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VEIL-PIERCING UNBOUND
PETER B. OH∗
INTRODUCTION ................................................................................................. 90
I. LIBERATING PIERCING FROM THE VEIL ................................................. 96
A. Delimiting Liability ....................................................................... 97
B. Disclaiming Piercing ................................................................... 105
II. RECONCEIVING PIERCING .................................................................... 113
A. Demystifying the Constructive Trust ........................................... 113
B. Dismantling the Alternatives ....................................................... 118
III. PIERCING VIA THE CONSTRUCTIVE TRUST .......................................... 123
A. One Dimension ............................................................................ 124
B. Two Dimensions .......................................................................... 127
C. Three+ Dimensions ..................................................................... 131
CONCLUSION ................................................................................................... 136
Veil-piercing is an equitable remedy. This simple insight has been lost over
time. What started as a means for corporate creditors to reach into the
personal assets of a shareholder has devolved into a doctrinal black hole.
Courts apply an expansive list of amorphous factors, attenuated from the
underlying harm, that engenders under-inclusive, unprincipled, and
unpredictable results for entrepreneurs, litigants, and scholars alike.
Veil-piercing is misapplied because it is misconceived. The orthodox
approach is to view veil-piercing as an exception to limited liability that is
justified potentially only when the latter is not, a path that invariably leads to
examining scenarios based on different types of creditors/claims, corporations,
and shareholders. But the occasion to seek derivative relief from a shareholder
arises only when a claim cannot be enforced against a defendant corporation.
Veil-piercing is thus a secondary remedy, detached from limited liability and
its rationales.
To fix veil-piercing, corporate law must look beyond itself. For centuries the
law of restitution has featured the constructive trust, an equitable remedy that
disgorges misappropriated assets from unjustifiably enriched parties. This
Article novelly re-conceives veil-piercing as constructive trust and
∗ Associate Professor of Law, University of Pittsburgh School of Law. B.A., Yale

College; J.D., The University of Chicago. E-mail: poh@pitt.edu. I thank Steven A. Bank,
Douglas M. Branson, Mirit Eyal-Cohen, Andrew Kull, David Millon, Greg Mitchell, as well
as participants from a Distinguished Lecture at Queen Mary University of London School of
Law and the 2011 Annual Meeting of the Association of American Law Schools’ Section on
Remedies, for their comments and suggestions.
89
90 BOSTON UNIVERSITY LAW REVIEW [Vol. 93:89
demonstrates how its application to judgment-proof corporations can yield

more coherent and effective results.
INTRODUCTION
Veil-piercing is an equitable remedy. This simple insight has been lost over
time. Since the dawn of modern civilization, corporations have been able to
enshroud themselves in a “veil” of limited liability.1 And by the early
nineteenth century, courts began to “pierce” this veil to reach into the personal
assets of a shareholder.2 Today, veil-piercing has become one of the most
litigated issues within corporate law,3 permeating the entire business
landscape, from ordinary transactions to environmental disasters.4
But from its inception, veil-piercing has been an abysmal failure. There is
no uniform test for veil-piercing, which typically requires demonstrating that a
corporation was an “alter ego” or “instrumentality,” controlled or dominated
by a shareholder to perpetuate a fraud, wrong, or injustice that proximately
caused loss or injury to a plaintiff.5 To apply this complex test, courts have
compiled an expansive list of ex post fact-specific factors, none of which is
dispositive, weighted, or necessarily related to the underlying harm.6
And then there are the metaphors. Despite Justice Cardozo’s venerable
caution that “[m]etaphors in law are to be narrowly watched, for starting as
devices to liberate thought, they end often by enslaving it,”7 veil-piercing has
1 Incarnations of limited liability can be found in early Byzantine, Islamic, and Roman
law. See, e.g., Timothy P. Glynn, Beyond “Unlimiting” Shareholder Liability: Vicarious
Tort Liability for Corporate Officers, 57 VAND. L. REV. 329, 336 & nn.20-22, 337 & nn.23-
24 (2004) (delineating origins and citing sources).
2 In the United States, the “cradle” of veil-piercing, KAREN VANDEKERCKHOVE, PIERCING
THE CORPORATE VEIL 76 (2007), vestiges of the practice can be traced back to 1809, see
Bank of the U.S. v. Deveaux, 9 U.S. (5 Cranch) 61, 75 (1809) (“[I]t is said that you may
raise the veil which the corporate name interposes and see who stand behind it.”); Fairfield
Cnty. Tpk. Co. v. Thorp, 13 Conn. 173, 179 (1839) (“There are cases . . . in which courts
have drawn aside the veil and looked at the character of the individual corporators . . . .”).
3 Peter B. Oh, Veil-Piercing, 89 TEX. L. REV. 81, 90 n.59 (2010).
4 See, e.g., FRANKLIN A. GEVURTZ, CORPORATION LAW § 1.5, at 69 (2d ed. 2010)
(describing veil-piercing as “the area of corporation law which the attorney seeking to avoid
corporate practice is most likely to confront”); see also United States v. Bestfoods, 524 U.S.
51, 61-64 (1998) (fashioning a variant of veil-piercing for claims brought under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA)).
5 FREDERICK J. POWELL, PARENT AND SUBSIDIARY CORPORATIONS: LIABILITY OF A
PARENT CORPORATION FOR THE OBLIGATIONS OF ITS SUBSIDIARY § 3, at 4-6 (1931).

6 See, e.g., Associated Vendors, Inc. v. Oakland Meat Co., 26 Cal. Rptr. 806, 813-15
(Dist. Ct. App. 1962) (listing twenty factors); Cathy S. Krendl & James R. Krendl, Piercing
the Corporate Veil: Focusing the Inquiry, 55 DENVER L.J. 1, 52-55 (1978) (listing thirty-one
factors).
7 Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926).
2013] VEIL-PIERCING UNBOUND 91
enabled judges to unleash their inner poet. The imagery of a corporate “alter
ego” or “instrumentality” has proven too seductive for courts to resist engaging
in “jurisprudence by metaphor or epithet,”8 liberally conjuring up a mish-mash
of gilded allusions.9
All of this has exacted a steep price from entrepreneurs and litigants.
Somehow they must navigate their way through an “incoherent”10 and
“intellectually disturbing”11 doctrine that more closely resembles a tolerated
evil than a preferred good. The task of justifying veil-piercing has been
described as “an exercise in futility: an attempt to articulate doctrinal standards
for an area all too often characterized by ambiguity, unpredictability, and even
a seeming degree of randomness.”12 Not surprisingly, this has prompted calls
to discard the doctrine altogether.13
Veil-piercing is misapplied because it is misconceived. For about a century,
veil-piercing has been regarded as an exception to, and thus “inextricably
linked with[,] the predicate principle of limited liability. Hence, what one
makes of veil piercing depends in the first instance on one’s view of limited
liability.”14 Pursuant to this view, veil-piercing is justified potentially only
when limited liability is not.
This stems from limited liability being framed as loss-allocation.15 The
orthodox approach defines the scope of shareholder liability according to its
distributive impact on different types of creditors/claims, corporations, and
shareholders.16 And nowhere is the approach more apparent than within
empirical studies of veil-piercing. Published two decades ago, the seminal
8 PHILLIP L. BLUMBERG, THE LAW OF CORPORATE GROUPS: PROCEDURAL PROBLEMS IN

THE LAW OF PARENT AND SUBSIDIARY CORPORATIONS 8 (1983).
9 See, e.g., HARRY G. HENN & JOHN R. ALEXANDER, LAWS OF CORPORATIONS § 146, at
344 n.2 (3d ed. 1983) (listing some of the “verbal characterizations, epithets, and
metaphors” in which “judicial opinions indulge”); see also People v. Clauson, 41 Cal. Rptr.
691, 694 (Dist. Ct. App. 1965) (“If the corporation . . . has been acting as a juristic monkey
to help pull the stockholder[’]s income-chestnuts out of the [income-tax-law-]fire then the
court will deal with the stockholder-cat as though it was the corporation-monkey’s paw.”
(quoting Albert Lévitt, Disregarding the Corporate Entity in Tax Cases, 22 TAXES 457, 458
(1944))); cf. THIS IS SPINAL TAP (Spinal Tap Prod. 1984) (“The musical growth of this band
cannot even be charted. They are treading water in a sea of retarded sexuality and bad
poetry.” (quote from character Marty diBergi, played by Rob Reiner)).
10 David Millon, Piercing the Corporate Veil, Financial Responsibility, and the Limits of
Liability, 56 EMORY L.J. 1305, 1381 (2007).

11 ROBERT CHARLES CLARK, CORPORATE LAW 38 (1986).
12 Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479, 507 (2001).
13 Id. at 535; Douglas C. Michael, To Know a Veil, 26 J. CORP. L. 41, 42 (2001).
14 Bainbridge, supra note 12, at 481; see also infra Part I.
15 See infra Part I.B.
16 See, e.g., Bainbridge, supra note 12, at 487 fig.1; Michael, supra note 13, at 46 (“[I]t
was recognized that veil-piercing cases could be productively analyzed if divided by the
type of case or plaintiff.”).
study is designed entirely from loss-allocation analysis,17 and that path has
been followed by all subsequent empirical veil-piercing studies.18
But this is a path to hell,19 dependent upon mistaken assumptions.20 The
orthodox approach posits a mutually exclusive choice between limited or
17 Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL

L. REV. 1036, 1044 (1991) (examining approximately 1600 veil-piercing cases according to
whether they arose from contract, criminal, statutory, or tort claims; involved close or public
corporations; and targeted corporate or individual shareholders); see also infra notes 98-106
and accompanying text.
18 See Christina L. Boyd & David A. Hoffman, Disputing Limited Liability, 104 NW. U.
L. REV. 853, 877 (2010) (examining 690 federal district court cases from 2000 to 2005);
Nicholas L. Georgakopoulos, Bankruptcy Veil-Piercing: Bypassing Broken Nodes?, 27
EMORY BANKR. DEV. J. 471, 473-75 (2010) (extrapolating from West Key Number searches
of 244,258 contract and/or tort cases from 1947 to 2010); Nicholas L. Georgakopoulos,
Contract-Centered Veil Piercing, 13 STAN. J.L. BUS. & FIN. 121, 129 (2007) (extrapolating
from West Key Number searches of 175,316 contract and/or tort cases from 1947 to 2003);
Lee C. Hodge & Andrew B. Sachs, Empirical Study, Piercing the Mist: Bringing the
Thompson Study into the 1990s, 43 WAKE FOREST L. REV. 341, 347 (2008) (sampling 228
cases from 1986 to 1995); John H. Matheson, The Modern Law of Corporate Groups: An
Empirical Study of Piercing the Corporate Veil in the Parent-Subsidiary Context, 87 N.C. L.
REV. 1091, 1108 n.5, 1110 (2009) (examining 360 parent-subsidiary cases from January 1,
1990 to March 1, 2008); Richmond McPherson & Nader Raja, Empirical Study, Corporate
Justice: An Empirical Study of Piercing Rates and Factors Courts Consider When Piercing
the Corporate Veil, 45 WAKE FOREST L. REV. 931, 940 (2009) (sampling 236 cases from
1996 to 2005); Geoffrey C. Rapp, Preserving LLC Veil Piercing: A Response to Bainbridge,
31 J. CORP. L. 1063, 1068, 1071-72 (2006) (examining sixty-one limited liability company
rulings from 1997 to 2005); see also Charles Mitchell, Lifting the Corporate Veil in the
English Courts: An Empirical Study, 3 COMPANY FIN. & INSOLVENCY L. REV. 15, 20-24,
app. at 24-28 (1999) (examining 290 British cases from 1859 up to and including 1998); Ian
Ramsay & David B. Noakes, Piercing the Corporate Veil in Australia, 19 COMPANY & SEC.
L.J. 250, 261 (2001) (examining 104 Australian cases up to and including 1999); Peter B.
Oh, Piercing v. Lifting 9, 14 (Nov. 17, 2012) (unpublished manuscript) (on file with author)
(examining 188 British cases from 1888 up to and including 2006). There have been,
however, some minor refinements to Thompson’s loss-allocation approach. See, e.g., Boyd
& Hoffman, supra, at 886-901 (parsing various substantive claims and reorganizing data by
type of creditor).
19 Cf. PERCY BYSSHE SHELLEY, PROMETHEUS UNBOUND 37 (Lawrence John Zillman ed.,
Yale University Press 1968) (1820) (reinterpreting in poetic form the classic play by
Aeschylus, Prometheus Bound, about the banishment and then liberation of Prometheus,
whom Shelley envisioned to resemble Satan, in that he “leads us to weigh his faults with his
wrongs, and to excuse the former because the latter exceed all measure,” but whom Shelley
also thought distinctly represented “the type of the highest perfection of moral and
intellectual nature, impelled by the purest and the truest motives to the best and noblest
ends”).
20 Cf. Paul A. David, Clio and the Economics of QWERTY, 75 AM. ECON. REV. 332, 332
(1985) (“A path-dependent sequence of economic changes is one of which important

influences upon the eventual outcome can be exerted by temporally remote events,
unlimited liability, in which veil-piercing serves to correct misallocated loss.21

On one level the choice is false because limited liability continues to be upheld
even in scenarios where it is broadly recognized to be unjustified.22 From a
positive and normative standpoint, there is thus no basis to presume that
efficiency-based rationales for limited liability necessarily govern veil-
piercing. On another level the choice is incomplete because analysis of limited
liability is preoccupied with the law of obligations, that is, claims by contract
and tort creditors.23 From an empirical and theoretical standpoint, the current
framework does not or cannot account for, respectively, property and unjust
enrichment, the remaining two pillars of private law.24
These problems reflect a deeply flawed conception of veil-piercing. For if
the analysis for limited liability is so clear and compelling, why is unlimited
liability analysis such a convoluted inquiry? To date, no one has supplied a
satisfactory answer.25 The reason may be that everyone apparently has
forgotten that veil-piercing originated as an equitable procedure to remedy the
problem of unenforceable judgments. The earliest forms of shareholder
liability were envisioned as incidental provisional relief, available only when
none could be had from a corporation.26 Accordingly, whether an initial claim
lay in contract, property, tort, or unjust enrichment against a corporation had
no ultimate bearing on whether liability should be imposed on a shareholder.
Veil-piercing thus was detached from the question of corporate liability.
In this light the shambled state of veil-piercing is hardly a surprise. Over the
years there have been incessant attempts to rehabilitate veil-piercing. Some
have argued for codifying the common law test in the hope that legislative
guidance and statutory interpretation might constrain courts.27 Others instead
including happenings dominated by chance elements rather than systematic forces.”); O.W.
Holmes, The Path of the Law, 10 HARV. L. REV. 457, 472-73 (1897).
21 See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the
Corporation, 52 U. CHI. L. REV. 89, 109 (1985) (“The [veil-piercing] cases may be
understood, at least roughly, as attempts to balance the benefits of limited liability against its
costs.”); see also infra notes 53-60 and accompanying text.
22 See infra Part I.A.
23 Cf. RUDOLPH SOHM, THE INSTITUTES: A TEXTBOOK OF THE HISTORY AND SYSTEM OF
ROMAN PRIVATE LAW § 77, at 371 (James Crawford Ledlie trans., Oxford at the Clarendon
Press 3d ed. 1907) (“An obligation arises either from a declaration of consensus, i.e. ex
contractu, or from an act done in contravention of the law, i.e. ex delicto.”); id.
(acknowledging that the category does not comprise even the entire universe of possible
obligatory-esque claims, including “obligationes quasi ex contractu” and “obligationes quasi
ex delicto” (internal quotation marks omitted)); infra Part I.B.
24 See, e.g., JAMES GORDLEY, FOUNDATIONS OF PRIVATE LAW: PROPERTY, TORT,
CONTRACT, UNJUST ENRICHMENT 3 (2006); see also infra notes 121-130 and accompanying
text.
25 Cf. infra note 183.
26 See infra Part I.
27 See, e.g., Rebecca J. Huss, Revamping Veil Piercing for All Limited Liability Entities:
have focused on simplifying the test, proposing ways to distill the universe of
existing factors into their essential ingredients.28 But all of these approaches
are premised on loss-allocation analysis. Until this conceptual path linking
veil-piercing and limited liability can be extirpated, the prospect of a cogent
remedy will remain illusory.
To fix veil-piercing, corporate law must look beyond itself. And to find the
solution, one need look no further than Justice Cardozo, who regarded
conventional veil-piercing with such eloquent contempt.29 Years before
dallying with veil-piercing, Cardozo had coronated the constructive trust as
“the formula through which the conscience of equity finds expression.”30 For
centuries the law of restitution has provided courts with this means to enforce
Forcing the Common Law Doctrine into the Statutory Age, 70 U. CIN. L. REV. 95, 96
(2001); John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era
of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving
Owners’ Limited-Liability Protection, 75 WASH. L. REV. 147, 152 (2000). But see, e.g., I.
MAURICE WORMSER, DISREGARD OF THE CORPORATE FICTION AND ALLIED CORPORATION
PROBLEMS 37-38 (1927) (dismissing this idea as “not only impossible but preposterous”).
Nevertheless, there have been some legislative attempts to control veil-piercing. See, e.g.,
Oh, supra note 3, at 121-23 (analyzing the effects of numerous revisions to article 2.21A of
the Texas Business Corporation Act, which imposes an actual fraud requirement on veil-
piercing claims grounded in contract).
28 See, e.g., Bainbridge, supra note 12, at 535 (advocating a test partially derived from
the factors of fraud and siphoning of funds, on the basis that “these tests are workable”); see
also infra Part III.A-B.
29 See supra note 7 and accompanying text. Cardozo’s eloquence ironically obscured, if
not undermined, his own attempt to fix veil-piercing. See Berkey v. Third Ave. Ry. Co., 155
N.E. 58, 61 (N.Y. 1926) (“The logical consistency of a juridical conception will be indeed
sacrificed at times, when . . . essential to the end some accepted public policy may be
defended or upheld.”); STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL § 1:4, at 1-24,
1-21 (2004) (“Shrouding his own analysis irretrievably in the mists of metaphor,” Cardozo’s
“ringing phrases, when analyzed, yield little of substance.”). Cardozo’s proposed test
essentially relies on basic agency principles, supplemented with public policy, to thwart a
perceived “perversion” of limited liability as a state-conferred privilege; premised on this
now-defunct concession theory, the test has suffered the same fate. See, e.g., Bainbridge,
supra note 12, at 495 (“It has been over half-a-century since corporate legal theory, of any
political or economic stripe, took the concession theory seriously.”); Michael, supra note 13,
at 57 (“It makes no logical sense to base veil-piercing in a theory of corporate privilege.”).
30 Beatty v. Guggenheim Exploration Co., 122 N.E. 378, 380 (N.Y. 1919); see also
Meinhard v. Salmon, 164 N.E. 545, 548 (N.Y. 1928) (“A constructive trust is . . . the
remedial device through which preference of self is made subordinate to loyalty to others.”).
Indeed, the new Restatement of Restitution is modeled upon Cardozo’s conception of the
constructive trust. RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 55(1)
cmt. a (2011) (“The remedy described by § 55 is intended to be the same, in scope and in
function, as the remedy described by Cardozo.”).
judgments by disgorging misappropriated assets from the hands of

unjustifiably enriched parties.31
At first blush the match seems perfect to even the most jaded skeptic. Never
have two remedies been so misunderstood. Like veil-piercing, the constructive
trust has been denigrated as a troubled child of equity.32 Moreover, the
constructive trust has been banished from the family of ordinary trusts,33
forced to reside within the shadowy world of quasi-law.34 And, to make
matters even worse, the constructive trust involves elements of unjust
enrichment, the shifty relative everyone knows but prefers to avoid.35
But in truth the constructive trust is what veil-piercing should be. Over time,
veil-piercing has been stripped of its equitable nature and remedial structure.36
These attributes, however, pristinely remain with the constructive trust, which
can supply alternative relief to an inferior, initial remedy in either equity or
31 See RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 55(1) (“If a
defendant is unjustly enriched by the acquisition of title to identifiable property at the

expense of the claimant or in violation of the claimant’s rights, the defendant may be
declared a constructive trustee . . . of the property in question and its traceable product.”);
RESTATEMENT (FIRST) OF RESTITUTION: QUASI-CONTRACTS AND CONSTRUCTIVE TRUSTS §
160 (1937) (“Where a person holding title to property is subject to an equitable duty to
convey it to another on the ground that he would be unjustly enriched if he were permitted
to retain it, a constructive trust arises.”); infra note 142.
32 Cf. infra notes 143-149 and accompanying text.
33 See, e.g., RESTATEMENT (FIRST) OF RESTITUTION: QUASI-CONTRACTS AND

