Concurrent ‘Alter-Ego’ Claims: Oklahoma Leads the Nation in Extending Protection to Shareholders, Officers and Directors

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Oklahoma Bar Journal - Vol. 85, No. 8 - March 15, 2014

During the past several years, practitioners have devoted significant attention to the fate of the Oklahoma Legislature’s efforts at, and the Oklahoma Supreme Court’s response to, legislative tort reform. However, few noticed the relatively quiet enactment last year of a statute with far-reaching implications for the officers, directors and shareholders of corporations as well as the members and managers of limited liability companies in Oklahoma. This statute — which appears to be the first in the country to effectively circumvent long-standing judicial interpretations of the language of a substantially identical statute found not only in Oklahoma’s General Corporation Act, but also in the corporation codes of many other states — offers strong protection to ownership and management of companies against so-called “piercing the veil” lawsuits.

On Nov. 1, 2013, an amendment to Okla. Stat. tit. 12, §682 went into effect. In current form, Section 682(B) now states:

No suit or claim of any nature shall be brought against any officer, director or shareholder for the debt or liability of a corporation of which he or she is an officer, director or shareholder, until judgment is obtained therefor against the corporation and execution thereon returned unsatisfied. This provision includes, but is not limited to, claims based on vicarious liability and alter ego. Provided, nothing herein prohibits a suit or claim against an officer, director or shareholder for their own conduct, act or contractual obligation arising out of or in connection with their direct involvement in the same or related transaction or occurrence.

The provision, which effectively stays the filing of “alter-ego” or “piercing the corporate veil” claims also applies to the members and managers of limited liability companies.[1] Corporate attorneys will likely recognize that the first sentence of Section 682(B) is merely a duplication of a statute which has existed in Oklahoma’s corporation code for almost 30 years. Okla. Stat. tit. 18, §1124(B) states:

No suit shall be brought against any officer, director or shareholder for any debt of a corporation of which he is an officer, director or shareholder, until judgment is obtained therefor against the corporation and execution thereon returned unsatisfied.

However, almost a decade ago, in Fanning v. Brown,[2] the Oklahoma Supreme Court, in dicta, rejected the contention that Section 1124(B) applied to stay “alter-ego” claims, stating:

Subsection (B) of §1124 must be read in relation to subsection (A). Subsection (A) provides that subsection (B) applies only to claims conferred “by the provisions of the Oklahoma General Corporation Act” which permits officers, directors, and shareholders to be held liable for the debts of the corporation in certain instances.

The Oklahoma Legislature’s rejection of Fanning is reasonable because it is not altogether clear that, as a matter of statutory interpretation, the Fanning court’s in dicta statement was correct. While Section 1124(A) certainly makes clear that creditors have a cause of action against officers, directors and shareholders when they are otherwise liable under other provisions of the corporation statutes, these liabilities were already effectuated and made clear by those other provisions. [3] Subsection (A) does not, in fact, provide that subsection (B) applies only to liabilities conferred by the corporation statutes. In fact, Section 1124(B) goes further, and outlines when suits may be brought “for any debt” (as opposed, for example, to specified statutory liabilities) of the corporation. Given that Section 1124(B) uses the phrase “any debt” and Section 1124(A) merely restates obligations already existing under other provisions of the corporation laws, it would seem that a better rule of statutory interpretation would be that the courts should presume that the Legislature has not done a vain and useless thing.[4]

Section 1124(B) is the Oklahoma analog of Section 325(b) of Delaware’s Corporation Code. Like the Fanning court, courts in other jurisdictions interpreting Delaware’s version have held that subsection (b) must be read in conjunction with subsection (a) and only applies to stay the filing of lawsuits alleging liability based upon the provisions of the corporation statutes.[5] These situations would appear to be extremely limited, including, for example, instances in which shareholders of a dissolved corporation are liable for the company’s debt following dissolution not in accordance with statutory procedures,[6] or perhaps liability of a shareholder to extent of the unpaid consideration for shares of the corporation to satisfy the claims of creditors of insolvent companies.[7] Interestingly, it would not, according to Fanning, apply to shareholder liability based upon other provisions of Oklahoma law, such as management’s liability for application of amounts to be held in trust under the lien statutes[8] or as a result of the corporation’s failure to pay franchise tax.[9]

