How to Plead Piercing the Corporate Veil in Minnesota

What does a Minnesota complaint need to say to plead veil piercing?

A Minnesota complaint needs a short and plain statement giving the owner fair notice of the piercing theory and the facts behind it. Minnesota state courts do not use the federal “plausibility” standard, but a court is “not bound by legal conclusions stated in a complaint” in deciding a motion to dismiss.

Minn. R. Civ. P. 8.01 requires a pleading that “shall contain a short and plain statement of the claim showing that the pleader is entitled to relief and a demand for judgment for the relief sought.” In Walsh v. U.S. Bank, N.A., 851 N.W.2d 598 (Minn. 2014), the Minnesota Supreme Court declined to adopt the federal plausibility test and held: “A claim is sufficient against a motion to dismiss for failure to state a claim if it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.”

That standard is generous, but the same opinion also repeats that a court is “not bound by legal conclusions stated in a complaint when determining whether the complaint survives a motion to dismiss for failure to state a claim.” A paragraph alleging only that the owner is the company’s alter ego states a legal conclusion. The owner’s motion under Minn. R. Civ. P. 12.02 for “(e) failure to state a claim upon which relief can be granted” is aimed at exactly that kind of paragraph. The facts that make the conclusion possible belong in the complaint.

Why is a stand-alone veil-piercing count a mistake?

Veil piercing is a remedy for a liability the company already owes, so a count that only says “pierce the veil” has nothing to attach to. The complaint should plead the underlying claim against the company and ask for piercing as relief against the owner in the same lawsuit.

The Minnesota Supreme Court has said that “The concept of piercing the corporate veil is equitable in nature.” Roepke v. Western National Mutual Insurance Co., 302 N.W.2d 350 (Minn. 1981). The Minnesota Court of Appeals put it the same way: “Piercing the corporate veil is an equitable remedy that may be applied in order to avoid an injustice.” Equity Trust Co. Custodian v. Cole, 766 N.W.2d 334 (Minn. App. 2009).

When I explain the doctrine to business owners, I describe it this way: first you show that the company owes the debt, and piercing is then the way to make the owner answer for that established debt. It is not its own reason the owner is liable.

The rules let you plead both at once. Minn. R. Civ. P. 8.05(b) allows “as many separate claims or defenses as the party has regardless of consistency and whether based on legal or equitable grounds or both.” Minn. R. Civ. P. 20.01 lets you join the owner as a defendant when the claims arise “out of the same transaction, occurrence, or series of transactions or occurrences” and share a common question. Minn. R. Civ. P. 18.02 adds that a claim normally heard only after another one is concluded may be joined with it, “but the court shall grant relief in that action only in accordance with the relative substantive rights of the parties.”

What facts should the complaint allege for the alter-ego prong?

The complaint should allege specific facts tied to the factors Minnesota courts weigh in deciding whether the company was the owner’s alter ego. Courts look at how the business actually ran, not at what its paperwork says.

The baseline is the shield. Minn. Stat. § 302A.425 limits what a corporate shareholder owes the corporation and its creditors on the shares to one duty: “to pay to the corporation the full consideration for which the shares are issued or to be issued.” The exception comes from Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509 (Minn. 1979), which lists the factors: “insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.”

The Minnesota Supreme Court later restated the approach: courts look to the “reality and not form” of how the company operated. Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 2007). A strong complaint gives each factor its own paragraph with the facts behind it:

1. Capital. What the company had when it took on your contract, compared with what the job required.
2. Money flow. Payments from the company to the owner or the owner’s other businesses, especially while your bill went unpaid.
3. Records and roles. Missing records, officers who never acted, one person signing on every side.
4. Facade. Shared accounts, addresses, and employees between the owner and the company.

Every factor you can support makes the claim harder to dismiss. How much proof each one needs later is covered in the burden of proof in veil-piercing cases.

Why do veil claims fail on the injustice prong?

A veil claim fails on this prong when the complaint proves the alter-ego factors and never explains why respecting the company would be unjust. Minnesota requires both, and a plaintiff who knowingly dealt with a thinly run company has to show more than that the company could not pay.

Victoria Elevator states the rule: “Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness.” The Court of Appeals described the showing in Equity Trust: “evidence that the corporate entity has been operated as a constructive fraud or in an unjust manner must be presented.”

Groves v. Dakota Printing Services, Inc., 371 N.W.2d 59 (Minn. App. 1985), shows the failure. The trial court addressed only the first prong, and the Court of Appeals reversed personal liability, noting: “This was a commercial transaction, and respondents knew they were dealing with a corporation when they bought the building.”