CONSTRUCTIVE TRUSTS § 160 cmt. a (“Constructive trusts are not dealt with in the
Restatement of Trusts . . . .”); 5 AUSTIN WAKEMAN SCOTT & WILLIAM FRANKLIN FRATCHER,
THE LAW OF TRUSTS § 461, at 300-02 (4th ed. 2006) (examining why constructive trusts are
covered by the Restatement (First) of Restitution).
34 Other condemned cohabitants of this world include quasi-contracts and quasi-torts. See
infra note 147. But cf. PETER BIRKS, AN INTRODUCTION TO THE LAW OF RESTITUTION 30
(1985) (“The common law has found no use for quasi-tort.”). Birks notes “‘[q]uasi-’ and
‘constructive’ have the same sense,” which is aptly captured by one of his “sillier Oxford
stories”:
The college’s rules forbid the keeping of dogs. The Dean keeps a dog. Reflecting on
the action to be taken, the governing body of the college decides that the labrador is a
cat and moves to next business. That dog is a constructive cat. Deemed, quasi- or
fictitious, it is not what it seems. When the law behaves like this you know it is in
trouble, its intellect either genuinely defeated or deliberately indulging in some
benevolent dishonesty. . . . If cuckoos had to be quasi-thrushes or constructive
blackbirds we should know less about them.
Id. at 22.
35 The shiftiness can be attributed partially to the status of restitution, which is often
interchanged with unjust enrichment, as a substantive claim and a remedy. See, e.g.,
RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 1 cmt. e (“A liability in
unjust enrichment (restitution) is enforced by restitution’s characteristic remedies . . . and a
claim in unjust enrichment (restitution) is subject to characteristic defenses.”).
36 See infra Part I.
law.37 Accordingly, the constructive trust’s principles and rationales operate

independently of whatever kind of creditor/claim, corporation, or shareholder
is within the original suit.
And the constructive trust is not just lipstick on the veiled pig. Unlike loss-
allocation, the constructive trust concerns the location of benefit, namely
whether retention of a misappropriated asset is justified.38 Further, unlike veil-
piercing, this inquiry is not restricted to a shareholder, but instead follows and
traces a disputed asset to its ultimate holder.39 Moreover, once that holder has
been designated a constructive trustee, the plaintiff is conferred proprietary
rights to the asset.40 And when the constructive trustee is insolvent, these rights
take priority over any general unsecured creditors;41 indeed, although not a
necessary condition, bankruptcy is the context where the constructive trust
excels.
This Article novelly re-conceives veil-piercing as constructive trust. Part I
evinces how the orthodox approach to veil-piercing as an exception to limited
liability has no positive or normative merit, either empirically or theoretically.
Part II proceeds to introduce the constructive trust and demonstrate its
superiority over prominent alternatives. Part III concludes by showing how the
constructive trust can be applied to a triad of classic veil-piercing scenarios in a
more principled manner and with more effective outcomes than the current
approach.
I. LIBERATING PIERCING FROM THE VEIL

Limited liability has been romanticized to mythical proportions. Capping the
personal risk of shareholders has been hailed as “the greatest single discovery
of modern times”42 and “one of the first principles of American law.”43 These
lofty accolades are bolstered by rationales so compelling that they have framed
37 See infra Part II.A.

38 See infra notes 145-46, 159 and accompanying text.
39 See infra notes 165-67 and accompanying text.

42 NICHOLAS MURRAY BUTLER, WHY SHOULD WE CHANGE OUR FORM OF GOVERNMENT?
82 (1912) (“Even steam and electricity are far less important than the limited liability
corporation, and they would be reduced to comparative unimportance without it.”); see also
WORMSER, supra note 27, at 14 (“[M]any immigrants doubtless possess full knowledge of
th[e] fact [that limited liability is the greatest advantage of incorporation] before coming
within hailing distance of the Statue of Liberty.”).
43 PRESSER, supra note 29, § 1.1, at 1-4 to -5 (“It is now accepted as one of the first
principles of American law that those who own shares in corporations . . . normally are not
liable for the debts of their corporations.”); see also William W. Cook, “Watered Stock” –
Commissions – “Blue Sky Laws” – Stock Without Par Value, 19 MICH. L. REV. 583, 583 n.4
(1921) (quoting President of Harvard University Charles William Eliot: “[T]he privilege of
limited liability [is] the corporation’s most precious characteristic. [And it] is by far the
most effective legal invention for business purposes made in the nineteenth century . . . .”).
and governed limited liability’s primary exception, veil-piercing. The question

of when a shareholder should be held liable personally for corporate debts is
answered by determining when limited liability is not justified. This invariably
leads to analysis of various scenarios, based on different types of
creditors/claims, corporations, and shareholders.
This Part shows how this path has been paved with mistaken notions. The
first Section evinces the illogic of conceiving limited liability in exclusive
terms with veil-piercing qua unlimited liability. The second Section then
exposes the illegitimacy of analyzing veil-piercing in connection with different
types of creditors/claims or corporations. After this conception and analysis are
shown to be dead ends that must be abandoned, piercing is left standing alone
as a post-judgment equitable remedy, independent of the veil of limited
liability and its rationales.
A. Delimiting Liability
The rationales for limited liability have mutated over time. Prior to 1809,
when the first general incorporation statute was enacted, unlimited liability
apparently was the initial default rule.44 But the advent of the War of 1812
provided a patriotic reason for states to limit the liability of shareholders as a
means of making the corporate form accessible to entrepreneurs of all kinds
and means.45 Roughly a century later, with the shift from a concessionary to
contractarian paradigm for conceiving the firm, the justifications for limited
liability correspondingly embraced a modern preference for economic
efficiency.46 Today, those principles unquestionably govern not only limited
liability, but its chief exception, veil-piercing.
One justification for limited liability is enhanced firm governance. The
characteristic separation between corporate ownership and control inherently
generates agency costs.47 Managers have an incentive to minimize these costs
44 See Act of Mar. 3, 1809, ch. 65, § 6, 1809 Mass. Acts 464, 466; Oscar Handlin &
Mary F. Handlin, Origins of the American Business Corporation, 5 J. ECON. HIST. 1, 10

(1945) (“Examination of contemporary Anglo-American law . . . strikes at the very roots of
the common assumption that limited liability was always an essential attribute of
corporateness . . . .”); Morton J. Horwitz, Santa Clara Revisited: The Development of
Corporate Theory, 88 W. VA. L. REV. 173, 208 (1985) (“[T]ruly limited shareholder liability
was far from the norm in America even as late as 1900.”).
45 PRESSER, supra note 29, § 1:3, at 1-14 to -15 (arguing that limited liability served “as a
means of encouraging the small-scale entrepreneur, and of keeping entry into business
markets competitive and democratic. Without [limited liability], it was believed, only the
very wealthiest men . . . could possess the privilege of investing in corporations.” (emphasis
omitted)).
46 See id. at 1-16 (“[W]hether or not the democratic justification has since been lost sight
of, the economic argument of the public’s potential gains from a policy of limited liability . .
. has remained the primary justification for limited liability.”); Larry E. Ribstein, Limited
Liability and Theories of the Corporation, 50 MD. L. REV. 80, 83-84, 130 (1991).
47 See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial
because unrestricted transferability provides dissatisfied shareholders with an

option for disinvestment.48 Limited liability not only promotes such
transferability, but also permits managers to pursue more profitable projects
due to the capped risk for shareholders.49 As a result, investors can assume a
passive role with respect to monitoring the firm and their fellow shareholders’
solvency.50
Another justification for limited liability is more facile shareholding. With
the amount of risk restricted to the purchase price, shares can be a fungible and
normalized reflection of different firms’ value.51 And by stabilizing the extent
of total liability, investors can reduce risk even further by diversifying their
stock portfolios.52 In this way limited liability stimulates broad participation
within capital markets.
These well-established economic rationales all share a basic premise. As
Stephen Presser has noted, “[t]he principal thrust of law and economics
analysis of limited liability has been to demonstrate that the rule is more
efficient than a rule of unlimited liability.”53 In contractarian terms the issue
assumes the form of a hypothetical ex ante bargaining session that asks: “If the
shareholders and creditors could costlessly bargain . . . would they adopt a rule
of limited or unlimited personal liability?”54 The choice seems quite natural,
Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976).
48 Easterbrook & Fischel, supra note 21, at 94-95 (“The costs of the separation of
investment and management (agency costs) may be substantial. . . . Investors individually

respond to excessive agency costs by disinvesting.”).
49 Id. at 97 (“[M]anagers maximize investors’ welfare by investing in any project with a
positive net present value. They can accept high-variance ventures . . . without exposing the
investors to ruin.”). Some might prefer to say “externalized” rather than “capped” risk. Nina
A. Mendelson, A Control-Based Approach to Shareholder Liability for Corporate Torts,
102 COLUM. L. REV. 1203, 1206, 1239 (2002) (“[T]he presence of a controlling shareholder
likely will prompt a corporation to externalize more costs than if the corporation’s equity is
diffusely held by many very small shareholders.”). But see Easterbrook & Fischel, supra
note 21, at 98 (“Limited liability is an arrangement under which the loss largely lies where it
falls. Loss is swallowed rather than shifted.”).
50 See David W. Leebron, Limited Liability, Tort Victims, and Creditors, 91 COLUM. L.
REV. 1565, 1570-74 (1991).

51 See Paul Halpern et al., An Economic Analysis of Limited Liability in Corporation
Law, 30 U. TORONTO L.J. 117, 129-31 (1980).

52 Henry G. Manne, Our Two Corporation Systems: Law and Economics, 53 VA. L. REV.
259, 262 (1967) (“One of the great advantages of the large corporate system is that it allows
individuals to use small fractions of their savings for various purposes, without risking a
disastrous loss if any corporation in which they have invested becomes insolvent.”).
53 PRESSER, supra note 29, § 1:7, at 1-35 (emphasis added).
54 Bainbridge, supra note 12, at 486-87; see also Richard A. Posner, The Rights of
Creditors of Affiliated Corporations, 43 U. CHI. L. REV. 499, 522 (1976) (suggesting that
one test for disregarding limited liability due to corporate misrepresentation “would be to
differentiate among types of creditors in terms of their information costs”). Stephen Presser
asserts that Posner “is simply developing an argument, the inappropriateness of piercing the
given the historical prominence of unlimited liability,55 as well as its default

status in the event of defective incorporation.56 Along these lines, the merits of
any prospective increase in shareholder liability are to be measured against the
costs of sacrificing limited liability.57
Indeed, this premise girds the relation between limited liability and veil-
piercing. Because the latter results in joint and several liability for
shareholders, its net effect mimics pure unlimited liability.58 Accordingly, the
orthodox approach is to conceptualize veil-piercing qua unlimited liability as a
contiguous exception to limited liability.
Figure 1. Limited Liability – Veil-Piercing
Limited Liability
Unlimited Liability/
Veil-Piercing
Figure 1 simply depicts the conventional view that, “[o]nce the appropriate
limits of limited liability are understood, veil piercing can police those limits.
That understanding, however, depends on a sound sense of the policy basis for
limited liability . . . .”59 Indeed, some have even argued that the difficulties
with veil-piercing are the product of “a failure to identify what is at stake in a
veil piercing case: the very principle of limited liability for the shareholders.”60
veil in a contractual context, already advanced by [Frederick] Powell.” PRESSER, supra note
29, § 1:7, at 1-38.
55 See supra notes 44-45 and accompanying text.
56 Fred S. McChesney, Doctrinal Analysis and Statistical Modeling in Law: The Case of
Defective Incorporation, 71 WASH. U. L.Q. 493, 496-97 (1993) (characterizing defective

incorporation as a subset of veil-piercing). But see Timothy R. Wyatt, Note, The Doctrine
of Defective Incorporation and Its Tenuous Coexistence with the Model Business
Corporation Act, 44 WAKE FOREST L. REV. 833, 847-51 (2009) (criticizing McChesney’s
assertion).
57 There are, however, alternatives to limited liability. See, e.g., Easterbrook & Fischel,
supra note 21, at 101-03 (assessing the possibility of investor insurance purchased by the
firm).
58 Henry Hansmann & Reinier Kraakman, Toward Unlimited Shareholder Liability for
Corporate Torts, 100 YALE L.J. 1879, 1932 (1991) (“[V]eil-piercing is itself simply a form
of unlimited liability.”). But cf., e.g., Leebron, supra note 50, at 1578-79 (“Liability in
excess of a corporation’s assets might be assessed against shareholders either on a joint and
several or on a pro rata basis. . . . However, any joint liability rule probably would be
coupled with a contribution rule. . . . [Joint liability coupled with contribution, in some
aspects, would be] equivalent to a pro rata rule . . . .” (footnote omitted)).
59 Millon, supra note 10, at 1311; see also supra note 14 and accompanying text.
60 Jonathan M. Landers, A Unified Approach to Parent, Subsidiary, and Affiliate

The principle, however, has its own limitations. A common distinction for
limited liability concerns its justifications for close versus public
corporations.61 Unlike their close peers, shareholders of public corporations
tend to be passive investors that enjoy the benefit of unrestricted
transferability.62 Accordingly, the corporate governance justifications for
limited liability would seem to be stronger in the publicly held context.63
And yet public corporations do present a moral-hazard problem.64 Limited
liability gives managers an incentive to pursue overly risky projects that inure
to shareholders.65 Further, moral hazard tends to be even more pervasive when
there are affiliates or subsidiaries,66 a common setup for public corporations.67
Questions in Bankruptcy, 42 U. CHI. L. REV. 589, 620 (1975).

