/stockholders from responsibility for their corporation’s liabilities. That’s the primary reason individuals form corporations, including closely held corporations like Hobby Lobby. (A closely held corporation is one whose shares are not publicly traded). They don’t have to; a person could simply conduct business under his/her own personal identity. But if they did, and they were sued for something they did in connection with the business, all of their assets, including their personal assets, would be at risk in a lawsuit. So people form corporations (or other business entities such as limited liability companies) to protect their personal assets from any potential business liabilities. Then they do business under the corporate name, and if they incur liabilities in connection with business activities, a lawsuit filed in connection with the business must be brought against the corporation (not them personally), and any judgment their creditor is awarded can only be collected against the corporation’s assets. Thus the corporation, once duly formed, is deemed to have an existence separate and apart from the identity of its owner or owners. This separation is called the “corporate veil”. The government allows this in order to foster innovation and risk taking. Not all new businesses succeed, and if people had to put all of their personal assets on the line every time they had a new idea, they would be less likely to risk a new enterprise. But there are certain circumstances, especially when the identities of the corporation and its owners/stockholders are not kept strictly separate, when the corporate veil is said to be “pierced”, which exposes the owners to personal liability for the corporation’s debts and liabilities.
Here’s an example from my own days of practicing law. I represented a corporate client that was owed money by another small, closely held corporation. We brought suit and obtained a judgment for several thousand dollars. But before we could collect on the judgment, the corporate defendant closed its doors and went out of business, apparently having no assets, which would make collecting on the judgment difficult, if not impossible. My client knew where the defendant banked, and so we served a subpoena with restraining order on the bank. Not surprisingly, the debtor corporation’s accounts had been cleared out, so there was nothing to collect on there. But curious thing; the corporation had maintained a safe deposit box at the bank, which was held in the corporate name. I therefore prepared a petition asking the Court to have the bank turn over the box’s contents to my clients to satisfy the debt, and served it on the defendant’s attorney, who immediately called me in a panic. It seems the defendant corporation’s owner/stockholder had kept his very valuable coin collection in the safe deposit box. The attorney assured me that the coin collection was owned by the owner/stockholder personally, and so should not be subject to collection for the corporation’s debt. Ah, but the box was in the corporation’s name, and by putting his personal asset in a corporate-designated account (in this case the safe deposit box), the owner had co-mingled personal and corporate assets, which effectively removed the distinction between the corporation and the owner. To maintain separate identities for the owner/stockholder and the corporation (the aforementioned corporate veil) you must keep strict separation between the entities. So even though the coin collection was owned by the corporation’s stockholder as a personal (not corporate) asset, I could still take possession of it to satisfy the corporation’s debt owed to my client, because by co-mingling assets in one safe deposit box, the corporation and its owner/stockholder had failed to maintain their separate identities. As the coin collection was worth much more than the judgment, the owner agreed to pay the entire judgment amount.
Back to Hobby Lobby; the Supreme Court has ruled, in essence, that the Hobby Lobby corporation is deemed to have the religious convictions of the corporation’s stockholders, the Green family. But wait a minute: Hobby Lobby is a corporation that operates stores that sell hobby supplies to the general public. Its corporate activities have no connection to religion. Thus the corporation has no religious interests; it is not a church or other house of worship, nor a religious school or hospital. It is not even a store that sells primarily religiously-oriented goods; it is a hobby supply store. So the only way that you can deem the Hobby Lobby corporation to have any religious interests at all is to impute the religious beliefs of its owners to the corporation itself. But if that’s the case, where is the total and complete separation of the corporate entity and its stockholders that the corporate veil requires? It no longer exists, and so applying the legal logic of years of precedent, the corporate veil is pierced and the Green family’s personal assets become open to collection from any judgment against the Hobby Lobby corporation. This is not, I believe, what the Supreme Court intended, no less the Green family and their attorneys. If closely held corporations are deemed to have the religious (or any other) beliefs of their stockholders, then they lose their separate identities. The corporate veil is pierced, and all stockholders of closely held corporations forfeit the protection of their personal assets that was the reason they formed their corporations in the first place. Legal chaos would ensue, of course, but this is the logical conclusion that flows from the Court’s Hobby Lobby reasoning. It is disconcerting, if not downright weird, that the only lawyers in the country who seem to be blissfully unaware of the potential corporate catastrophe flowing from the rationale of the Hobby Lobby decision are named Roberts, Alito, Scalia, Thomas and Kennedy.