In any event, the second sentence of Section 682(B) goes beyond Section 1124(B) and makes abundantly clear that its provisions bar the filing of a lawsuit against the officers, directors or shareholders of a corporation based upon an alter-ego or piercing the veil doctrine until a judgment has been rendered against the corporation and execution returned unsatisfied. And, given its “including but not limited to” language, it would also appear to extend that protection to causes of actions or liabilities arising in other provisions of the Oklahoma Statutes beyond those found in the corporation laws. This statute appears to be the first of its kind and affords broad protections to not only officers, directors and shareholders of domestic corporations but also those of foreign corporations in suits brought in Oklahoma courts. Section 682(B) still allows for suits based upon the personal torts or contractual obligations of shareholders, officers and directors, which is in accord with an existing 10th Circuit interpretation of Section 1124(B).[10]

Uncertain case law

Given the paucity of any particularized statutory or judicial guidelines for alter-ego claims in Oklahoma beyond factors involving a corporation’s liability for the debts of a subsidiary, the Legislature’s willingness to effectuate a statutory stay of such actions is understandable. For example, trial courts may be hesitant to dispose of the issue on summary judgment given the Supreme Court of Oklahoma’s indication that veil-piercing issues “doubtless gives rise to a fact question.”[11] Yet, Oklahoma’s Uniform Jury Instructions do not contain a standard jury instruction for determinations of such liability. In fact, the courts across the country are split (despite various judicial observations concerning the “weight of authority”) whether a party has a right to a jury on such a claim in the first place.[12] Even more perplexing for the trial court is that while equitable claims should ordinarily be tried by the court, the court may in its discretion submit the issue to a jury when the case involves both legal and equitable claims,[13] or may consider the jury’s findings advisory only.[14] To make matters worse, to the extent these issues are submitted to a jury, in the absence of uniform instructions, Oklahoma courts may be persuaded to utilize jury instructions based on rather vague and often inapposite standards.

For example, in Sautbine v. Keller,[15] the Supreme Court of Oklahoma recognized that the common- law alter-ego theory in Oklahoma has “been amplified to allow application not only for fraud or wrong, but also in cases where the facts require the court to disregard separate existence of the corporation and shareholders in order to protect rights of third persons and accomplish justice.” Other courts have held that it may be utilized “when it is essential in the interest of justice to do so, or where the corporate shield is used to defeat an overriding public policy.”[16] For example, courts have disregarded the corporate form of a company that failed to satisfy a Workers’ Compensation Court award based on public policy without any finding of the usual alter-ego factors.[17] Indeed, jury instructions may simply recite the non-exhaustive list of factors cited in Frazier v. Bryan Mem. Hosp. Auth,[18] which were whether:

1) the parent corporation owns all or most of the subsidiary’s stock,

2) the corporations have common directors or officers,

3) the parent provides financing to its subsidiary,

4) the dominant corporation subscribes to all the other’s stock,

5) the subordinate corporation is grossly undercapitalized,

6) the parent pays the salaries, expenses or losses of the subsidiary,

7) almost all of the subsidiary’s business is with the parent or the assets of the former were conveyed from the latter,

8) the parent refers to its subsidiary as a division or department,

9) the subsidiary’s officers or directors follow directions from the parent corporation and

10) legal formalities for keeping the entities separate and independent are observed.[19]

These factors, which pertain to the corporation- subsidiary relationship (and, if taken literally, effectively eviscerate it as a reliable method of insulation from liability), stand a significant chance of misinterpretation when applied to closely-held corporations with individual or single-member LLC shareholders. Most notably, the notion of “gross undercapitalization” can be particularly threatening to a relatively new enterprise, which may not have yet realized anything other than losses and could serve to defeat the entire purpose of a corporation — limiting liability in order to promote the infusion of risk capital for commercial enterprise. However, defendants’ attempts to obtain clarifying instructions relating to undercapitalization have been refused.[20] Similarly, case law is scant with regard to officer and director liability, with only a brief recitation of the standard set forth in Preston-Thomas Const. v. Central Leasing[21] in 1973. On top of all this, the issue may be raised for the first time in post-judgment execution proceedings[22] and the statute of limitations has never served as an effective bar for such claims.[23] Section 682(B), which reduces the alter-ego claim in Oklahoma to what amounts to a purely stand-alone equitable declaration by the court of liability for a previously adjudicated and liquidated debt of the corporation, would seem to make clear that such alter-ego claims are equitable and not triable to a jury as a matter of right.