61 Easterbrook & Fischel, supra note 21, at 109-10 (“The distinction between close and
public corporations is supported by economic logic. . . . This has profound implications for
the role of limited liability.”); Manne, supra note 52, at 278 (“As we begin to examine the
differences between [these two types of] corporations, it becomes apparent that the two are
extremely dissimilar.”).
62 Cf. Manne, supra note 52, at 279 (“Participants in a small business have a very real
interest in knowing and controlling the identity of other participants. Thus it is not
surprising to find that restrictions on share transferability are very common with small
corporations.”).
63 Millon, supra note 10, at 1314 (“The argument for limited liability may be less
compelling as to shareholders of close corporations than as to those of publicly held

companies.”). Certainly, the distinction enjoys considerable empirical support, as every veil-
piercing study has found that plaintiffs prevail exclusively against close corporations. E.g.,
Oh, supra note 3, at 110 tbl.3 (finding a 0.00% veil-piercing rate in four cases involving a
public corporation); Thompson, supra note 17, at 1055 tbl.7 (finding a 0.00% veil-piercing
rate in nine cases involving a public corporation); Robert B. Thompson, Piercing the Veil
Within Corporate Groups: Corporate Shareholders as Mere Investors, 13 CONN. J. INT’L L.
379, 384 (1999) (updating his 1991 study with an additional ten years of cases, and still
finding that “[p]iercing the veil is a doctrine directed exclusively at close corporations and
corporate groups”). This finding, however, serves less to vindicate limited liability’s
rationales, and more to reflect the reality that public corporations tend to feature disperse
shareholding that in turn precludes a sufficient level of control or domination to justify veil-
piercing. See, e.g., GEVURTZ, supra note 4, § 1.5.3, at 78 (“[R]equiring control screens out
piercing against the shareholders of a publicly traded corporation . . . . This provides a
doctrinal underpinning to explain the fact that there never has been a case in which the court
pierced to hold shareholders in a public corporation liable for the company’s debts.”).
64 The moral-hazard problem is not restricted to publicly held corporations. On the
contrary, the problem arguably is more pernicious within the closely held context. Halpern
et al., supra note 51, at 141 (stating that the moral hazard problem “is likely to be more
severe for small, tightly held companies than for larger companies”). The point here is
merely to illustrate that, even within the most compelling scenarios, efficiency-based
justifications do not determine the complete scope of limited liability.
65 Id. at 140-41.
66 Easterbrook & Fischel, supra note 21, at 111 (“[T]he moral-hazard problem is
probably greater in parent-subsidiary situations because subsidiaries have less incentive to

insure.”); Leebron, supra note 50, at 1617, 1619 (“With regard to integrated subsidiaries,
Accordingly, there is a broad consensus that limited liability should not apply
in these situations.68
This consensus, however, does not rest on efficiency grounds. Under the
shareholding rationale,69 imposing joint and several liability for mass risk
would discourage investment, as well as open the door to judgment-proof
firms.70 And, under the corporate-governance rationale, the loss due to mass
risk presents no direct concern to shareholders, provided agency costs are
relatively low.71 On balance, then, limited liability should apply to firms that
engage in mass-risk activities, even when they have a negative net social
value.72 The unpalatable nature of this conclusion, even for the staunchest
there is little reason to respect the separate corporate entities when noncontractual tort
claimants are involved. . . . It is unclear what justifies the legal presumption against veil
piercing between related corporations on behalf of noncontractual creditors.”).
67 Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1, 21 (1996) (“Th[e] parent-
subsidiary ownership strategy is in wide use among the largest companies in America. Most
large companies consist of numerous corporate entities. Limiting liability – that is, defeating
part of it – is the principal reason for creating those entities.” (footnote omitted)).
68 E.g., Mendelson, supra note 49, at 1204 (“There is little disagreement that limited
shareholder liability for corporate torts can encourage socially costly corporate activity –
risky activity selected because the corporation and its shareholders do not bear all the
expected costs of the activity.” (footnote omitted)); id. at 1204 n.2 (citing sources). A
notable few, however, maintain an agnostic position. See, e.g., Easterbrook & Fischel, supra
note 21, at 104 (“Externalization of risk imposes social costs and thus is undesirable. The
implications of this point, however, are unclear, both because modifying limited liability has
its costs and because moral hazard would exist without limited liability.”).
70 See Bainbridge, supra note 12, at 492 (“[I]t would be prohibitively costly for the
creditor of a corporation to bring individual suits against thousands of geographically

diverse investors.”); Hansmann & Kraakman, supra note 58, at 1903 (“There is no doubt
that unlimited liability . . . would increase the cost of equity. . . . If shareholders faced joint
and several liability for all corporate debts . . . these costs might be very large.”). Along with
numerous other commentators, Hansmann and Kraakman instead provocatively propose a
regime of pro rata liability. Id. at 1903 & n.69. Not everyone agrees with this proposal,
however. See, e.g., Bainbridge, supra note 12, at 496-500 (criticizing the proposal and citing
other critical sources). The proper scope and form of limited liability are beyond the
purview of this paper; the point here is merely that limited liability and its rationales do not
extend logically to veil-piercing.
71 See supra notes 47-50 and accompanying text. To be sure, shareholders would be
concerned if mass risk resulted in a diminished share price, but the effect is indirect as such
liabilities would be diluted and spread over time, during which there would be ample
opportunity for exit.
72 See Hansmann & Kraakman, supra note 58, at 1883 (“Since limited liability permits
cost externalization, a corporation engaged in highly risky activities can have positive value
for its shareholder, and thus can be an attractive investment, even when its net present value
to society as a whole is negative.”). A useful parallel is the theory of efficient breach of
contracts. See Richard Craswell, Contract Remedies, Renegotiation, and the Theory of
Efficient Breach, 61 S. CAL. L. REV. 629, 630, 638 (1988) (“Since so many contract
proponents of limited liability,73 belies that limited liability’s “real policy

basis . . . does not appear to be efficiency. Instead, the goal seems to be to
promote investment by transferring risk from investors to creditors.”74 This is
the apparent goal of legislatures, which uniformly embrace broad limited
liability.75 Consequently, the task of minimizing moral hazard has fallen to
courts, which have imposed liability on corporate agents in specialized
scenarios.76
But this is not veil-piercing. Pure veil-piercing enables a plaintiff to reach
the personal assets of only a shareholder.77 From a strict efficiency standpoint,
courts can and should impose liability on a shareholder that induces a
corporation to generate mass risk with a negative net value. Liability in these
situations is directed at corporate agents, such as directors and officers, and yet
still analyzed within the veil-piercing rubric.78 And because the remedy is
designed for shareholders, courts have had to adapt the multiple factors that
already bear little, if no, connection with the underlying harm.79 As a result,
remedies depart in one direction or the other from the ‘ideal’ of perfect compensation, the
prospect of inefficient breaches . . . would seem to loom large.”).
73 See supra note 49.
74 Millon, supra note 10, at 1317.
75 See Bainbridge, supra note 12, at 500 (highlighting that states apparently refuse to
repeal limited liability “for mass torts, or indeed, torts of any kind” and that “[t]he
availability of limited liability in related contexts . . . likewise has been reaffirmed”);
Millon, supra note 10, at 1314 (“Corporate statutes all confer limited liability in general
terms. . . . There is no distinction between contract- and tort-based claims or between
closely held or public corporations.”).
76 See infra note 80.
77 Helen Anderson, Piercing the Veil on Corporate Groups in Australia: The Case for
Reform, 33 MELB. U. L. REV. 333, 342 (2009) (“‘Pure’ veil-piercing occurs where liability is
imposed simply because a legal person occupies the position of a shareholder.”).
78 Cf. United States v. Bestfoods, 524 U.S. 51, 64-67 (1998) (examining vicarious
liability provisions within CERCLA). With unanimous support Justice Souter acknowledged
that, “whereas the rules of veil piercing limit derivative liability for the actions of another
corporation, CERCLA’s ‘operator’ provision is concerned primarily with direct liability for
one’s own actions.” Id. at 65. The Court, however, ultimately rejected the suggestion from
courts and commentators that an “indirect, veil-piercing approach can subject a parent
corporation to liability only as an owner, and not as an operator” under CERCLA. Id. at 64
n.10.
79 See supra note 6 and accompanying text. In Bestfoods, for instance, the Court realized
that the amorphous veil-piercing standards for parent-subsidiary control could not be
adapted to directors and officers, and instead fashioned an even more nebulous test:
[T]he presumption that an act is taken on behalf of the corporation for whom the
officer claims to act is strongest when the act is perfectly consistent with the norms of
corporate behavior, but wanes as the distance from those accepted norms approaches
the point of action by a dual officer plainly contrary to the interests of the subsidiary
yet nonetheless advantageous to the parent.
Bestfoods, 524 U.S. at 70 n.13. Tellingly, though, the Court backed away from its own test,
limited liability has spawned a group of cases that look and stumble like veil-
piercing, but in fact are not.80
This mutation belies how limited liability and veil-piercing are misaligned.
The rationales for limited liability justify its preservation within a broad range
of scenarios.81 But that justification does not quadrate perfectly with the scope
of veil-piercing qua unlimited liability:
Figure 2A. The Mass Risk Scenario82
Limited Liability
Mass Risk
Unlimited Liability/ Scenario
Veil-Piercing
Figure 2A depicts the mass risk scenario as an area where limited liability
applies, albeit unjustifiably, while the shaded box represents the gap where
courts have attempted to stretch veil-piercing beyond its original form with
distortive results. The problem, however, cannot be ascribed to just a
misapplication of veil-piercing; somewhat understandably courts have elected
the path of least resistance by exploiting a malleable common law test for veil-
piercing rather than chipping away at the statutory strictures of limited
liability.
Rather, the principal culprit is a mistaken premise that limited liability and
veil-piercing are mutually exclusive. The moral-hazard problem highlights the
relevance of broad policy considerations, in addition to efficiency, to
determining the proper scope of limited liability. In the specific case of mass
stating that it was not an “attempt to recite the ways in which the Government could show
that dual officers or directors were in fact acting on behalf of the parent.” Id.
80 See, e.g., Worth v. Tyler, 276 F.3d 249, 262 (7th Cir. 2001) (rejecting application of
“alter ego” theory for individual liability under Title VII); UA Local 343 of the United
Ass’n of Journeymen v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1475 (9th Cir. 1994) (“The
alter ego doctrine as developed in labor law is analytically different from the traditional veil-
piercing doctrine as developed in corporate law.”); Lumpkin v. Envirodyne Indus., Inc., 933
F.2d 449, 461 (7th Cir. 1991) (“[T]he corporate veil may be pierced more easily in ERISA
cases . . . to promote the federal policies underlying the statute . . . .”); Morris Okun, Inc. v.
Harry Zimmerman, Inc., 814 F. Supp. 346, 348 (S.D.N.Y. 1993) (distinguishing statutory
trust for sellers and suppliers under the Perishable Agricultural Commodities Act “from the
piercing the veil doctrine”); Comm’r v. RLG, Inc., 755 N.E.2d 556, 563 (Ind. 2001) (“The
responsible corporate officer doctrine is distinct from piercing the corporate veil, and
explicitly expands liability beyond veil-piercing.”).
81 See, e.g., sources cited supra notes 61-63 and accompanying text.
82 Mass risk is merely one example of the misalignment between limited liability and
veil-piercing. Another scenario concerns affiliate or sibling entities owned by a common

shareholder. See infra Part III.C.
risk, a choice is posed between stimulating corporate investment and protecting

social welfare.83 Courts currently misframe the choice in terms of whether to
impose personal liability on corporate agents.84 But even if the inquiry were
focused properly on shareholders, the competing policies implicated by mass
risk have no bearing on whether veil-piercing will occur. Instead a myriad of
independent and unweighted factors determine whether a judgment against a
corporation will be satisfied by resort to personal assets.85 The application and
scope of veil-piercing thus are detached from the dynamics of the moral hazard
problem, which accounts for the unpredictable and unprincipled doctrinal state
of affairs.
Instead, shareholder liability should be conceived as a balancing test. On the
one hand, whether liability should be applied on a limited or unlimited basis is
an ex ante inquiry, which turns on efficiency and policy considerations.86 On
the other hand, whether creditors should be awarded relief from a
shareholder’s (or agent’s) personal assets is an ex post inquiry, which involves
traditional veil-piercing or some other kind of remedy.87 These inquiries,
therefore, should be de-linked:
Figure 2B. The Mass Risk Scenario Redux
EX ANTE EX POST
Limited
Liability Mass Risk
Veil-Piercing
Unlimited Scenario
Liability
To be sure, a regime of unlimited liability has the same ultimate effect as

veil-piercing, in that a shareholder is personally responsible for corporate
debts;88 conversely, for that shareholder, veil-piercing does entail displacing

84 See supra note 76 and accompanying text; cf. Leebron, supra note 50, at 1587 (“Even
assuming that shareholders who would be held liable will cause managers to act efficiently
in taking potential losses into account . . . there may be costs to unlimited liability that
outweigh its benefits.”).
86 See supra notes 50-57, 69-75 and accompanying text.
87 Kevin M. Warsh, Corporate Spinoffs and Mass Tort Liability, 1995 COLUM. BUS. L.
REV. 675, 696 (describing “what Professor [Reinier] Kraakman calls ‘ex post remedies,’ a
series of legal doctrines that further protect contract creditors from the management and
equityholders: veil-piercing, fraudulent conveyance law and equitable subordination”); see
also infra Part II.B.
88 See supra note 58 and accompanying text.
limited liability. But the present approach to veil-piercing does not take into
account whether limited liability is justified. And there is no necessary logical
relationship between the propriety of protecting the corporate form and
awarding a remedy such as veil-piercing.89
B. Disclaiming Piercing
The conceptual shadow cast by limited liability has stunted veil-piercing in
another crucial way. Pursuant to the conventional view, the scope of veil-
piercing can be defined simply by determining the scenarios where limited
liability is justified. To organize these scenarios, scholars began to classify
veil-piercing cases based on different types of substantive claims. What was
once a scheme borne largely from convenience, however, has become an
integral, but deficient, feature of veil-piercing analysis.
The approach originated with William Douglas and Carrol Shanks.90 Their
early analysis of parent-subsidiary cases framed shareholder liability in terms
of loss-allocation: “The issue is whether the loss resulting from a contract or
tort claim against the subsidiary will be placed on it or the parent. . . . For
analytical reasons the cases will be grouped according to whether the claim is
tort or contract.”91 Those analytical reasons subsequently were articulated by
Elvin Latty, who observed that parent-subsidiary liability cases
present narrower issues, to be solved by principles . . . [that] follow[]
more or less beaten paths in fields of law often quite remote from that of
stockholder liability. . . . Many of the cases that purport to be, or are cited
as being, decided upon a broad ground of stockholder’s liability really
involve the stockholder’s own torts or contracts.92
89
This can be gleaned by the uncertainty over whether veil-piercing should be available
against unincorporated business entities. See Larry E. Ribstein, Reverse Limited Liability
and the Design of Business Associations, 30 DEL. J. CORP. L. 199, 216-19 (2005) (focusing
on reverse-piercing, but also demonstrating how traditional veil-piercing is ill-equipped for
asset partitioning within partnerships).
90 See William O. Douglas & Carrol M. Shanks, Insulation from Liability Through
Subsidiary Corporations, 39 YALE L.J. 193, 194 (1929). One commentator has speculated
that “[t]he trend toward principled analysis probably began with Alexander Hamilton Frey’s
1951 discussion of defective incorporation.” Michael, supra note 13, at 46 (citing Alexander
Hamilton Frey, Legal Analysis and the “De Facto” Doctrine, 100 U. PA. L. REV. 1153,
1153 (1952)). Douglas and Shanks’ work, however, antedates Frey’s, which Michael admits
is “not directly relevant to the veil-piercing issue.” Id.
91 Douglas & Shanks, supra note 90, at 194-95 (“The problem here is to ascertain the
manner of organization and operation which is necessary in order to secure the insulation
from liability which the organizers desired and which the legal system permits. . . . On
analysis the problem resolves itself into one of allocation of losses.”).
92 ELVIN R. LATTY, SUBSIDIARIES AND AFFILIATED CORPORATIONS: A STUDY IN
STOCKHOLDERS’ LIABILITY §§ 22-23, at 77-78 (1936); see also supra note 23.
The distinction between contract and tort thus was introduced only to classify
various shareholder liability cases.93
Latty had the foresight to recast this distinction in terms of creditors. In his
view, the boundaries of contract and tort were drawn in ways that failed to
reflect differences between veil-piercing cases within the parent-subsidiary
context.94 Decades later, Henry Manne explained that the risk of corporate
insolvency simply represents a cost of doing business for voluntary creditors,
who have incentives to insure themselves, unlike involuntary creditors, who
are victims of unforeseeable harms.95
However drawn, the distinction continues to serve as a prism for identifying
scenarios when shareholder liability is justified.96 As one commentator has
observed, “modern veil-piercing analysis has created at least three types of
cases,” organized by the plaintiff’s original claim.97 This is most clearly
manifest within the methodology employed by the legion of empirical veil-
piercing studies. Loss-allocation analysis supplies the blueprint for Robert
Thompson’s seminal study, which collected data from approximately 1600
veil-piercing opinions on claims within four substantive areas: contract,
93 Cf. Holmes, supra note 20, at 462 (“If you commit a tort, you are liable to pay a
compensatory sum. If you commit a contract, you are liable to pay a compensatory sum
unless the promised event comes to pass, and that is all the difference.”); Roy Kreitner,
Fault at the Contract-Tort Interface, 107 MICH. L. REV. 1533, 1534-37 (2009) (recounting
how tort and contract law had “switch[ed] positions” with regard to fault by the late
nineteen century, which contributed to the realignment of these two respective areas of
private law “along the border between public regulation and private ordering”).
94 LATTY, supra note 92, § 49, at 201 (“To make the classification more significant, the
line of distinction should perhaps be drawn between involuntary and voluntary creditors,
inasmuch as there may be some doubt as to whether . . . e.g., claimants under a breech [sic]
of warranty, should be treated like those, say, who lend money to the subsidiary.”). Latty’s
observation, however, tends to be disregarded in modern analysis. See, e.g., Bainbridge,
supra note 12, at 487 n.40 (using “the terms ‘contract creditor’ to encompass all classes of
voluntary creditors and ‘tort creditor’ to encompass all classes of involuntary creditors”);
Millon, supra note 10, at 1316 (“Involuntary, or tort, creditors are in a quite different
situation [than voluntary creditors with claims based on obligations arising out of
contract].”).
95 See Manne, supra note 52, at 263 (“[A]t least in the case of voluntary creditors –
which certainly includes most business creditors – the risk of insolvency is regularly
understood and, where significant, treated as any other cost. . . . This last explanation of
limited liability does not account for the problem of the involuntary creditor, or . . .
noncommercial creditors.”); see also Easterbrook & Fischel, supra note 21, at 107-09
(arguing that, with respect to involuntary creditors, the incentives for insurance are shifted
to the corporation). But see Halpern et al., supra note 51, at 147 (“[M]erely because a
creditor is ‘involuntary’ does not in every case conclude the case against limited liability.”).
96 The same function is performed by the conventional distinctions between closely and
publicly held corporations, as well as between individual and corporate shareholders. See
supra note 63; infra note 224.
97 Michael, supra note 13, at 54.
criminal, statute, and tort.98 And that basic approach has served as the template
for all subsequent empirical veil-piercing studies.99
Moreover, despite Thompson’s caution,100 his study ignited a controversy
about veil-piercing in relation to contract versus tort claims. The prevailing
view of courts and commentators, regardless of ideological stripe, long has
been that contract creditors should have less success with veil-piercing because
of the opportunity to assess and insure themselves from risk.101 Thompson’s
study, however, found that requests for veil-piercing occur and prevail
considerably more often when couched in contract than tort,102 a result that he
acknowledged, “more than any other in the project, go[es] against the
conventional wisdom.”103
My re-examination of opinions has restored the wisdom in favor of tort and
involuntary creditors, but even these results are unsatisfying. Federal and state
courts inexplicably still pierce in contract and voluntary creditor claims at rates
far higher than what one might expect, while the margin between these rates
and, respectively, tort and involuntary-creditor claims hardly reflects the
disparate strength of these rationales.104 Existing empirical data thus have
provided only part of the story about veil-piercing litigation.105
98 Thompson, supra note 17, at 1058 tbl.9 (reporting veil-piercing rates for contract,
criminal, statute, and tort claims); Robert B. Thompson, Piercing the Veil: Is the Common
Law the Problem?, 37 CONN. L. REV. 619, 628 (2005) (“Recognizing a corporation as
separate from its shareholders is a way of allocating risk in a business transaction.”
(emphasis omitted)); see also supra note 17 and accompanying text. But cf. Oh, supra note
3, at 94 nn.77-78 (noting that the approximate total dataset for Thompson’s study matches
the total number of claims, manifesting a reduction of multiple claims within each opinion
into one data entry).
100 Thompson, supra note 63, at 392 (“I would discourage devoting too much attention to
whether corporate law conflicts with tort law . . . .”).