The injustice paragraph should describe conduct. The example I use is a company president who signs a contract the president knows the company cannot honor, collects the customer’s payment, and pays it out to the owners as a profit distribution before the company stops performing. Facts like those tell the court why the owner, not the customer, should bear the loss. Expect the owner to answer with the defenses owners raise to a veil-piercing claim, and plead with those defenses in mind.

How do Minnesota LLC rules change the pleading?

For a Minnesota LLC, the complaint should not rely on missed meetings or skipped internal paperwork, because the LLC statute removes those lapses as a ground for piercing. Everything else in the corporate case law still applies, and an LLC formed in another state may be governed by that state’s law.

Minn. Stat. § 322C.0304, subd. 2, provides: “The failure of a limited liability company to observe formalities relating exclusively to the management of its internal affairs is not a ground for imposing liability on the members, managers, or governors for the debts, obligations, or other liabilities of the company.” Subdivision 3 then provides that, except for those internal formalities, “the case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies.”

A common mistake is leading an LLC complaint with missed annual meetings and missing minutes. Lead instead with capital, money flow, and commingling, which the statute leaves in play.

Check where the LLC was formed before drafting. Under Minn. Stat. § 322C.0801, subd. 1, “The law of the state or other jurisdiction under which a foreign limited liability company is formed governs” both its internal affairs and “(2) the liability of a member as member, a manager as manager, and a governor as governor for the debts, obligations, or other liabilities of the company.” For a Delaware or Wisconsin LLC, consider pleading facts that meet both that state’s test and Minnesota’s.

Who should the complaint name besides the record owner?

The complaint should name every person who actually controlled the company and took its money, not only the people on the ownership records. It should also plead any claim against those people for their own wrongful acts as a separate count, because that liability does not depend on piercing.

In Equity Trust, the Court of Appeals affirmed piercing against principals who were not listed as owners: “If veil piercing were solely dependent on a party’s ownership interest in an entity, unscrupulous parties could avoid personal liability under the doctrine by simply acting in a capacity that does not involve ownership.”

Direct liability is a separate route. The LLC shield in Minn. Stat. § 322C.0304, subd. 1, provides that company debts “do not become the debts, obligations, or other liabilities of a member, manager, or governor solely by reason of the member acting as a member, manager acting as a manager, or governor acting as a governor.” In State ex rel. Humphrey v. Alpine Air Products, Inc., 490 N.W.2d 888 (Minn. App. 1992), a consumer-protection case brought by the Attorney General, the court affirmed personal liability for a company president who was “responsible for the design and use of the air purifiers and for all of” the company’s promotional claims. No piercing was needed.

If a count alleges fraud, Minn. R. Civ. P. 9.02 applies: “the circumstances constituting fraud or mistake shall be stated with particularity.” The rules for pleading fraud with particularity apply to that count even when the veil count is pleaded under the general standard.

For related companies, ask early for the documents between them. In my practice, when I set up a holding company and an operating company for a client, I put a simple contract between the two companies to show they operate as separate businesses. When no such paper exists, that absence is a fact worth pleading.

When does a fraudulent-transfer count belong next to the veil claim?

A fraudulent-transfer count belongs in the complaint when money or assets moved from the company to the owner or an insider while your claim was unpaid and the facts fit one of the routes in Minnesota’s fraudulent-transfer statutes. Those routes include actual intent to hinder creditors; a transfer for less than reasonably equivalent value while the company’s remaining assets were unreasonably small for its business or it expected debts beyond its ability to pay; and, for a creditor whose claim already existed, a transfer for less than reasonably equivalent value while the company was insolvent. It reaches the transferred assets directly and does not depend on proving the company was the owner’s alter ego.

Under Minn. Stat. § 513.44, a transfer is voidable if the debtor made it “(1) with actual intent to hinder, delay, or defraud any creditor of the debtor,” and the statute lists factors a court may consider, including whether “(1) the transfer or obligation was to an insider” and whether “(2) the debtor retained possession or control of the property transferred after the transfer.” A transfer is also voidable if the debtor made it “without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:” either “was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction” or “intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.” For a creditor whose claim arose before the transfer, Minn. Stat. § 513.45 also makes a transfer voidable if the debtor made it “without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation,” or if “the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.” Minn. Stat. § 513.47 lets the creditor obtain “(1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim,” among other relief.