Unanswered questions

Section 682 does leave some questions unanswered. Perhaps most importantly, it is not inconceivable that the corporation would, prior to judgment and execution, file a voluntary petition under Chapter 7 or Chapter 11 of the United States Bankruptcy Code. Would, for example, a claim against the corporation addressed in a confirmed Chapter 11 plan, render the possibility of an actual judgment, let alone one that remained unsatisfied, a virtual impossibility and thus allow the officers, directors and shareholders to avoid a veil-piercing claim altogether? Would this violate Oklahoma’s constitutional right of access to the courts[24] or might it constitute a special law regulating the courts’ treatment of a special class of plaintiffs — contract or tort creditors of an alter-ego company?[25] Might this encourage requests for abstention by the bankruptcy court or motions to lift the automatic stay to allow claimants to adjudicate their claim in state court during the pendency of the bankruptcy case, thus slowing the administration of the Chapter 11 case while judgments against the corporation were pursued not for purposes of establishing and liquidating a claim but rather simply in order to establish the statutory predicate for a subsequent alter-ego lawsuit? Additionally, would the doctrine apply to bar declaratory judgments by insurers under fidelity bonds in which the insurer seeks a declaration that the corporate insured was an alterego of a malfeasant officer, director or shareholder, thus precluding liability because the bond did not cover loss resulting from the insured’s own wrongdoing? Would the statute serve to preclude judicial determinations of alter-ego allegations in determining whether a party is bound by an arbitration agreement when that determination might be used later in the proceedings for liability purposes?[26] How will the corporation’s own indemnification obligations to officers and directors be affected given that by the time any suit is brought against those individuals, by definition, corporate resources will be exhausted? These are all matters that may bear judicial interpretation or subsequent amendment.

There are also unanswered questions regarding the language of the statute. Section 682(C) states:

Subject to the exceptions provided for in subsection B of this section, any claim against an officer, director or shareholder asserting liability against such officer, director or shareholder for the liabilities of a corporation shall not be tried during the same phase of the proceeding in which the issues of liability with respect to the corporation are tried unless there also exists a claim based upon the conduct or act of the officer, director or shareholder of the corporation arising out of the same or related transaction or occurrence.

This subsection appears superfluous. It is difficult to conceive of a scenario in which a claim against the protected class for the company’s debt could be tried simultaneously with a claim against the company for the same liability when subsection (B) already makes clear that no such claim may be brought until judgment has been obtained against the corporation. Perhaps the only reasonable construction of subsections (B) and (C) is that subsection (C) merely clarifies that claims against officers, directors and shareholders for their independent liabilities may indeed be tried in the same proceeding.

Perhaps the most interesting aspects of Section 682 concern the scope of its application. Section 682(D), which extends the statute’s protection afforded officers, directors and shareholders of corporations to members and managers of limited liability companies, states: “Members and managers of limited liability companies shall be afforded the same substantive and procedural protection from suits and claims as the protections provided to officers, directors and shareholders of a corporation as set forth in subsections B and C of this section.” The use of the phrase “substantive and procedural” may be critical in the interpretation of the law’s scope. To the extent the statute is considered procedural in nature, then it may also apply to suits in Oklahoma courts brought against the officers, directors and shareholders of not only Oklahoma but also foreign corporations. Moreover, if the statute is considered procedural, would it apply retroactively to lawsuits pending as of its effective date of Nov. 1, 2013?[27] Finally, if considered a substantive matter of corporation law, then it should apply, at least with respect to Oklahoma corporations, in federal court.[28]

Section 682 represents an important step by the Oklahoma Legislature in effectuating the centuries-old policy underlying the corporate entity — limited liability. Potential plaintiffs will, with the benefit of the tolling provisions of Section 682(E), have to first obtain a judgment against the corporation itself and determine whether it may be satisfied before exposing ownership and management to what could be needless litigation expense.