101 E.g., PHILLIP I. BLUMBERG, THE LAW OF CORPORATE GROUPS: TORT, CONTRACT, AND
OTHER COMMON LAW PROBLEMS IN THE SUBSTANTIVE LAW OF PARENT AND SUBSIDIARY
CORPORATIONS § 8.04, at 163 (1987) (“[V]ery special pressures in tort require a different
treatment than [veil-piercing] cases arising in other areas of the law, such as contract.”);
Easterbrook & Fischel, supra note 21, at 112 (“Courts are more willing to disregard the
corporate veil in tort than in contract cases. . . . Contract creditors . . . are compensated ex
ante for the increased risk of default ex post. Tort creditors, by contrast, are not
compensated.”); Leebron, supra note 50, at 1601 (“[A]lmost every commentator has paused
to note that limited liability cannot be satisfactorily justified for tort victims . . . .”).
102 Thompson, supra note 17, at 1058 tbl.9 (reporting a veil-piercing rate of 41.98% for
contract versus 30.97% for tort); Thompson, supra note 63, at 385 (reporting that “new data
suggests that the judiciary is still reluctant to pierce the veil in tort cases”).
103 Thompson, supra note 17, at 1058; cf. PRESSER, supra note 29, § 1:7, at 1-36 n.5
(noting that Thompson’s results “appear to be on their way to becoming the conventional
wisdom”).
104 See Oh, supra note 3, at 125 tbl.8 (finding a veil-piercing rate of 46.24% for contract
versus 47.75% for tort); id. at 142 tbl.15 (finding a veil-piercing rate of 47.50% for
This may be because all of the studies share a conceptual deficiency. To

date, no one has classified veil-piercing opinions based on substantive claims
arising in either property or unjust enrichment.106 And these claims have been
neglected almost entirely by commentators.107 The neglect is curious,
particularly in light of the historical conception of shareholder liability as a
property-based mesne process.108 And the continued use of veil-piercing as an
equitable remedy should have exposed the incompleteness of an analysis
confined to contract and tort.109
The omission is due to our dependence on loss-allocation analysis. The
initial framing by Douglas and Shanks reflects their contemporary fancy with
splitting the unitary domain of obligations within Roman Law into contract and
tort along the lines of fault.110 While the line has been re-drawn by economic
analysis, the contract-tort divide continues to thrive within agency and, by
extension, corporate law.111 Pursuant to this orthodox approach, the scope of
voluntary creditors versus 52.83% for involuntary creditors).

105 Even an attempt to combat selection effects by analyzing veil-piercing dockets yields
materially similar results. See Boyd & Hoffman, supra note 18, at 886-901.
106 See supra note 18. Data for these claims are reported, if at all, within the diverse
category of statutory claims. See Oh, supra note 3, at 129 tbl.10 (reporting twenty-two real
property and forty-nine remedial veil-piercing cases arising under a statute); see also Boyd
& Hoffman, supra note 18, at 887 fig.7 (presenting cause-of-action data for “Equitable
Solutions” and “Property Law,” as distinguished from “Enforcement Mechanisms,” “Other
State Claims,” “Other Federal Claims,” and “Veil Piercing,” although the basis for that
distinction is not clear and the categories are not necessarily of comparable scope).
107 But see Warner Fuller, The Incorporated Individual: A Study of the One-Man
Company, 51 HARV. L. REV. 1373, 1397 (1938) (describing veil-piercing claims in property
law); Jason W. Neyers, Canadian Corporate Law, Veil-Piercing, and the Private Law
Model Corporation, 50 U. TORONTO L.J. 173, 238 (2000) (“[I]f X would have been found
liable under a general tort, contract, unjust enrichment, or statutory analysis, the court will
find them liable through some sort of ‘veil-piercing.’”).
108 See, e.g., Act of Mar. 4, 1800, ch. 80, § 8, 1799 Mass. Acts 481, 484 (“[I]n any
judgment to be rendered against said Corporation, [a] Plaintiff, not being able to find any
property of the Corporation to attach on mesne process, or whereon to levy his Execution,
shall have the right of attaching or levying his Execution on any . . . individual Members of
the Corporation, in the same manner as if the Action had been brought and the judgment
rendered against them in their individual capacity.”).
109 See 1 WILLIAM MEADE FLETCHER ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF
PRIVATE CORPORATIONS § 41.10, at 136-37 (perm. ed., rev. vol. 2006) (“A claim based on
the alter ego theory is not in itself a claim for substantive relief, but rather is procedural. . . .
It has been said that the alter ego doctrine is thus remedial, not defensive, in nature.”).
110 See supra note 23 and accompanying text. The influence of obligations on loss-
allocation analysis might explain why Thompson’s empirical study of veil-piercing did not
recognize fraud as a separate substantive claim. See Oh, supra note 3, at 95-97.
111 See Caroline Bradley, Transatlantic Misunderstandings: Corporate Law and
Societies, 53 U. MIAMI L. REV. 269, 279 (1999) (“[M]uch of corporate law is an adaptation
of the rules of tort, contract, and agency to fit a special legal form . . . .”); Eric Rasmusen,
veil-piercing turns on a choice of whether shareholder liability should be

limited or unlimited,112 which then migrates into an analysis of different types
of creditors/claims.
Contributing to this migration is concern over the mass-risk scenario. Even
when analyzed by Ronald Coase,113 the prospect of third parties bearing risk
from corporate torts was more hypothetical than real. That started to change
two decades ago, setting the stage for Henry Hansmann and Reinier
Kraakman’s provocative proposal of a pro rata shareholder liability regime for
corporate torts.114 Notably, they distance their analysis from the familiar entry
point of examining the effect of shareholder liability on capital markets:
In the past, limited liability has generally been seen as a problem of
corporate law. . . . Consequently, the formal boundaries of the corporation
that have been established for purposes of contractual rights should also
be respected in tort. One of the principal points we wish to make is that
this is not so. . . . Rather, shareholder liability should be seen as a
standard problem of tort law.115
They instead embrace the least-cost avoider analysis that thrives within agency
law.116 But that analysis, Hansmann and Kraakman reason, does not apply to
contract creditors, which can determine and insure themselves against the risks
posed by limited liability.117
Independent of its merits,118 Hansmann and Kraakman’s argument is
ultimately quite conventional. Even when the view of corporate law is set
aside, veil-piercing remains within the orthodox framework, in which limited
liability is mutually exclusive of veil-piercing.119 According to them, “[t]o
Agency Law and Contract Formation, 6 AM. L. & ECON. REV. 369, 379 (2004) (“Agency
law often seems a hybrid of tort and contract.”).
113 R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 1-2 (1960).
114 Hansmann & Kraakman, supra note 58, at 1880-81 (“Changes in technology,
knowledge, liability rules, and procedures for mass tort litigation have for the first time
raised the prospect of tort claims that exceed the net worth of even very large
corporations.”).
115 Id. at 1916; see also supra notes 51-52 and accompanying text.
116 See Rasmusen, supra note 111, at 369; Eric A. Posner, Agency Models in Law &
Economics 11 (Univ. of Chi. Law Sch., John M. Olin Law & Econ. Working Paper No. 92,
2d Series, 2000), available at http://ssrn.com/abstract=204872; cf. United States v. Carroll
Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (“[I]f the probability be called P; the injury,
L; and the burden, B; liability depends on whether B is less than L multiplied by P: i.e.,
whether B < PL.”).
117 Hansmann & Kraakman, supra note 58, at 1919 (“The case against limited liability in
tort does not extend to contract. There are compelling reasons for retaining limited liability
as the background rule for contract creditors.”); see also supra note 101 and accompanying
text.

decide that there are any circumstances in which shareholders can be held
liable for tort damages . . . is to discard limited liability in principle. . . . In
sum, the distinction between ‘liberalized veil-piercing’ and ‘unlimited liability’
is largely rhetorical.”120 And once shareholder liability is justified for corporate
torts, Hansmann and Kraakman maintain, the principles of loss-allocation in
tort should control veil-piercing.121
Tort, however, hardly exhausts the scope of shareholder liability.122
Hansmann and Kraakman may have disavowed the view from corporate law,
but not that from economic analysis. They apparently have taken their cue
from Guido Calabresi and A. Douglas Melamed’s classic framework, in which
efficiency considerations govern liability rules, and not initial entitlements.123
Adjunct to that framework is a general reluctance of economic analysis, as well
as its hypothesis of an efficient common law,124 to engage real property.125
120 Hansmann & Kraakman, supra note 58, at 1932.

121 Id. (“[A]s soon as one has recognized that shareholders can be personally liable for
corporate torts in principle, one is logically driven to employ general principles of tort law –
rather than formalities of corporate structure – to determine the scope of their potential
liability.”). Hansmann and Kraakman do admit that distinguishing between contract and tort
damages presents “difficulties . . . in areas, such as products liability and workplace
injuries.” Id. at 1920. But they dismiss such difficulties on the basis that “courts must
already draw the line between tort and contract in other contexts, such as the enforceability
of waivers of warranties”; thus, there “should be no need to develop an extensive new
jurisprudence for this purpose.” Id. at 1921. Moreover, while warranty claims are indeed a
“freak hybrid born of the illicit intercourse of tort and contract,” William L. Prosser, The
Fall of the Citadel (Strict Liability to the Consumer), 50 MINN. L. REV. 791, 800 (1966), the
track record of courts in this regard is hardly exemplary, see, e.g., Glenn D. West & W.
Benton Lewis, Jr., Contracting to Avoid Extra-Contractual Liability – Can Your
Contractual Deal Ever Really Be the “Entire” Deal?, 64 BUS. LAW. 999, 1009-10 (2009)
(“Even since courts have enforced express warranties as contractual promises, many courts
have continued to recognize a separate tort claim for breaches of those express warranties . .
. .”).
122 Indeed, corporate torts arguably do not even exhaust the scope of involuntary creditor
claims. See Manne, supra note 52, at 263 (explaining that laborers, “[a]s the principal
victims of industrial accidents, [] formerly constituted the most numerous group of
involuntary creditors”). In fairness, Hansmann and Kraakman are concerned principally
with corporate torts, but the pair’s analysis is heavily premised on classic loss-allocation.
123 Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and
Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1110 (1972).
124 See, e.g., Richard A. Posner, The Law and Economics Movement, 77 AM. ECON. REV.
1, 5 (1987) (“Common law (i.e., judge-made) rules are often best explained as efforts,
whether or not conscious, to bring about . . . efficient outcomes.”).
125 See Thomas W. Merrill & Henry E. Smith, What Happened to Property in Law and
Economics?, 111 YALE L.J. 357, 359 (2001). This is not to say that economic analysis
cannot explain some aspects of property law, see Harold Demsetz, Toward a Theory of
Property Rights, 57 AM. ECON. REV. 347, 347 (1967), only that the focus tends to be unduly
narrow in general, and virtually non-existent in corporate law. But see Henry Hansmann &
Nevertheless, no positive account of shareholder liability focused exclusively

on the law of obligations can purport to be complete,126 as real property claims
can and do support veil-piercing.127 And analyses derived from real property
principles have yielded some of the more intriguing alternatives to veil-
piercing.128
In contrast, the neglect of unjust enrichment is not surprising at all. This
pillar of private law has been kicked aside within common law jurisdictions129
and dismissed by economic analysis. As a species of restitution,130 unjust
enrichment concerns gain-based recovery, in contrast to the loss-based
recovery that preoccupies compensation131:
The essence of restitutionary claims is often said to be the focus on the
defendant’s gain as opposed to the plaintiff’s loss. From an economic
perspective, this is immediately anomalous. Economic analysis generally
sees legal intervention as a response to conduct that imposes harm . . . .
[T]he presence of a gain as such is not a reason for the law to become
concerned.132
Whereas economic analysis justifies liability on the basis of efficient
allocation, restitutionary principles resort to disgorgement for fair
redistribution. With respect to veil-piercing, economic analysis thus has very
little to say, much less prescribe, about wrongful benefits.
These omissions are but by-products of the true flaw in veil-piercing. The
various types of substantive claims all entail certain remedies. Whether these
Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J. 387, 390
(2000) (“[O]rganizational law is much more important as property law than as contract
law.”).
126 The more natural pairing would seem to be between contract and property, given their
focus on a particular kind of subject matter, whereas tort law, by virtue of its focus on a
category of conduct, that is, wrongdoing, has “family ties to criminal, contract, property,
and regulatory law, not to mention alternative compensation schemes.” 1 DAN B. DOBBS,
THE LAW OF TORTS § 7, at 10 (2000).
127 Oh, supra note 3, at 129 tbl.10 (reporting twenty-two real property cases with a veil-
piercing rate of 54.55%, which exceeds that for the overall dataset).
128 See infra Part II.B.
129 PETER BIRKS, UNJUST ENRICHMENT 3 (2d ed. 2005) (“Of the subjects which form the
indispensable foundation of private law, unjust enrichment is the only one to have evaded
the great rationalization achieved since the middle of the 19th century in both England and
America . . . .”).
130 See infra note 151 and accompanying text.
131 BIRKS, supra note 129, at 3.
132 Christopher T. Wonnell, Unjust Enrichment and Quasi-Contracts, in 2

ENCYCLOPEDIA OF LAW AND ECONOMICS 795, 796 (Boudewijn Bouckaert & Gerrit de Geest
eds., 2000) (citations omitted). To be clear, this is not to suggest that the rise of economic
analysis entirely explains the virtual disappearance of restitution from American academic
curriculum and discourse. See BIRKS, supra note 129, at 4; infra note 160 and accompanying
text.
remedies are compensatory or restitutionary in nature is less relevant than the

fact that they apply to the defendant corporation. These remedies are thus
primary, in that their justification is linked to the nature and properties of the
initial claim. Only if and when that corporation is incapable of satisfying an
adverse judgment can a plaintiff then proceed to seek redress from a
corporation’s shareholder:
A finding of fact of [veil-piercing] . . . creates no cause of action. It
merely furnishes a means for a complainant to reach a second corporation
or individual upon a cause of action that otherwise would have existed
only against the first corporation. An attempt to pierce the corporate veil
is a means of imposing liability on an underlying cause of action such as
a tort or breach of contract.133
Veil-piercing is thus a secondary remedy that becomes ripe only when there is
an unenforceable award for its underlying substantive claim:
Figure 3: Veil-Piercing
EX ANTE EX POST
Shareholder Liability Creditor/Claim Remedy1 Remedy2
Limited Contract
Unlimited Tort
Equity/ Veil-Piercing
Law (Equity)
??? Property
N/A Unjust Enrichment
Figure 3 properly depicts veil-piercing de-linked from orthodox loss-allocation

analysis. The scope of shareholder liability, limited or unlimited, is shown in
privity with obligatory claims, respectively, contract or tort creditors, along
with their adherent initial remedy in equity or law. Also represented is the
uncertainty or inapplicability of shareholder liability with, respectively,
property and unjust enrichment claims.134 All of these columns appear under
the umbrella of ex ante analysis, as they are driven by efficiency and the policy
133 FLETCHER ET AL., supra note 109, § 41.10, at 136-37 (citations omitted).
134 The status of property and unjust enrichment are addressed within the framework of
restitution. See infra notes 149-55 and accompanying text.
logic of loss-allocation.135 In contrast, veil-piercing involves an ex post inquiry

about the equitable need for incidental relief,136 and thus stands alone.
II. RECONCEIVING PIERCING

Stripped of the veil of limited liability, piercing reveals its true form.
Originally conceived as a provisional remedy, piercing was available
incidentally and only when no relief could be had from a corporation.137
Inspired by the English chancery system, American legislatures conferred
courts with discretionary equitable power, unfettered by any concern for the
type of creditors/claims, corporations, or shareholders, to reverse wrongful
conduct. This is the essence of the law of restitution. And nothing epitomizes
the aim and function of this domestically endangered, but nonetheless vital,
domain better than the constructive trust.138
This Part explains how to re-conceive piercing as constructive trust. The
first Section removes the cloud of confusion and obscurity that enshrouds the
constructive trust, delineating its components and structurally comparing them
with piercing. The second Section proceeds to flesh out the constructive trust’s
mechanics and merits relative to the doctrine of substantive consolidation and
fraudulent transfer law, each of which has been proposed as a potential
replacement for veil-piercing.
A. Demystifying the Constructive Trust

Realizing the equitable nature of piercing reveals a superior remedial option,
the constructive trust. Considered to be “[b]y all odds the most important
contribution of equity to the remedies for prevention of enrichment,”139 this
“purely . . . remedial institution”140 empowers courts to issue an “order
declaring that the defendant [] holds a disputed asset on trust for the

136 See supra notes 87 and accompanying text.
137 See, e.g., Corning v. McCullough, 1 N.Y. 47 (1847) (involving a charter that provided
for joint and several liability only when “a creditor may, after judgment obtained against the
corporation, and execution returned unsatisfied, sue any stockholder and recover his
demand”).
138
See Andrew Kull, Rationalizing Restitution, 83 CALIF. L. REV. 1191, 1195 (1995)
(“To put it bluntly, American lawyers today (judges and law professors included) do not
know what restitution is. The subject is no longer taught in law schools, and the lawyer who
lacks an introduction to its basic principles is unlikely to recognize them in practice.”); id. at
1197 n.17 (“The enfeebled state of American restitution stands in sharp contrast to the
situation in England, Canada, Australia, and the Commonwealth generally. In all of these
countries, restitution . . . currently enjoys belated but unprecedented judicial attention and
academic favor.”).
139 JOHN P. DAWSON, UNJUST ENRICHMENT: A COMPARATIVE ANALYSIS 26 (1951).
140 Roscoe Pound, The Progress of the Law, 1918-1919, 33 HARV. L. REV. 420, 421
(1920).
plaintiff.”141 For centuries, the constructive trust has been an equitable tool
wielded to enforce judgments via disgorgement.142
Unfortunately, like veil-piercing, this device is often misunderstood. As a
preliminary matter, the constructive trust is not even a proper trust:
An express trust and a constructive trust are not divisions of the same
fundamental concept. They are not species of the same genus. They are
distinct concepts. A constructive trust does not, like an express trust, arise
because of a manifestation of an intention to create it, but it is imposed as
a remedy to prevent unjust enrichment. A constructive trust, unlike an
express trust, is not a fiduciary relation . . . .143
Instead, the constructive trust is a “species of equitable remedy, comparable in
function to the injunction or decree of specific performance.”144 No element of
consent is necessary because a constructive trust is judicially imposed;145 a
court simply declares that a defendant holds a disputed asset for the benefit of
a plaintiff.146 The result is a fictional trust,147 where the wrongfully deprived
141 Anthony Duggan, Constructive Trusts from a Law and Economics Perspective, 55 U.
TORONTO L.J. 217, 217 (2005); see also supra note 31.
142 As with veil-piercing, see supra note 2, the precise origins of the constructive trust are
unknown. Compare 1 GEORGE E. PALMER, THE LAW OF RESTITUTION § 1.3, at 9-10 (1978)
(“The beginnings of constructive trust can be found in seventeenth century English cases . . .
[many of which] arose out of the Statute of Frauds of 1677 . . . .”), with DAWSON, supra note
139, at 26 (describing the constructive trust as having “emerged from the fog of eighteenth-
century equity”). The earliest American judicial reference to the constructive trust appeared
in Lessee of Thompson v. White, 1 U.S. (1 Dall.) 424, 427 (Pa. 1789) (“[W]here there has
been a fraud in gaining a conveyance from another, the grantee may be considered as a mere
trustee.”). See also Swearingham v. Stull’s Ex’rs, 4 H. & McH. 38, 40 (Md. 1797) (“[T]his
Court, when the ends of justice required it, hath always raised a constructive trust, and
compelled the trustee to perform it . . . .”).
143 RESTATEMENT (FIRST) OF RESTITUTION: QUASI-CONTRACTS AND CONSTRUCTIVE
TRUSTS § 160 cmt. a (1937); see also RESTATEMENT (THIRD) OF RESTITUTION & UNJUST
ENRICHMENT § 55 cmt. b (2011) (“It is commonly repeated that a constructive trust is ‘not a
real trust’ since it is ‘only a remedy.’ One might go further and explain that the term
‘constructive trust’ . . . is only a manner of speaking.”).
144 John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L.J. 625,
631 (1995); see also infra note 159.