You do not have to win the debt claim first. Minn. R. Civ. P. 18.02 provides that “a plaintiff may state a claim for money and a claim to have set aside a conveyance fraudulent as to that plaintiff, without first having obtained a judgment establishing the claim for money.” Minnesota’s voidable-transactions act (sections 513.41 to 513.51) has no time-limit section of its own, so look to the limitations provisions of Minn. Stat. chapter 541 before relying on an older transfer. The fraudulent transfer rules explain the claim in more depth.

How does a plaintiff reach an out-of-state owner or parent company?

A Minnesota plaintiff reaches a nonresident owner or parent through the long-arm statute, and the Court of Appeals has held that an alter-ego relationship with a Minnesota-active subsidiary can support jurisdiction over the parent. The complaint should plead those jurisdictional facts, not just the veil factors.

Minn. Stat. § 543.19, subd. 1, allows jurisdiction over “any foreign corporation or any nonresident individual” for a cause of action arising from listed acts, “in the same manner as if it were a domestic corporation or the individual were a resident of this state,” including one who “(2) transacts any business within the state.” Subdivision 3 adds: “Only causes of action arising from acts enumerated in subdivision 1 may be asserted against a defendant in an action in which jurisdiction over the defendant is based upon this section.”

In JL Schwieters Construction, Inc. v. Goldridge Construction, Inc., 788 N.W.2d 529 (Minn. App. 2010), subcontractors sued a Wisconsin parent for accepting fraudulent transfers from its insolvent LLC subsidiary. The court explained that “a plaintiff need only make a prima facie showing of personal jurisdiction before trial, and the complaint and any supporting evidence must be taken as true,” and affirmed jurisdiction because the facts showed the subsidiary was operated as the parent’s instrumentality.

Expect a motion to dismiss for lack of personal jurisdiction under Minn. R. Civ. P. 12.02 for “(b) lack of jurisdiction over the person.” Facts about shared accounts, guaranties, and money flowing to the parent serve both the jurisdiction argument and the veil claim.

What changes if the defendant removes the case to federal court?

After removal, the federal rules govern the case, and the federal pleading standard is the plausibility standard the Minnesota Supreme Court declined to adopt. A complaint drafted only to meet Minnesota’s standard may not meet the federal one.

Under 28 U.S.C. § 1441(a), “Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants.” The statute also limits removal based only on the parties being from different states: such a case “may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.” Suing a Minnesota owner alongside an out-of-state company can keep the case in state court. Other subsections of § 1441 add procedures and exceptions for particular kinds of cases. Fed. R. Civ. P. 8(a)(2) uses the same words as the Minnesota rule, and Fed. R. Civ. P. 81(c)(1) provides: “These rules apply to a civil action after it is removed from a state court.” In Walsh, the Minnesota Supreme Court described plausibility as the pleading standard “for civil actions in federal court,” said it “raises the bar for claimants,” and declined to adopt it even though, as it noted, “the relevant text of Fed.R.Civ.P. 8(a)(2) is identical to the text of Minn. R. Civ. P. 8.01.”

When the case is one the owner could remove, draft the facts as if a federal judge will read them. Facts that clear the federal bar clear Minnesota’s too.

How can a plaintiff fix a weak veil claim after filing?

A plaintiff can ask to amend a thin veil claim once discovery shows the facts, and Minnesota’s rule says “leave shall be freely given when justice so requires.” Adding a new defendant late is harder, because relation back for a new party has its own conditions.

Minn. R. Civ. P. 15.01 provides that, after the early window, “a party may amend a pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.” Bank records and tax returns produced in discovery often supply the capital and money-flow facts the first complaint could only allege.

For an owner you did not name at first, Minn. R. Civ. P. 15.03 lets an amendment changing the party relate back if the claim arises out of the conduct, transaction, or occurrence in the original pleading and, “within the period provided by law for commencing the action against the party, the party to be brought in by amendment (1) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against that party.” Because relation back turns on notice within that period and on a mistake about identity, naming the owner at the start is safer. The procedure for amending a complaint covers the motion itself.

A veil-piercing complaint in Minnesota works when it pleads the company’s liability, joins the owner, and gives facts for both the alter-ego factors and the injustice that would follow from respecting the company. Add direct and fraudulent-transfer counts where the facts support them, plead jurisdiction over any nonresident, and write the facts as if a federal judge may read them. If the judgment is already entered, the steps for collecting a judgment in Minnesota come next, and the litigation practice page describes how Aaron Hall handles these cases. If you would like a second set of eyes on a planned veil-piercing claim, email aaron@aaronhall.com with a brief description of the debt and the company involved.