  1. Okla. Stat. tit. 12, §682(D)(Supp. 2013).
  2. 2004 OK 7 at n.8, 85 P.3d 841, citing Lone Star Indus., Inc. v. Redwine, 757 F.2d 1544, 1553 (5th Cir. 1985).
  3. See infra at n.5 and n.6.
  4. State ex rel. Okla. Dept. of Public Safety v. Gurich, 2010 OK 56, ¶25.
  5. Pinellas County v. Great Amer. Indus. Group, Inc., No. 90 C 5254, 1991 WL 259020 at *3 (N.D. Ill. Dec. 2, 1991); Shirley v. E & E Trucking Co., No. Civ. A 0014-0686, 1987 WL 860828 at *1 (Del. Com. Pl. May 6, 1987);
  6. Okla. Stat. tit. 18, §1100.3 (2011).
  7. Id. at §1043(A). It should be noted, however, that Section 1043(B) seems to contain its own analog to Section 1124(B) with regard to when a suit for such liability may be brought.
  8. Okla. Stat. tit. 42, §153(2) (2011).
  9. Okla. Stat. tit. 68, §1212(B) (2011).
  10. Okla. Federated Gold & Numismatics, Inc., 24 F.3d 136, 141 (10th Cir. 1994).
  11. Frazier v. Bryan Mem. Hosp. Auth., 1989 OK 73, ¶16, 775 P.2d 281.
  12. See e.g., Iantosca v. Benistar Admin. Services, Inc., 843 F. Supp. 2d 148, 153 (D. Mass. 2012)(holding right to jury trial on alter-ego theory where money judgment, as opposed to declaration, sought); U.S. v. Vacante, No. 1:08cv1349 OWW DLB, 2010 WL 2219405 at **3-4 (E.D. Cal. June 2, 2010)(collecting cases and holding that right to jury trial applied where money judgment sought); but see International Financial Services Corp. v. Chromas Technologies Canada, Inc., 356 F.3d 731 (7th Cir. 2004)(finding no right to jury trial on alter-ego claim); Advanced Telephone Sys., Inc. v. Com-Net Professional Mobile Radio, LLC, 846 A.2d 1264 (Pa. Super. Ct. 2004)(finding no state constitutional right to jury trial on alter-ego claim); In re Thorn, 788 So.2d 140 (Ala. 2000)(finding no right to jury trial on alter-ego claim). It should be noted that in Maxxum Constr., Inc. v. First Comm. Bank, 2011 OK CIV APP 84, ¶9, 256 P.3d 1058, the court indicated both that a piercing the veil claim was “purely equitable” and then, in the next sentence, stated that it was “predominantly equitable.” In Puckett v. Cornelson, 1995 OK CIV APP 72, ¶11, 897 P.2d 1154, the court held that “an action against a corporate officer or shareholder to recover on a corporate debt stands purely in equity.”
  13. I.C. Gas Amcana, Inc. v. J.R. Hood, 1992 OK 119, ¶8, 855 P.2d 597. On the other hand, if the equitable claims are paramount, there is no right to a jury. Butcher v. McGinn, 1985 OK 58, ¶8, 706 P.2d 878.
  14. Ray v. Masters, 1967 OK 159, ¶0, 429 P.2d 991.
  15. 1966 OK 29, ¶15, 423 P.2d 447.
  16. King v. Modern Music Co., 2001 OK CIV APP 126, ¶17.
  17. Thomas v. Vertigo, Inc., 1995 OK CIV APP 45, ¶¶7-10, 900 P.2d 458. Thomas is interesting in that the court seemed to agree to that Section 1124(B) of the corporation statutes indeed barred a claim against an officer, director or shareholder until judgment against the company was returned unsatisfied. Id. at ¶12.
  18. 1989 OK 73, ¶17, 775 P.2d 281; see also Gilbert v. Sec. Fin. Corp. of Okla., 2006 OK 58, ¶23, 152 P.3d 165.
  19. Even factors as vague as “commonality of purpose” have been recognized as applicable. Pennmark Resources Co. v. State ex rel. Okla. Corp. Comm’n., 2000 OK CIV APP 63, ¶16, citing Oliver v. Farmers Ins. Group of Cos., 1997 OK 71, ¶8, 941 P.2d 985.
  20. Gilbert, 2006 OK 58 at ¶25.
  21. 1973 OK CIV APP 10, ¶¶8-9.
  22. Sproles v. Gulfcor, Inc., 1999 OK CIV APP 81, ¶¶2-3, 987 P.2d 454.
  23. Boulden v. Colbert Nursing Home, Inc., 2011 OK CIV APP 21, ¶17, 249 P.3d 105 (“[S]hareholder liability for a corporation’s judgment may be litigated — on a corporate veil or alter-ego theory of recovery — after the statute of limitations on the underlying claim has expired”).
  24. Okla. Const. Art. II, §6.
  25. Okla. Const. Art V, §46.
  26. Carter v. Schuster, 2009 OK 94, ¶14, 227 P.3d 149.
  27. Walls v. Amer. Tobacco Co., 2000 OK 66, ¶24, 11 P.3d 626.
  28. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

 

Topics:  Alter Ego, Board of Directors, LLC, Officers, Professional Liability, Shareholder Litigation, Shareholders

Published In: Bankruptcy Updates, Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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