145 A. J. OAKLEY, CONSTRUCTIVE TRUSTS 1 (2d ed. 1987) (“Unlike all other trusts, a
constructive trust is imposed by the court as a result of the conduct of the trustee and
therefore arises quite independently of the intention of any of the parties.”); George P.
Costigan, Jr., The Classification of Trusts as Express, Resulting, and Constructive, 27
HARV. L. REV. 437, 448, 450 (1914) (“Express trusts and resulting trusts are trusts by the
real or the presumed intention of the parties, but . . . a constructive trust is a law-imposed
trust.” (footnote omitted)).
146 See PALMER, supra note 142, § 1.4, at 26 (Cumulative Supp. No. 2 1998) (asserting
that a plaintiff-beneficiary need not even “expressly seek a constructive trust for the court to
exercise its equitable powers and grant one”).
plaintiff is a “beneficiary” and the wrongful acquirer is deemed to be a

“trustee.”148
Further, the constructive trust is not restricted to unjust enrichment. Within
the United States, the constructive trust is conventionally regarded “as a means
of correcting wrongdoing or remedying unjust enrichment.”149 This unduly
narrow conception of the constructive trust stems from a traditional account of
civil restitution as a means for exclusively redressing unjust enrichment.150
That account once was espoused avidly by Peter Birks, who renounced it just
prior to his death, having realized that obligations can warrant restitution.151
Birks, though, left intact the unique status accorded to property. Within his
expanded account, civil law is divided entirely between the dual goals of
147 GEORGE GLEASON BOGERT, THE LAW OF TRUSTS AND TRUSTEES § 471, at 8 (rev. 2d
ed. 1978) (“A constructive trust, or as frequently called an involuntary trust, is a fiction of
equity.”). The relationship between the constructive trust and the law of trusts is akin to that
between quasi-contracts and the law of contracts. BIRKS, supra note 34, at 22 (“[I]n relation
to the restitutionary event the terms chiefly relied upon are ‘quasi-contract’ and
‘constructive trust.’ . . . ‘Quasi-’ and ‘constructive’ have the same sense.”); see also supra
note 34 and accompanying text.
148 The constructive trustee also is not subject to any fiduciary duties, as is the case with
actual trusts. SCOTT & FRATCHER, supra note 33, § 462, at 304 (“[A] court of equity does
not treat the constructive trustee for all purposes as though he were in reality a trustee . . . it
will not impose upon him the numerous fiduciary obligations that are imposed upon the
trustee of an express trust.”).
149 Langbein, supra note 144, at 631; see also RESTATEMENT (THIRD) OF RESTITUTION
AND UNJUST ENRICHMENT, § 55 cmt. b (2011) (“A court has the power to reassign title . . . as
a means of rectifying unjust enrichment.”); Duggan, supra note 141, at 219 (“In Canada, the
courts, following the United States [sic] lead, have developed the ‘remedial’ constructive
trust to prevent unjust enrichment. . . . The remedial constructive trust is not part of English
or Australian law.”).
150 See BIRKS, supra note 34, at 17 (“Restitution and unjust enrichment identify exactly
the same area of law. The one term simply quadrates with the other.”); see also
RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT, § 1 cmt. b (“The law of
restitution is predominantly the law of unjust enrichment . . . .”). While acknowledging that
“the law of restitution is very far from imposing liability for every instance of what might
plausibly be called unjust enrichment,” and that “the concepts of unjust enrichment and
restitution (in the literal meaning of ‘restoration’) correlate only imperfectly,” the drafters of
the new Restatement maintain that “the terms of ‘restitution’ and ‘unjust enrichment’ . . .
generally be treated as synonymous.” Id. § 1 cmts. b & c.
151 BIRKS, supra note 129, at 4 (“The law of gain-based recovery is larger than the law of
unjust enrichment. Every unjust enrichment gives rise to a right to restitution and therefore
belongs in the law of restitution. But that proposition cannot be turned around . . . .”); see
also Andrew Burrows, Foreword to BIRKS, supra note 129, at vii (“This new edition was
important to [Birks] and, with characteristic commitment, he was still working on it, despite
ever-failing health, until a few days before he died.”); cf. BIRKS, supra note 34, at 25
(“Restitution is not the only mechanism against unjust enrichment. . . . [I]t might equally be
said that prevention (by deterrence and anticipation) should be contrasted with reversal (by
restitution).”).
compensation and restitution,152 which translate respectively into obligations

(that is, contract and tort) and unjust enrichment.153 Property, the fourth pillar
of private law, thus would appear to be neglected in a manner reminiscent of
veil-piercing.154 The comparison would be apt if property was conceived of as
a substantive claim; instead, according to Birks, property represents a class of
remedies, namely those in rem, as distinguished from those in personam.155
These conceptual shifts provide some crucial keys to veil-piercing. Because
restitution functions to complement, and not supplant, compensation, in rem
relief is incidental to the ordinary means for compensating breaches of contract
or tortious wrongs.156 This supporting remedial role goes a long way toward
explaining property’s negligible presence as a substantive claim within veil-
piercing cases,157 as well as the abundance of veil-piercing requests arising in
contract over tort.158 Only when the initial remedy, in equity or at law, is
ineffectual will restitutionary remedies be applied, which is the precise
function performed by the constructive trust.159
152 See BIRKS, supra note 129, at 11 (“‘Restitution’ and ‘compensation’ are partners.
Compensation is loss-based recovery. Restitution is gain-based recovery.”).
153 See BIRKS, supra note 34, at 53-55 (depicting “the entire subject of restitution” as
comprising wrongs and unjust enrichment, with consent encompassing most contracts, and
other events, including the constructive trust, comprising “residue”); BIRKS, supra note 129,
at 21 (referencing four categories of civil wrongs, “torts, equitable wrongs, breaches of
statutory duty not amounting to a tort, and breaches of contract,” which can be formulated
as “manifestations of consents and wrongs” occurring before “unjust enrichments”).
154 See supra notes 24, 121-30 and accompanying text.
155 BIRKS, supra note 34, at 49-53; BIRKS, supra note 129, at 28-30.
156 See Robert Chambers, Constructive Trusts in Canada, 37 ALTA. L. REV. 173, 181-82
(1999) (“Where the consequences mean that restitution is potentially available, the law faces
two questions . . . is this the sort of wrong which gives the victim a right to restitution and, if
so, should that right be (or include) a right in rem (a constructive trust) or merely a right in
personam (to an account of profits or restitutionary damages)?”).
157 See supra notes 106-09, 123-27 and accompanying text.
158 See supra note 102 and accompanying text. But see David Millon, The Still-Elusive
Quest to Make Sense of Veil-Piercing, 89 TEX. L. REV. 15, 25-27 (2009) (asserting that veil-
piercing claims may arise less often in tort because of a smaller universe of potential
creditors as well as the availability of liability insurance). This observation also may explain
the relative paucity of veil-piercing grounded in unjust enrichment, which is disfavored as
compared to contract. See BIRKS, supra note 34, at 47 (“[T]he plaintiff can never put himself
in a better position by suing in unjust enrichment rather than in contract. Otherwise the law
of restitution would subvert bargains.”).
159 David Hayton, Personal Accountability of Strangers as Constructive Trustees, 27
MALAYA L. REV. 313, 314 (1985) (describing the constructive trust as “a fiction which
provides a useful remedy where no remedy is available in contract or in tort”); see also
Duggan, supra note 141, at 217 (“[S]ometimes the constructive trust serves . . . a
‘perfectionary’ function: the court grants the remedy to enforce an express or implied
bargain between [plaintiff] and [defendant].” (citing Chambers, supra note 156, at 183)).
The remedy thus is detached from the underlying claim’s dynamics.

Whether the suit involves a substantive claim grounded in contract, property,
tort, or unjust enrichment, or concerns a voluntary or involuntary creditor, has
no bearing on the application of a constructive trust.160 To qualify as a
constructive beneficiary, a plaintiff simply must be deprived of an asset
through some wrongful means.161 Accordingly, all that matters is whether the
process by which the asset was misappropriated warrants equitable relief.
This orientation to process extends to the defendant’s enrichment. As a
species of restitution, the constructive trust concerns the propriety of benefits,
not losses.162 Accordingly, the nature and extent of the harm caused by a
misappropriated asset is not relevant.163 All that matters is whether the
retention and enjoyment of the asset is sufficiently wrongful to justify its return
to the plaintiff.164
Moreover, the constructive-trust inquiry is not party-specific. Because the
focus is on the status of the misappropriated asset, it is simply “traced” from
the initial wrongdoer to its ultimate custodian.165 Provided the transfer was not
160 See supra note 145 and accompanying text. But cf. Saul Levmore, Explaining
Restitution, 71 VA. L. REV. 65, 67-68 (1975) (performing an economic analysis of the entire
law of restitution with a focus on the cause of action, not the choice of remedy, which
parallels loss-allocation analysis).
161 The constructive trust also addresses transactions that the law treats as ineffective or
productive of wrongful gain, such as those that are invalid by reason of mistake. See, e.g.,
Michigan v. Little River Band of Ottawa Indians, No. 5:05-CV-95, 2006 WL 2092415, at *4
(W.D. Mich. July 26, 2006) (“The party seeking to have a constructive trust imposed bears
the burden of establishing fraud, misrepresentation, concealment, undue influence, duress,
or some other circumstance that would make it inequitable for the holder of legal title to
retain the property.”); Costigan, supra note 145, at 451 (“[W]hether fraudulent retention is
called actual fraud or constructive fraud, it is sufficient justification for raising a
constructive trust.”).
162 ROBERT GOFF & GARETH JONES, THE LAW OF RESTITUTION 14 (2d ed. 1978) (“The
object of a restitutionary claim is to strip a defendant of a benefit which he has unjustly

gained at the plaintiff’s expense.”); see also supra notes 151-152 and accompanying text.
163 Cf. BIRKS, supra note 129, at 39 (“Every problem in unjust enrichment can be
unlocked by asking these five questions: (i) Was the defendant enriched? (ii) Was it at the
expense of this claimant? (iii) Was it unjust? (iv) What kind of right did the claimant
acquire? (v) Does the defendant have a defence?”).
165 See OAKLEY, supra note 145, at 8 (“[T]he imposition of a constructive trust gives rise
to the relationship of trustee and beneficiary which, on any view, is sufficient to satisfy the
prerequisites of such an equitable tracing claim.”). There are multiple conceptions of
tracing, which have been described in a variety of confusing ways. See, e.g., 2 DAN B.
DOBBS, DOBBS LAW OF REMEDIES: DAMAGES-EQUITY-RESTITUTION § 6.1, at 11-26 (2d ed.
1993) (discussing different tracing methods for various scenarios). The constructive trust is
compatible with any of these conceptions, but arguably the most clear and precise account
has been formulated by Lionel Smith, whose “rules-based tracing” focuses on value, rather
than assets or property, and consists of two distinct processes: following and claiming. See
on a bona fide basis,166 whatever party currently holds the asset will qualify as
a constructive trustee. And even if altered or substituted, the asset nevertheless
will be subject to a proprietary claim that can result in disgorgement.167
The constructive trust is thus structurally suited to classic veil-piercing
scenarios. Unlike orthodox loss-allocation analysis, which sifts through the
different types of creditors/claims, corporations, and shareholders to determine
when an exception should be made,168 the constructive trust takes all of these
variables as given. By focusing on whether a corporation’s inability to satisfy a
judgment results in an unjustifiable allocation of benefits, the principles
governing the constructive trust entirely avoid the pitfall of trying to justify a
remedy by resorting to attributes of the original claim.169 And the inquiry is
sufficiently flexible to accommodate any transfer of benefit from a corporation
to its shareholder(s).170
B. Dismantling the Alternatives

To revamp veil-piercing via extra-corporate principles is hardly a radical
proposition. Indeed, this tack has been attempted numerous times over the
years. One notable attempt resorts to bankruptcy, which features a triad of
corporate disregard doctrines – equitable subordination, substantive
consolidation, and veil-piercing – each of which is designed for specific
situations.171 In a spirited exchange with Judge Richard Posner, Jonathan
Landers endeavored to unify these doctrines in relation to parent-subsidiary
and affiliate corporate arrangements.172 For Landers, veil-piercing amounts to
LIONEL D. SMITH, THE LAW OF TRACING 10 (1997) (distinguishing “following,” an entirely

factual and mechanical exercise that “is not a claim or a right in itself” and “does not make
anyone liable,” from “claiming,” a justificatory exercise that determines whether liability
should attach along with the award of certain proprietary rights to a victim).
166 OAKLEY, supra note 145, at 8 (“[I]t is not possible to maintain an equitable tracing
claim [against] . . . a bona fide purchaser of a legal interest in the property for value without
notice of the adverse claim of the beneficiary under the constructive trust.”).
167 See SMITH, supra note 165, at 6 (“Tracing identifies a new thing as the potential
subject matter of a claim, on the basis that it is the substitute for an original thing which was
itself the subject matter of a claim.”); R. M. Goode, The Right to Trace and Its Impact in
Commercial Transactions – I, 92 L.Q. REV. 360, 370 (1976) (“[T]he right to follow denotes
a right to trace the asset into a changed form . . . .”).
170 See infra notes 244, 267-69 and accompanying text.
171 See Landers, supra note 60, at 590 (“Although all have a common source in the
division of one business into more than one corporate entity, these . . . situations have
commonly been analyzed individually under the legal rubrics of equitable subordination,
piercing the corporate veil, and consolidation of related bankrupts.”).
172 See id. at 589-90; Posner, supra note 54, at 499-500 (arguing that Landers’ “neglect
of economic principles vital to an understanding of credit transactions, limited liability, and

corporate affiliation undermines both his general approach and his specific conclusions”).
an inadequate “viability-procedural observance analysis,” in which courts

determine whether a defendant corporation was actually a viable business that
has been held out publicly as such.173 According to Landers, this approach is
inferior to substantive consolidation.174
Nevertheless, Landers’ effort leaves much to be desired. On the one hand,
substantive consolidation is over-inclusive, because the assets and liabilities of
all related entities are pooled together, with the result that “some general
creditors fare better and others worse.”175 On the other hand, substantive
consolidation is under-inclusive, because the doctrine does not reach beyond
formal bankruptcy.176 Moreover, Landers’ analysis of veil-piercing is
essentially a case study of the orthodox loss-allocation approach and its
pitfalls. Preoccupied with preserving limited liability, veil-piercing assumes
the familiar form of a mutually exclusive exception;177 accordingly, the only
apparent option for salvaging veil-piercing is for Landers to rearrange the
The exchange emerged during a visit at the University of Chicago Law School by Landers,
who recounts that “the issues discussed [within this triad of articles] became somewhat of a
cause célèbre.” Jonathan M. Landers, Another Word on Parents, Subsidiaries and Affiliates
in Bankruptcy, 43 U. CHI. L. REV. 527, 527 n.† (1976).
173 Landers, supra note 60, at 621, 623 (“The model for corporateness requires both
economic viability and the observance of certain procedural formalities. While this proposed
test is not precise or capable of quantification, it is possible to reconcile most of the piercing
cases by reference to its criteria.”).
174 Id. at 633-34 (rejecting veil-piercing on the basis that the multiple enterprise factors
are based “on the largely mythical theory that the owners will respect the corporate integrity
of constituent companies”). Landers ultimately concludes, however, that no complete
unitary approach is possible. Id. at 652 (“[A] theory of complete fusion . . . would be in
direct conflict with the corporate law that permits separate incorporation of subsidiaries and
related companies . . . .”).
175 Douglas G. Baird, Substantive Consolidation Today, 47 B.C. L. REV. 5, 6 (2005); see
also Union Sav. Bank v. Augie/Restivo Baking Co., 860 F.2d 515, 519 (2d Cir. 1988)
(applying an even stricter test for substantive consolidation that requires proving its
inurement to the benefit of all creditors).
176 In fairness, Landers explicitly is concerned only with the fragmentation of corporate
disregard doctrines within federal bankruptcy law. But even he recognizes a “dearth of
bankruptcy authority on the veil piercing question,” the orientation of which to state law and
limited liability statutes represents “practical constraints [that] make a consistent judicial
rule based on economic reality impossible.” Landers, supra note 60, at 625-26. Regardless,
even within bankruptcy, substantive consolidation “lacks the solid foundation one usually
expects of doctrines so firmly embedded in day-to-day practice” and “lives in a peculiar
nether-world” between fraudulent conveyance and veil-piercing law. Baird, supra note 175,
at 15, 21.
177 See Landers, supra note 60, at 623-26 (struggling to reconcile the “basic policy
behind limited liability,” the logic of contract and tort cases, and “some standard . . . for
distinguishing cases where piercing is appropriate from those where it is not”); supra Part
I.A.
hodgepodge of existing attenuated factors.178 Given such an awkward and

limited framework,179 there is no wonder why any kind of alternative, in or out
of bankruptcy, might seem attractive.
Another notable effort tries to absorb veil-piercing within the law of
fraudulent conveyance. Inspired by the similarities Landers identified between
equitable subordination and veil-piercing, Robert Clark provocatively
suggested that these doctrines could be viewed as mere permutations of
fraudulent conveyance.180 Unlike substantive consolidation, the Uniform
Fraudulent Conveyance Act, its successor, the Uniform Fraudulent Transfer
Act, and the Bankruptcy Code collectively supply protections against attempts
to hinder, delay, or defraud creditors of corporations within the zone of
insolvency.181 And, unlike veil-piercing, fraudulent conveyance law provides
relief that does not require “complete revocation of limited liability,” yet is not
restricted to the amount of inadequate capitalization.182
Unfortunately, Clark’s proposal falls short in a number of respects. As a
preliminary matter, the law of fraudulent conveyance is arguably no less
amorphous and unsettled than veil-piercing.183 What is clear about fraudulent-
178 See Landers, supra note 60, at 621-22 (formulating the viability-procedural
observance test simply in terms of various factors within the conventional veil-piercing
test). In Landers’ test, economic viability groups together adequate capitalization and
siphoning of funds, as well as fraud, misrepresentation, and illegality, whereas procedural
observance concerns corporate formalities and commingling. Id.
179 See supra Part I.B; infra Part III.A-B.
180 Robert Charles Clark, The Duties of the Corporate Debtor to Its Creditors, 90 HARV.
L. REV. 505, 505 (1977) (“In particular, the doctrines of equitable subordination and
piercing the corporate veil may be seen as applications of the same notions of securing the
moral obligations of debtors to creditors which are at work in fraudulent conveyance law.”).
More precisely, Clark regards equitable subordination as “a functional substitute for, though
not an equivalent of, a trustee action ‘to pierce the corporate veil’ under state law,” id. at
535, which he contends is an application of fraudulent conveyance law.
181 11 U.S.C. § 548(a)(1) (2006); UNIF. FRAUDULENT TRANSFER ACT § 4(a)(1), 7A
U.L.A. 58 (2006); UNIF. FRAUDULENT CONVEYANCE ACT § 7, 7A U.L.A. 378 (2006)

(withdrawn 1984).
182 See Clark, supra note 180, at 547 (“[A]ffirmatively responding to plaintiff’s requests
to pierce the veil in either of these ways may fail to compensate completely outside creditors
for harm wrongfully caused them if the personal assets of the defendants are insufficient to
fill the need.”).
183 See Douglas G. Baird & Thomas H. Jackson, Fraudulent Conveyance Law and Its
Proper Domain, 38 VAND. L. REV. 829, 830 (1985) (“The difficulty that courts and
legislatures have faced for hundreds of years has been one of trying to define what kinds of
transactions hinder, delay, or defraud creditors.”); Kenneth C. Kettering, Securitization and
Its Discontents: The Dynamics of Financial Product Development, 29 CARDOZO L. REV.
1553, 1620 (2008) (“[T]he limitless generality of fraudulent transfer law precludes any
definition more systematic than that previously offered: it is the residual tool by which
courts have policed undesirable debtor behavior when no more specialized tool is at hand.”).
One critique of Clark’s approach is that “bounded rationality, the institutional constraints on
conveyance provisions is that they can be circumvented quite easily by

disguising an asset transfer as a distribution of dividends.184 Clark
commendably acknowledged this problem, for which he offers only a largely
aspirational prescription that “court[s] can and should hold that . . . fraudulent
conveyance rules preempt the dividend rules of state corporation laws.”185 But
this seemingly simple fix actually opens up a Pandora’s Box of problems. To
expand fraudulent conveyance law in this way effectively would render
ordinary corporate transactions, in or out of bankruptcy, hostage to creditors,
as even a proper distribution might qualify as a transaction.186 Indeed, even
without such an expansion, current fraudulent conveyance law arguably
regards all sorts of valid transactions, such as leveraged buyouts, to be
injurious to creditors.187 So instead of the “shotgun remedy” supplied by veil-
piercing,188 Clark has recommended a blunt sledgehammer.
judicial decisionmaking, and the incentives to shirk from agency cost theory, all argue for
ways to decide [veil-piercing] cases using minimal effort,” and thus might suggest that
“[s]lapping the requisite veil piercing epithet on a case is just a shortcut, and doing so is far
more consistent with judicial incentives than puzzling through the complexities of
fraudulent transfer law.” Bainbridge, supra note 12, at 523. Whether the complexity of
fraudulent transfer law exceeds that of the current veil-piercing test, with its laundry list of
attenuated factors, is a close call. But the framing of a suit is a choice that primarily lies with
the plaintiff, who has incentives to select the most promising test, and not the judge.
Regardless, Bainbridge’s criticism fails to engage the merits of Clark’s approach, and
simply represents a debatable explanation for the status quo that he too would prefer to
avoid.
184 Landers, supra note 60, at 596 (“Since any gratuitous distribution to a related
company constitutes a dividend, the law of fraudulent conveyances provides little protection
for creditors beyond that already provided in state corporation statutes forbidding dividends
that invade capital or that will render a corporation insolvent.”).
185 Clark, supra note 180, at 558. Clark subsequently has touted that his “argument now
has case law support.” CLARK, supra note 11, § 2.5, at 89 (citing Wells Fargo Bank v.
Desert View Bldg. Supplies, Inc., 475 F. Supp. 693 (D. Nev. 1978), aff’d mem. op., 633
F.2d 221 (9th Cir. 1980)). But, almost a quarter century later, no other case appears to have
followed suit, which may be because current fraudulent conveyance law is “concerned
[with] individual rather than corporate debtors,” and thus ill-prepared to deal with routine
transfers such as distributions. Baird & Jackson, supra note 183, at 832.
186 See Baird & Jackson, supra note 183, at 834 (“Treating transfers by a debtor that
make creditors as a group worse off as fraudulent conveyances is overbroad because many
ordinary transfers that a debtor makes do this.”); id. at 853 (describing a scenario where a
“firm issues new preferred debt and then uses the proceeds as a dividend,” and concluding
that “there seems to be little reason for fraudulent conveyance law to control” the
distribution for lax creditors). A more sinister possibility is that fraudulent conveyance law
gives creditors an incentive to void relevant transactions that ultimately may release their
own obligations.
187 See id. at 834 (“If one applies fraudulent conveyance law to leveraged buyouts . . .
one might work counter to the interests of those creditors who, before the fact, would have
wanted their debtor to have the power to enter into such transactions.”); id. at 850-53
In contrast, the constructive trust represents a surgical knife. Transforming a

defendant into a constructive trustee confers the plaintiff-beneficiary with a
choice of two remedies: (1) the constructive trustee may be held personally
liable for essentially what amounts to a breach of trust, or (2) the plaintiff-
beneficiary may exercise proprietary rights to the misappropriated assets.189
Which remedy applies is an election made on an ex post basis,190 and thus the
plaintiff-beneficiary can make an informed decision about how to maximize
recovery.
When the constructive trustee is solvent, the choice turns on the asset’s
value. On the one hand, if the misappropriated property has depreciated, its
original value can be recovered by holding the constructive trustee personally
liable.191 On the other hand, if the misappropriated property has appreciated,
the original value and its identifiable fruits can be recovered by exercising the
plaintiff-beneficiary’s proprietary rights.192
An insolvent constructive trustee also presents a clear choice. Because the
remedy of personal liability will result in the claim ranking with, rather than
ahead of, general unsecured creditors,
the only situation in which the beneficiary is likely to choose to rely on
the personal liability of the constructive trustee . . . will be where the
property which is the subject matter of the constructive trust has fallen in
value to a percentage of its original value smaller than the percentage that
is likely to be paid out by the trustee in bankruptcy to the general
creditors.193
Otherwise, the proprietary rights will push the plaintiff-beneficiary to the
front of the general, unsecured line;194 this “valuable trump” is thus essentially
(demonstrating how fraudulent conveyance law distorts arm’s-length transactions in

leveraged buyouts).
188 Clark, supra note 180, at 547 (“The piercing cases appear to employ a shotgun
remedy, that is, a remedy less precisely responsive than those invoked in fraudulent
conveyance cases, but one more biased toward a punitive result than those invoked by the
doctrine of equitable subordination.”).
189 See OAKLEY, supra note 145, at 1 (“[W]hen property is declared to be the subject-
matter of a constructive trust, the imposition of that trust produces liabilities both of a
proprietary and of a personal nature for the constructive trustee.”).
190 See, e.g., Meinhard v. Salmon, 164 N.E. 545, 549 (N.Y. 1928) (imposing a
constructive trust that presented plaintiff with an ex post option to receive shares or join a
misappropriated lease).
191 OAKLEY, supra note 145, at 5-6.
192 Id.
193 Id. at 6; see also id. at 6 n.13 (adding that when the property has depreciated at the
hands of the constructive trustee, “it will always be in the beneficiary’s interest . . . to both
recover the property and claim damages for the fall in its value”).
194 SCOTT & FRATCHER, supra note 33, § 481.2, at 398 (“In a great many of the cases in
which the owner of property seeks to follow it and impress a constructive trust or equitable
lien upon the product of the property . . . the claimant is given priority over the general
a priority accorded to the plaintiff-beneficiary,195 and will be almost

“inevitably cho[sen].”196
The priority can be justified on a number of grounds. From a property rights
standpoint, the constructive trust represents a pre-bankruptcy claim on a
misappropriated asset that must be forfeited by its current holder, who
possesses bare legal title.197 Similarly, from a relative-entitlements standpoint,
the priority serves to protect the superior constructive trust claim that the
plaintiff-beneficiary did or would possess outside of bankruptcy.198
Additionally, from a corrective-justice standpoint, the priority denies general
unsecured creditors the ability to benefit unjustifiably from an asset that
otherwise would not be available for distribution.199
III. PIERCING VIA THE CONSTRUCTIVE TRUST

Traditional veil-piercing is replete with distinctions and factors. Scenarios
typically are classified along the lines of whether they involve voluntary or
involuntary creditors/claims, close or public corporations, and individual or
corporate shareholders.200 Even the simplest scenarios are analyzed through the
prism of numerous factors that themselves may be mere proxies for certain
phenomena. Navigating through all these scenarios can be a rather daunting
exercise.
This Part takes a sleeker approach to demonstrating how the constructive
trust can be applied in lieu of veil-piercing. Unlike orthodox loss-allocation
analysis, the constructive trust operates independent of the type of
creditors of the wrongdoer.”).

195 HANOCH DAGAN, THE LAW AND ETHICS OF RESTITUTION 297 (2004) (“If this
restitution claimant succeeds in asserting . . . a constructive trust . . . she can simply reclaim
what is deemed to be equitably hers. Thus, this fortunate claimant gets, in effect, a priority .
. . .”).
196 OAKLEY, supra note 145, at 6-7.
197 See Andrew Kull, Restitution in Bankruptcy: Reclamation and Constructive Trust, 72
AM. BANKR. L.J. 265, 287 (1998) (“A decree that certain assets are held in constructive trust
for the benefit of a claimant means that, in the judgment of the court, the claimant has a
right of ownership in those assets superior to that of the person with possession and legal
title.”).
198
Duggan, supra note 141, at 246 (“Applying the relative entitlements theory[,] . . .
since [plaintiff’s] constructive trust claim would have had priority over the claim of an
execution creditor outside [defendant’s] bankruptcy, it prevails over unsecured creditors
inside [defendant’s] bankruptcy.”).
199 Emily L. Sherwin, Constructive Trusts in Bankruptcy, 1989 U. ILL. L. REV. 297, 332.
But see Kull, supra note 197, at 288-89 (criticizing Sherwin’s claim that “it is wrong to
regard the constructive trust claim as having an equitable interest in property, or to consider
that a constructive trust has any existence apart from its judicial declaration” as being based
on “a purported analysis in terms of property interests [that] is unduly formalistic and
ultimately arbitrary”).
creditor/claim, corporation, or shareholder involved in the original suit; the

relevant inquiry instead is the flow of unjustified benefits. Accordingly, classic
veil-piercing scenarios can be organized by the dimensional flow of assets (1)
horizontally from a corporation to a controlling shareholder, (2) vertically from
a subsidiary up to a parent corporation, and (3) diagonally from a corporation
to an affiliate or sibling via or at the behest of a common controlling
shareholder. Each of these dimensions also is connected with a different
component of the traditional veil-piercing test, with the net result taking into
account all possible types of factors. Across this triad of increasingly complex
scenarios, the constructive trust is shown to yield comparable, if not superior,
results than traditional veil-piercing.
A. One Dimension
The most basic scenario features a corporation with one shareholder. As one
court has stated: “In all the experience of the law, there has never been a more
prolific breeder of fraud than the one-man corporation. It is a favorite device
for the escape of personal liability.”201 Whether that is empirically accurate or
not,202 the presence of only one shareholder does simplify conventional veil-
piercing by effectively dispensing with any need to determine whether
sufficient control or domination exists. The inquiry thus is streamlined toward
evidence of intent to commit some kind of fraud, wrong, or injustice.203
This evidence can assume many forms, all of which are problematic.
Despite its intuitive relevance, fraud or misrepresentation is not dispositive,
much less required, in all jurisdictions.204 What constitutes a sufficient
showing, actually or constructively,205 has produced inconsistent results that
201 In re Dixie Splint Coal Co., 31 F. Supp. 283, 288 (W.D. Va. 1937); see also Bernard
F. Cataldo, Limited Liability with One-Man Companies and Subsidiary Corporations, 18
LAW & CONTEMP. PROBS. 473, 482 (1953) (“These sentiments [toward corporate disregard]
have special significance with respect to one-man companies . . . . His complete dominion
and superior knowledge carry opportunities for manipulation and maneuvering.”).
202 See Thompson, supra note 17, at 1055 tbl.7 (reporting that veil-piercing cases most
frequently involve parent-subsidiary structures, but the highest success rate concerns
requests against only one individual shareholder and that the “differences between the one,
two or three person corporations, and the other close corporations are statistically
significant”).
203 See supra note 5 and accompanying text. The proximate-causation requirement is
omitted here to sharpen the substantive contrast with constructive-trust analysis. The harm-
or-loss requirement is discussed in Part III.B.
204 Compare FLETCHER ET AL., supra note 109, § 41.25, at 165 (stating that “corporate
existence can be disregarded without a specific showing of fraud” and providing supporting
cases), with Iceland Telecom, Ltd. v. Info. Sys. & Networks Corp., 268 F. Supp. 2d 585,
591 (D. Md. 2003) (“[A]ll binding precedent from the state courts of Maryland . . . give this
Court no example of when a Court should pierce the corporate veil absent a showing of
fraud . . . .”).
205 Compare, e.g., Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del.
belie an unsettled standard that either challenges courts or presents them with
an opportunity for results-oriented rulings.206 Indeed, the same difficulty
plagues undercapitalization, a popular proxy for fraud or misrepresentation.207
Over time judicial focus on the amount of capital has shifted from the time of
incorporation to that of the alleged misconduct,208 while morphing into
something called “financial responsibility”209 and meandering into whether
funds have been siphoned for a shareholder’s personal use.210
1989) (“Fraud or something like it is required.”), and Menetti v. Chavers, 974 S.W.2d 168,
174 (Tex. App. 1998) (“[T]he actual fraud requirement [for contractual obligations] should
be applied, by analogy, to tort claims . . . .”), with Associated Vendors, Inc. v. Oakland Meat
Co., 26 Cal. Rptr. 806, 813 (Dist. Ct. App. 1962) (“[T]he doctrine does not depend on the
presence of actual fraud, it is designed to prevent what would be fraud or injustice, if
accomplished.”).
206 See, e.g., Sea-Land Servs., Inc. v. Pepper Source, No. 88 C 4861, 1992 WL 168537,
at *4-5 (N.D. Ill. July 10, 1992) (deeming evidence that a shareholder engaged in individual
tax evasion and gave oral assurance that the corporation would pay any freight bills “if there
were sufficient corporate funds” as constitutive of fraud).
207 See William P. Hackney & Tracey G. Benson, Shareholder Liability for Inadequate
Capital, 43 U. PITT. L. REV. 837, 859 (1982) (“There is no question today but that
inadequate capital is considered by all courts to be one of the most important factors in cases
imposing liability on shareholders for corporate obligations.”). There is, however, some
dispute about whether undercapitalization is equally relevant for contract versus tort
creditors. Compare id. at 867 (“The courts seem more inclined to hold shareholders liable
for the torts of their corporations than for their contracts when . . . inadequate capitalization
is present, and the textwriters generally support this position.” (footnote omitted)), with
Adolf A. Berle, The Theory of Enterprise Entity, 47 COLUM. L. REV. 343, 349 n.15 (1947)
(“In all cases insufficient capitalization is persuasive evidence that the enterprise was not
separate.”).
208 The shift can be attributed to the relaxation of minimum-capital requirements within
incorporation statutes down to a nominal amount, if any at all. See Millon, supra note 10, at
1337 (“Corporation statutes no longer include requirements for minimal initial capitalization
or ongoing levels of capital.”).
209 See, e.g., Radaszewski v. Telecom Corp., 981 F.2d 305, 309-10 (8th Cir. 1992)
(interpreting “capital” as including “financial responsibility”). Harvey Gelb has argued that
veil-piercing should apply when an entity has been operated in a “financially irresponsible”
manner. Harvey Gelb, Limited Liability Policy and Veil Piercing, 9 WYO. L. REV. 551, 573
(2009). This virtual reincarnation of the undercapitalization factor, however, relies entirely
upon classic loss-allocation analysis. See supra notes 177-78 and accompanying text.
Moreover, defining “financially irresponsible” conduct is hardly a simple task and arguably
would have countervailing economic effects. Cf. LoPucki, supra note 67, at 88-89
(delineating the negative effects of imposing a financial responsibility requirement on
entrepreneurs to thwart judgment-proofing strategies).
210 See, e.g., Pierson v. Jones, 625 P.2d 1085, 1089 n.1 (Idaho 1981) (“As to the issue of
undercapitalization, the issue is not whether the corporation was initially undercapitalized,
but whether [defendant] drained the corporate assets for his own use.”).
These factors have gone astray because they are misdirected. Although it is
the most dispositive factor within veil-piercing opinions,211 the absence or
presence of fraud or misrepresentation does not assert itself as strongly as other
factors do when couched in a substantive fraud claim.212 This curious reality
may be explained by judicial confusion about what exactly must be the subject
of fraud or misrepresentation to justify veil-piercing. Some courts follow the
orthodox view that fraud or misrepresentation within the original exchange
between a plaintiff and a corporation obviates the ability to account properly
for risk.213 But others examine the extent to which peripheral fraud or
misrepresentation by a shareholder is responsible for a corporation’s inability
to satisfy a judgment,214 which is what undercapitalization purports to
establish, albeit indirectly and imperfectly.215
No such confusion exists with respect to the constructive trust. Imposition of
this remedy can be triggered by the presence of fraud or misrepresentation, as
well as concealment, undue influence, or duress.216 Unlike veil-piercing,
however, the constructive trust inquiry focuses on whether the means by which
the asset has been transferred renders its retention by the current holder
unjustified. Because the constructive trust applies only when an initial remedy
within either equity or law is ineffectual,217 there is no connection with the
underlying substantive claim.
These types of wrongful conduct also comport with loss-allocation. The
opportunity of voluntary creditors to bargain and insure themselves against risk
generally negates any need for ex post compensation.218 That need clearly
reasserts itself when the distortive effects of fraud or misrepresentation are
present.219 Further, concealment, undue influence, and duress are all forms of
211 Oh, supra note 3, at 133-34 tbl.12 (reporting fraud or misrepresentation to be

dispositive in 989 cases, followed by injustice or unfairness in 890 cases); see also id. at 137
(presenting evidence of a substitution effect with other rationales when evidence of fraud or
misrepresentation is absent).
212 See id. at 136 tbl.13 (reporting a veil-piercing rate for fraud or misrepresentation that
is lower than when evidence of a sham or shell, siphoning of funds, instrumentality, alter
ego, or domination is absent or present).
213 See, e.g., Easterbrook & Fischel, supra note 21, at 112.
214 See, e.g., FLETCHER ET AL., supra note 109, § 41.32, at 196-97 (“In cases of fraud . . .
the courts may regard the real parties responsible and grant relief against them . . . based on
the principles of equity.”).
215 See Hackney & Benson, supra note 207, at 888 (“[T]he remedy of denying limited
liability goes beyond providing compensation for harm actually traceable to the
undercapitalization and may yield a punitive result. . . . ‘Piercing the veil’ solely for
undercapitalization . . . would convert an investor into a guarantor.”).
219 See Easterbrook & Fischel, supra note 21, at 112 (“Th[e] distinction between contract
and tort creditors breaks down when the debtor engages in fraud or misrepresentation.”).
unconscionable conduct that excuse enforcement of bargains.220 Notably,

though, none of these excuses recognized by the constructive trust constitutes a
ground for veil-piercing.221 Accordingly, the wrongful-conduct component can
yield a more comprehensive and yet precise form of relief for voluntary
creditors.222
B. Two Dimensions
The parent-subsidiary structure presents a more complex scenario. Despite
the contrary insistence of courts and some scholars,223 the test for veil-piercing
operates in materially different ways when the controlling shareholder is a
corporation, rather than an individual.224 This is largely because the additional
layer of limited liability enjoyed by that shareholder exacerbates the moral-
hazard problem.225 Accordingly, modern loss-allocation analysis, which
emerged from an exclusive preoccupation with the parent-subsidiary
220 See George S. Geis, Economics as Context for Contract Law, 75 U. CHI. L. REV. 569,
598 (2008) (reviewing VICTOR GOLDBERG, FRAMING CONTRACT LAW: AN ECONOMIC

PERSPECTIVE (2006)) (“Parties lacking real intent – through flaws from incapacity, fraud,
duress, mistake, and so on – should not be able to draw upon the power of the law to back
their bargains.” (emphasis omitted)).
221 Cf. supra note 5 and accompanying text.
222 This component does not include voluntary creditors, but their compensation is
supplied through the constructive trust’s unjustified enrichment analysis. See infra notes
237-41 and accompanying text.
223 See, e.g., HARRY G. HENN, HANDBOOK OF THE LAW OF CORPORATIONS AND OTHER
BUSINESS ENTERPRISES § 148, at 258 (2d ed. 1970) (“Generally-speaking, the principles
governing one-man, family, and other close corporations are applicable to subsidiary and
other affiliated corporations.” (footnote omitted)); Bainbridge, supra note 12, at 528
(“Under current law, the nature of the ultimate shareholder-defendant – corporation or
natural person – is irrelevant.”).
224 Empirical studies uniformly find federal and state courts are far more reluctant to
reach into the personal assets of a corporate, as compared to an individual, shareholder. See
Matheson, supra note 18, at 1153 (“Piercing [within the parent-subsidiary situation] occurs
about half as often as in the overall universe of piercing decisions.”); Oh, supra note 3, at
110 tbl.4 (finding a veil-piercing rate of 41.17% for corporate versus 51.69% for individual
shareholders); Thompson, supra note 17, at 1055 tbl.7 (finding a veil-piercing rate of
37.21% for corporate versus 43.13% for individual shareholders). This chasm rebuts a
broadly held conviction that veil-piercing should prevail more often in the parent-subsidiary
context. See infra note 227.
225 See BLUMBERG, supra note 101, at xl (“[M]ost of the presumed advantages of limited
liability are simply irrelevant where corporate groups are involved.”); Kurt A. Strasser,
Piercing the Veil in Corporate Groups, 37 CONN. L. REV. 637, 638 (2005) (“While
traditional corporate law has not articulated different rules for a parent company in its role
as a shareholder than for individual investor shareholders, parent companies in fact present
different policy issues and their limited liability should be determined by a different
analysis.”).
scenario,226 believes the presumption of separateness should not apply to

corporate shareholders.227
The chief problem lies in determining what constitutes separateness. To
assess whether a subsidiary is the “alter ego” or “instrumentality” of a parent,
courts typically examine the extent to which formal corporate practices and
commingled operations exist.228 This seemingly simple inquiry, however, is
quite difficult to apply due to the peculiar nature and diverse forms of
corporate groups.229 Over time courts have developed a checklist of
circumstantial factors, which are neither weighted nor connected to the
underlying harm, resulting in a pastiche of unpredictable precedent.230
One possibility that has enticed but never gained much traction with courts
is to reconfigure parent-subsidiary relations in terms of agency law.231 Analysis
along these lines tends to focus on the extent to which a subsidiary qualifies as
an agent subject to the control of a corporate parent, as a principal, for actions
taken on its behalf.232 Liability incurred by the subsidiary-agent then might be
imputed to its parent-principal. This apparent-authority scheme, however, is
not a perfect fit with veil piercing scenarios, which frequently lack the requisite
evidence of a traceable manifestation from the principal-parent.233 As a result,

227 See Easterbrook & Fischel, supra note 21, at 110-11 (“Courts’ greater willingness to
allow creditors to reach the assets of corporate as opposed to personal shareholders is . . .
consistent with economic principles.”); Landers, supra note 60, at 623 (“[C]ourts may have
a greater proclivity to reach corporate, as opposed to individual, stockholders.”).
228 E.g., Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1345 (7th Cir.
1987) (“Evidence indicative of an alter ego relationship includes . . . intermingling of

corporate identities or funds.”); see also David H. Barber, Piercing the Corporate Veil, 17
WILLAMETTE L. REV. 371, 377-78 (1981) (“The intent behind the formalities prong of the
piercing test . . . is to prevent shareholder-owners from impairing the interests of other
parties by carrying this unity of interest too far.”).
229 Cf. Millon, supra note 10, at 1361 (stating that “corporate shareholders do not
participate in control of the firm simply by virtue of their status as such” but instead
“exercise control only indirectly”).
231 See Robert B. Thompson, Agency Law and Asset Partitioning, 71 U. CIN. L. REV.
1321, 1326-42 (2003) (examining applicability of agency law generally in connection with
limited liability, as well as specifically with respect to parent-subsidiary structures).
232 See RESTATEMENT (THIRD) OF AGENCY § 1.01 (2005) (“Agency is the fiduciary
relationship that arises when one person (a ‘principal’) manifests assent to another person
(an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s
control, and the agent manifests assent or otherwise consents so to act.”); cf. Mendelson,
supra note 49, at 1206 (proposing a variant of agency-based analysis whereby “a
shareholder with the capacity to control would be fully responsible for corporate torts or
statutory violations” when the amount of vicariously generated liability exceeds corporate
assets).
233 See RESTATEMENT (THIRD) OF AGENCY § 2.03 (“Apparent authority is the power held
by an agent or other actor to affect a principal’s legal relations with third parties when a
agency principles tend to be merely “metaphorical or rhetorical [devices] . . .

relied upon simply to justify a conclusion that, for some other reason, liability
should follow from shareholder control.”234
Instead the constructive trust shifts the focus from liability to benefit. The
contours of agency law conform to the least-cost-avoider formula, of which
orthodox loss-allocation analysis is a mere variant.235 In this vein, veil-piercing
involves an attempt to specify objective bases for imposing personal liability
on a shareholder. But, as evidenced by current judicial efforts, properly
defining these bases is a notoriously difficult fact-intensive inquiry that makes
veil-piercing ill-suited to summary judgment.236 Rather than trying to
determine what attributes should expose a shareholder to liability, the
constructive trust focuses on whether the ultimate holder should retain the
proceeds flowing from title to a misappropriated asset.
That holder is converted into a constructive trustee upon proof that the
retention constitutes unjustified enrichment. Unlike liability and its implicit
deterrence framework, benefit-oriented analysis concerns explicit validity. In
essence, the custodian of a misappropriated asset must articulate a principled
reason against disgorgement.237 The universe of invalid reasons for enrichment
ranges from participatory grounds, such as nullity, terminability, and
voidability,238 to non-participatory grounds, such as wrongful benefits received
either absolutely involuntarily or knowingly.239 In contrast to veil-piercing,
third party reasonably believes the actor has authority to act on behalf of the principal and
that belief is traceable to the principal’s manifestations.”); cf. Krendl & Krendl, supra note
6, at 3 n.9 (embracing Judge Learned Hand’s position that “express agency would not
provide a remedy because the consensual element would be lacking and . . . implied agency
would be inappropriate because that would mean that the veil would be pierced in every
situation” (citing Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265 (2d
Cir. 1929))).
234 Millon, supra note 10, at 1332.
236 See, e.g., Am. Mgmt. Corp. v. Dunlap, 784 F. Supp. 1245, 1248 (N.D. Miss. 1992)
(“Whether it is a defendant who seeks to preserve a corporate shield over him, or a plaintiff
who is attempting to pierce the corporate veil, corporate disregard often raises genuine
issues of material fact, thus making summary judgment inappropriate.”).
237 See BIRKS, supra note 129, at 43 (“There is a limited range of recognized
explanations. If the putative explanation is invalid or if there never was even a putative
explanation, the enrichment is sine causa, it lacks the required explanatory basis and must
be given up.”).
238 Id. at 126 (“[T]he enrichment cannot be unjust until the other has brought the contract
to an end. . . . Subject to that caveat, nullity, termination, terminability, and voidability all
suffice to show that an enrichment has no valid basis. Mere unenforceability does not.”); see
also id. at 142-54 (examining inadequate participatory bases within contract, trust, and gift
contexts).
239 Id. at 155 (“In general, an absolutely involuntary enrichment will have no explanatory
basis at all.”); id. at 157 (“In the absence of a cogent explanation to the contrary, to insist on
fault is to disapply the law of unjust enrichment in favour of the law of wrongs. The
then, the “unjust” component to enrichment is not some amorphous set of

principles,240 but rather “a reason for restitution which is not a manifestation of
consent and not a wrong.”241
To see the merits of this approach, return to the mass-risk scenario.
Subsidiaries that externalize tortious harm generate strong incentives for their
parents to maintain formalities and segregate operations; as a result, victims
must pursue corporate agents with typically inadequate means,242 or nervously
hope that public pressure somehow will impel the parent to assume financial
responsibility.243 Rather than taking these diversionary courses, the
constructive-trust inquiry goes straight to whether the parent has benefited
from the subsidiary’s tortious conduct; to the extent that the underlying benefit
has been knowingly received by the parent, it must proffer a valid justification
for retaining those proceeds or else disgorge them. And, unlike veil-piercing,
this burden is imposed on the parent not by virtue of its status as a (controlling)
shareholder, but as the current holder of misappropriated assets. Accordingly,
if some of those assets have been distributed to shareholders or transferred to
another entity, they will be subject to judicial scrutiny and possible
disgorgement.244
The constructive trust thus can do what veil-piercing is supposed to.
Virtually everyone agrees that the justifications for limited liability do not
extend to the mass-risk scenario.245 Further, under the orthodox approach, no
one seriously questions that shareholder liability should protect involuntary
and tort creditors,246 who are the most compelling candidates for equitable
relief.247 And the need for such relief is most pronounced against corporate
equitable wrong is ‘knowing receipt.’”).

240 See BIRKS, supra note 34, at 18-19 (“[T]he word ‘unjust’ . . . invite[s judicial] appeals
to abstract conceptions of justice from whatever moral and political values might best suit a
party’s case. . . . In the phrase ‘unjust enrichment’ the word ‘unjust’ might, with a different
throw of the dice, have been ‘disapproved’ or, more neutrally, ‘reversible’. . . .”).
241 BIRKS, supra note 129, at 13.
243 See LoPucki, supra note 67, at 52-53 (describing how Exxon Corporation would have
evaded liability for the Valdez oil spill but for political backlash, and observing that
“[a]ttempting to predict whether cultural and political constraints will dissipate is a highly
speculative undertaking”).
244 Bona fide recipients without notice of an adverse claim, however, would be exempt.
See supra note 166 and accompanying text. Accordingly, the constructive trust would not
reach into the personal assets of most shareholders, only those who elect to profit from the
morally hazardous conduct after the remedy has been applied. Corporate agents thus would
be exposed to personal liability, but only to the extent they are and continue to be
shareholders.
245 See supra notes 49, 68 and accompanying text.
247 Cf. DAGAN, supra note 195, at 298 (“[T]his preference reflects a strong intuition that
does survive normative scrutiny, namely: the idea that involuntary creditors should not be
groups, which utilize judgment-proofing strategies on the largest scale. But

even when presented with these favorably stacked concerns, veil-piercing
cannot match the constructive trust.
C. Three+ Dimensions
The ultimate litmus test for any corporate disregard theory, though, is the
corporate enterprise. Fragmenting a business into a network of corporate
affiliates or siblings is an extremely effective prophylactic for veil-piercing.248
As with parent-subsidiary structures, the “alter ego” or “instrumentality”
inquiry can be thwarted by creating multiple corporations, each of which
adheres to corporate formalities and conducts distinct operations.249 Moreover,
because veil-piercing is designed to hold only a shareholder personally liable,
the remedy affords no relief for assets transferred from a corporation through a
parent to a third firm or party.250
The difficulties posed by enterprises form part of veil-piercing lore. In
Walkovszky v. Carlton,251 a pedestrian struck by a taxicab attempted to reach
through a controlling shareholder to access his nine other separately
incorporated taxicab companies and their insurance reserves.252 The suit was
dismissed on the basis that its veil-piercing theory did not seek derivative relief
from the shareholder.253 In rejecting that theory, the court observed that “it
cannot reasonably or logically be inferred . . . that the business . . . carried on
by a larger corporate entity composed of many corporations . . . would be
liable to each other’s creditors in contract and in tort.”254 As a result, the
pooled together with voluntary ones.”).

248 ARTHUR R. PINTO & DOUGLAS M. BRANSON, UNDERSTANDING CORPORATE LAW §
3.08, at 63 (1999) (“Under existing law, the segmentation strategy, as in isolating riskier
portions of a business in separate subsidiaries, is a viable strategy frequently utilized.”); see
also Lynn M. LoPucki, The Essential Structure of Judgment Proofing, 51 STAN. L. REV.
147, 149 (1998) (demonstrating how judgment-proofing can be obtained by splitting a
business structure into multiple limited liability entities).
250 Cf. Berle, supra note 207, at 354 (“Whenever ‘corporate entity’ is challenged, the
court looks at the enterprise. . . . This is, in essence, not so much a ‘disregard of the
corporate fiction’ as it is a holding that the economic enterprise . . . is illegal, or criminal, or
in violation of public policy, or fraudulent, or otherwise objectionable, as the case may
be.”).
251 223 N.E.2d 6 (N.Y. 1966).
252 Id. at 7.
253 Id. at 8 (“[I]t is one thing to assert that a corporation is a fragment of a larger
corporate combine which actually conducts the business. It is quite another to claim that the
corporation is a ‘dummy’ for its individual stockholders . . . .” (citation omitted)).
254 Id. at 10. This precursor to enterprise liability was couched by the Walkovszky court in
terms of agency principles. Id. at 7-8 (“In determining whether liability should be extended
to reach assets beyond those belonging to the corporation, we are guided, as Judge Cardozo
noted, by ‘general rules of agency.’” (quoting Berkey v. Third Ave. Ry. Co., 155 N.E. 58,
plaintiff was forced to amend the complaint to seek relief against only the
controlling shareholder in his individual capacity, whose presumably
inadequate personal assets had prompted the initial attempt to reach the sibling
companies.255
These shortcomings of veil-piercing have inspired what is known as
enterprise liability.256 More of a theory than an accepted doctrine,257 the
strategy is to demonstrate that a failure to treat various corporate entities as a
collective whole would promote injustice.258 As should be apparent, enterprise
liability borrows heavily from traditional veil-piercing;259 and, not surprisingly,
they can be confused for the same purpose.260
Some, however, maintain that enterprise liability is worth the stretch.
Indeed, Phillip Blumberg has advocated for the wholesale replacement of
liability for entities with that for enterprises.261 To accomplish this, the
61 (N.Y. 1926))).
255 Walkovszky v. Carlton, 287 N.Y.S.2d 546, 547 (App. Div. 1968) (“[T]he amended
complaint sufficiently alleges a cause of action against appellant, i.e., that he and the other
individual defendants were conducting the business of the taxicab fleet in their individual
capacities.”), aff’d, 244 N.E.2d 55, 55 (N.Y. 1968); see also Bainbridge, supra note 12, at
484 (speculating that the action eventually settled).
256 Cf. Bainbridge, supra note 12, at 526 (“Properly understood, veil-piercing is a vertical
form of liability . . . . Enterprise liability provides a horizontal form of liability . . . .”). A

related doctrine, which resides within bankruptcy, is substantive consolidation. See, e.g., In
re Bonham, 226 B.R. 56, 77 (Bankr. D. Alaska 1998) (rejecting an analogy to veil-piercing
as “misplaced” and instead concluding that “substantive consolidation is more like the
corporate law notion of enterprise liability”); see also supra notes 174-176 and
accompanying text.
257 Cf., e.g., Browning-Ferris Indus. of Ill., Inc. v. Ter Maat, 195 F.3d 953, 959-60 (7th
Cir. 1999) (noting the “general rule . . . that a shareholder qua shareholder, and a parent,
subsidiary, or other affiliate, qua affiliate, is not liable for a corporation’s debts,” and
observing that the prospect of requiring enterprises “to maintain a sufficient capital cushion
to be answerable” for externalized risk “has not carried the day in any jurisdiction that we
are aware of”).
258 Cf., e.g., Gartner v. Snyder, 607 F.2d 582, 587 (2d Cir. 1979) (requiring plaintiff to
prove defendant shareholder’s use of “the larger combine, to conduct his purely personal
business”).
259
PINTO & BRANSON, supra note 248, § 3.08, at 63 (observing that, to impose enterprise
liability, “it is necessary to focus on the grounds used to pierce the corporate veil”); see also
supra note 5 and accompanying text.
260 Bainbridge, supra note 12, at 528 (“[W]hile the remedies are conceptually distinct, in
practice the line between them tends to blur. In many cases, much the same set of facts
could be invoked to justify either or both remedies.”).
261 PHILLIP I. BLUMBERG, THE LAW OF CORPORATE GROUPS: PROBLEMS IN THE
BANKRUPTCY OR REORGANIZATION OF PARENT AND SUBSIDIARY CORPORATIONS, INCLUDING

THE LAW OF CORPORATE GUARANTIES § 18.02, at 699-704 (1985); see also Robert B.
Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate
Participants for Torts of the Enterprise, 47 VAND. L. REV. 1, 35-40 (1994) (advocating
boundaries between different entities would be assessed based on the “degree

of economic integration between the formally separate but commonly
controlled components of the corporate group.”262 Although the natural
question would seem to be what constitutes “economic integration,” Blumberg
never provides an answer,263 much less indicates how this approach could yield
principled or predictable results.264
The reason may be that enterprise liability ultimately cannot achieve
anything superior than its conceptual fountainhead, veil-piercing. This is
because both schemes are designed conventionally around liability rules.
While the justifications for limited liability clearly do not extend to
enterprises,265 defining them is hardly a sure proposition. The diverse array of
potential corporate groups, either in parent-subsidiary or enterprise form,
virtually ensures a contextual, fact-intensive inquiry.266
The benefits of enterprise liability, however, can be approximated by the
constructive trust. The real challenge with affiliate, parent-subsidiary, or
sibling structures is not sorting out their exact relationships, but rather
preventing misappropriated assets from being divided among or transferred to
multiple corporations. All too often, by the time a complex corporate structure
can be dissected, the money already is gone. Imposition of a constructive trust,
however, results in the application of tracing rules that operate independent of
the form or type of corporate structure.267 This is because any ultimate holder
can be designated a constructive trustee, provided the misappropriated assets
can be identified;268 and even when those assets have been intermixed with
enterprise liability).
262 BLUMBERG, supra note 8, § 22.03.2, at 431.
263 Blumberg does identify four “very rough types of complex corporate enterprises,” but
acknowledges that they are “imprecise” and that “[i]t obviously is not possible to fit all
industrial structures conveniently into any arbitrary system of classification.” Id. § 22.03.3,
at 432, 437.
264 See LoPucki, supra note 67, at 67 (criticizing Blumberg’s proposal as “vague and
uncertain,” and likely to “produce intolerable uncertainty for other system participants as
well”).
265 See Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573,
630 (1986) (“If a subsidiary corporation constitutes only one of a number of components of
a corporate group collectively conducting a fragmented unitary business, the very basis for
the establishment of limited liability as a matter of general legal policy disappears.”
(footnote omitted)). But see Kashfi v. Phibro-Salomon, Inc., 628 F. Supp. 727, 732-33
(S.D.N.Y. 1986) (“Courts are reluctant to disregard the separate existence of related
corporations by piercing . . . and have consistently given substantial weight to the
‘presumption of separateness.’”).

legitimate ones, a myriad of tracing methods are available for courts to

disgorge funds in an equitable fashion.269
Corporate affiliates or siblings thus present no unusual challenge. When a
judgment cannot be enforced against a particular corporate defendant, a court
simply follows the trail of any assets linked to the underlying harm into the
hands of any shareholder, related company, or third party.270 If these assets
have been appropriated wrongfully, the current holder must proffer a valid
explanation for retaining title.271 Absent any justification or defense, that
holder is designated a constructive trustee and the assets subject to proprietary
claims.272 The plaintiff-beneficiary then elects its preferred remedy.273
But this analysis would not have altered the outcome in Walkovszky.
Although that case nicely illustrates the (limited) mechanics of veil-piercing
within the corporate-enterprise scenario, the siblings correctly were shielded
from joint and several liability; as the court noted, the fact that all of these
corporations had complied with the minimum statutory insurance requirements
negated any possible finding of fraudulent or illicit conduct.274 To uphold
limited liability, therefore, would be a justified result.275 In contrast, a
constructive trust inquiry for Walkovszky would not have focused on whether
the defendant corporation had inadequate capital or committed a wrong, but
whether assets may have been “shuttling” among the different entities and
shareholders in an unjustified manner.276 Because no such evidence was
present,277 equity would have concluded that a constructive trust was
unjustified.
Nor would the outcome perforce differ if such evidence did exist. Imagine
the same facts in Walkovszky, but with one slight wrinkle: after the plaintiff’s
suit has been instigated, the defendant corporation distributes enough cash to
cover all damages in the form of a preferred dividend to a minority (affiliate or
sibling) shareholder.278 Due to a lack of requisite control or domination,

274 Walkovszky v. Carlton, 223 N.E.2d 6, 10 (N.Y. 1966) (“If it is not fraudulent for the
owner-operator of a single cab corporation to take out only the minimum required liability
insurance, the enterprise does not become either illicit or fraudulent merely because it
consists of many such corporations.”).
275 See supra notes 53-54, 207, 210, 219 and accompanying text.
276 Walkovszky, 223 N.E.2d at 10.
277 Id. (finding the complaint lacked sufficiently particularized allegations that the
defendants were “shuttling their personal funds in and out of the corporations”).
278 Walkovszky actually involved three individual stockholder defendants, Walkovszky v.
Carlton, 262 N.Y.S.2d 334, 335-36 (App. Div. 1965), one of whom was Carlton, the
controlling shareholder, Walkovszky, 223 N.E.2d at 9. The other two were never identified
and presumably held only a minority interest. See Walkovszky, 262 N.Y.S.2d at 336.
traditional veil-piercing would not provide any relief.279 The only way to make
this plaintiff whole would be to impose a constructive trust, on the basis that
the dividend was wrongfully received and would be retained unjustifiably by
the shareholder.280 Nevertheless, a court ultimately might decide not to order
disgorgement.
The reason would be an undesirable balance of competing interests. On the
one hand, restoring unjustified benefits represents ex post compensation that
would be justified under corrective-justice principles generally and economic
analysis specifically for involuntary creditors.281 On the other hand, upholding
limited liability reflects an ex ante bargain that shareholders would demand to
protect their distributions and ensure their participation within capital
markets.282 A quite plausible conclusion might be that restoring the plaintiff in
this hypothetical case would incur a much larger expense to shareholder
welfare across all corporations, and thus be a poor trade-off. Or a court might
conclude otherwise.
The point is that this calculus is impossible under orthodox analysis. When
limited liability is worth preserving, veil-piercing cannot be an option. Even
when limited liability is worth compromising for the benefit of certain types of
creditors, veil-piercing cannot deliver any relief from the corporate enterprise.
But where veil-piercing fails miserably, the constructive trust can succeed.
This is because the constructive trust is detached from the underlying claim,
and thus operates independent of limited liability and its rationales; as a result,
courts do not face a fork in the road, but instead have equitable discretion to
weigh the competing merits of pursuing ex ante goals or awarding ex post
relief.283 Although only one final course of action will be taken, it will flow
279 Cf. supra notes 228-229 and accompanying text.

280 See supra notes 237-41 and accompanying text. Fraudulent transfer law also would be
unable to void what is an entirely permissible distribution, provided the defendant
corporation remained solvent along with its mandatory insurance coverage. See supra notes
184-86 and accompanying text. Had the cash or some equivalent value instead been
transferred to a third-party non-shareholder, fraudulent transfer law would not yield a
materially different result than a constructive trust, because the receipt would be with notice
of an adverse claim. See supra note 166.
281
Cf. Ernest J. Weinrib, Correctively Unjust Enrichment, in PHILOSOPHICAL
FOUNDATIONS OF THE LAW OF UNJUST ENRICHMENT 31, 31-33, 52-53 (Robert Chambers et
al. eds., 2009).
283 See Puckett v. Richard, 418 So. 2d 838, 839 (Ala. 1982) (“In the exercise of its equity
jurisdiction, a . . . court is entirely justified in molding a decree which adjusts the equities of
all the parties.”); Duggan, supra note 141, at 219 (“The remedy is discretionary in the sense
that, even if the case satisfies all three elements of the test, the court will still not necessarily
impose the trust. The court may refuse to impose the trust on the ground that there are other
remedies available . . . which make the declaration of the constructive trust unnecessary or
inappropriate.” (internal quotation marks omitted)).
from a more principled and predictable reasoning process that can yield
efficient and equitable results.284
CONCLUSION
Veil-piercing has been called “Our Lady of the Common Law.”285 Over the
years, though, she has been dragged through the mud and pilloried,
withstanding attempts at expulsion from corporate law.286 All the while the
culprit quietly has stood in our midst. We have been so enamored with the
virtues of limited liability that using it to orient our view of veil-piercing seems
like a natural and reasoned path.
The problem is that “[l]imited liability is the rule, not the exception.”287
Orthodox loss-allocation analysis frames limited and unlimited liability as
mutually exclusive choices. Only when the rationales for limited liability have
reached their limits is veil-piercing qua unlimited liability charged with filling
the remaining gaps.
The resulting doctrine is not just “rare, severe and unprincipled,”288 but
inadequate, incomplete, and incorrect. No one seriously defends limited
liability within mass-risk or enterprise scenarios; yet veil-piercing proper is
unable to occupy that void. While everyone agrees that limited liability should
not apply in tort, empirical studies uniformly find otherwise. Furthermore,
those studies, along with courts and commentators, neglect veil-piercing claims
grounded in property and unjust enrichment.289 Despite veil-piercing’s origins
as a provisional procedural device forged from equity, courts continue to look
the other way and insist that veil-piercing is a partially legal remedy that
entails a triable right.290
To ignore the past of veil-piercing condemns it to an ineluctable fate. The
conclusion from our early corporate history is that unlimited shareholder
284 Whether resort to the constructive trust would diminish the volume of veil-piercing
requests is difficult to predict. One variable is how courts would conduct a remedial hearing,
which some, but not all, courts correctly conduct for veil-piercing; the specifics of that
procedure would affect the ultimate incentives of parties to settle. Moreover, the
constructive trust arguably might open the door to some claims, such as enterprise liability,
that otherwise are foreclosed under the current approach. Certainly, though, the constructive
trust can handle what pure veil-piercing is designed to redress, and in a more principled
fashion that would benefit not only litigants but entrepreneurs attempting to assess their
liability risk.
285 WORMSER, supra note 27, at 40.
287 Anderson v. Abbott, 321 U.S. 349, 362 (1944)
288 Easterbrook & Fischel, supra note 21, at 89.
289 See supra Part I.B.
290 See, e.g., William Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d
131, 136 (2d Cir. 1991) (“[T]he action for piercing the corporate veil appears to have its
roots in both law and equity.”).
liability was the default rule applied when a corporation was judgment-
proof.291 Following the lead of English chancery courts, American legislatures
fashioned an incidental equitable remedy. The nature, function, and scope of
what later became veil-piercing thus were independent of limited liability.
Nothing that has transpired since, not even the shift from democratic to
economic rationales for limited liability, amounts to an intervening cause that
would justify abandoning this original conceptual scheme.
We not only have denied the past, but also cannot see a better future. Almost
a century ago, Justice Cardozo stumbled upon the noble conscience of
equity,292 the constructive trust, yet failed to realize its relevance for veil-
piercing. He is not alone. Although ubiquitous within non-corporate contexts,
the constructive trust has never been considered as an alternative that maps
onto veil-piercing and can produce superior results. Instead, corporate law
stubbornly focuses on proposals to repackage or tweak veil-piercing as
currently conceived.293
Veil-piercing cannot be salvaged so simply; it must be re-conceived. Classic
scenarios that reveal the limits of veil-piercing are handled quite capably by
the constructive trust. Further, insolvency provides a setting where the
constructive trust shines, presenting a choice of remedies that enables a
plaintiff to optimize equitable relief while veil-piercing claims are pooled with
general unsecured creditors. Indeed, when also compared against equitable
subordination and fraudulent transfer law, the constructive trust represents the
most satisfying means to solve the persistent challenge of how to make
judgment-proof corporations and shareholders accountable for malfeasance.
Lady Justice has waited long enough for her integrity to be restored. Courts
already possess and routinely exercise the equitable discretion to impose and
fashion constructive trusts sua sponte.294 Instead of having to conjure up
metaphorical proof to beat the metaphorical veil of limited liability,295
entrepreneurs and litigants deserve a predictable and principled approach to
determining their ultimate exposure. By balancing the interests of claimants,
corporations, shareholders, and third parties, courts finally can produce
efficient and equitable results in one of the most dysfunctional and important
areas of corporate law.

294 See supra notes 145-46 and accompanying text; see also Pfohl Bros. Landfill Site
Steering Comm. v. Allied Waste Sys., Inc., 255 F. Supp. 2d 134, 141 (W.D.N.Y. 2003)
(imposing a constructive trust but denying a request for veil-piercing); Graham v. Mimms,
444 N.E.2d 549, 556-57, 560-61 (Ill. App. Ct. 1982) (same).
295 Cf. Fred S. McChesney, Contractarianism Without Contracts? Yet Another Critique
of Eisenberg, 90 COLUM. L. REV. 1332, 1336 (1990) (“[I]t takes a model to beat a model.”
(citing GEORGE J. STIGLER, THE THEORY OF PRICE 7 (4th ed. 1987))).

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VEIL-PIERCING UNBOUND

∗ Associate Professor of Law, University of Pittsburgh School of Law. B.A., Yale

demonstrates how its application to judgment-proof corporations can yield

PARENT CORPORATION FOR THE OBLIGATIONS OF ITS SUBSIDIARY § 3, at 4-6 (1931).

8 PHILLIP L. BLUMBERG, THE LAW OF CORPORATE GROUPS: PROCEDURAL PROBLEMS IN

Liability, 56 EMORY L.J. 1305, 1381 (2007).

12 Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479, 507 (2001).

13 Id. at 535; Douglas C. Michael, To Know a Veil, 26 J. CORP. L. 41, 42 (2001).

14 Bainbridge, supra note 12, at 481; see also infra Part I.

15 See infra Part I.B.

17 Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL

(1985) (“A path-dependent sequence of economic changes is one of which important

unlimited liability, in which veil-piercing serves to correct misallocated loss.21

26 See infra Part I.

judgments by disgorging misappropriated assets from the hands of

31 See RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 55(1) (“If a

defendant is unjustly enriched by the acquisition of title to identifiable property at the

33 See, e.g., RESTATEMENT (FIRST) OF RESTITUTION: QUASI-CONTRACTS AND

law.37 Accordingly, the constructive trust’s principles and rationales operate

I. LIBERATING PIERCING FROM THE VEIL

37 See infra Part II.A.

40 See infra notes 189-92 and accompanying text.

41 See infra notes 193-96 and accompanying text.

and governed limited liability’s primary exception, veil-piercing. The question

Mary F. Handlin, Origins of the American Business Corporation, 5 J. ECON. HIST. 1, 10

because unrestricted transferability provides dissatisfied shareholders with an

investment and management (agency costs) may be substantial. . . . Investors individually

REV. 1565, 1570-74 (1991).

Law, 30 U. TORONTO L.J. 117, 129-31 (1980).

given the historical prominence of unlimited liability,55 as well as its default

Figure 1. Limited Liability – Veil-Piercing

Defective Incorporation, 71 WASH. U. L.Q. 493, 496-97 (1993) (characterizing defective

60 Jonathan M. Landers, A Unified Approach to Parent, Subsidiary, and Affiliate

Questions in Bankruptcy, 42 U. CHI. L. REV. 589, 620 (1975).

compelling as to shareholders of close corporations than as to those of publicly held

probably greater in parent-subsidiary situations because subsidiaries have less incentive to

creditor of a corporation to bring individual suits against thousands of geographically

proponents of limited liability,73 belies that limited liability’s “real policy

74 Millon, supra note 10, at 1317.

Figure 2A. The Mass Risk Scenario82

veil-piercing. Another scenario concerns affiliate or sibling entities owned by a common

risk, a choice is posed between stimulating corporate investment and protecting

Figure 2B. The Mass Risk Scenario Redux

To be sure, a regime of unlimited liability has the same ultimate effect as

83 See supra notes 69-75 and accompanying text.

86 See supra notes 50-57, 69-75 and accompanying text.

whether corporate law conflicts with tort law . . . .”).

This may be because all of the studies share a conceptual deficiency. To

voluntary creditors versus 52.83% for involuntary creditors).

veil-piercing turns on a choice of whether shareholder liability should be

119 See supra notes 59-60 and accompanying text.

120 Hansmann & Kraakman, supra note 58, at 1932.

Nevertheless, no positive account of shareholder liability focused exclusively

131 BIRKS, supra note 129, at 3.

132 Christopher T. Wonnell, Unjust Enrichment and Quasi-Contracts, in 2

remedies are compensatory or restitutionary in nature is less relevant than the

Shareholder Liability Creditor/Claim Remedy1 Remedy2

N/A Unjust Enrichment