What Does Veil Piercing Success Mean Anyway?
posted by Dave Hoffman
If you look at opinions, winning in a veil piercing case is pretty easy to define: did the court agree to pierce the veil, reaching through an entity to its shareholders. If you were inclined, you could model success at those terminal moments in cases, asking which factors (described in the opinions) correlated with courts agreeing to pierce.
There’s value in this approach, not least because opinions shape reality. But there’s a problem too. Not only are opinions unrepresentative, but they come late in cases. The result is an extreme form of selection. It’s not clear (to me, anyway) what the null hypothesis regarding the effect of independent variables ought to be for late-stage dispositions.
Dockets offer the promise of a different approach: asking which factors correlate with success or failure early in cases. Further, assuming that adjudicated motions teach the parties about the strength of their cases, and that they settle strategically, we can even start to learn from the timing and incidence of settlement.
In this post, I’m going to relay some descriptive statistics about the veil piercing successes that plaintiffs achieved in our data. (I’m continuing to pull the data and some text from our paper.) To those who are getting annoyed by all of these posts, I’m sorry! I’ve been living with this project for a long time — I’m excited to finally share it publicly.
We coded 550 motions raising veil piercing problems, and 580 non-veil piercing motions, in our 690 cases. Overall, about half of all veil piercing motions result in plaintiffs advancing their veil piercing claims (but not ending the case), about fifteen percent involve judicial determinations against the veil piercing claim, twenty percent success on the merits (if defaults are included), and the remainder of motions were pending at the time of settlement. (Recall that 2 of 3 cases overall ended in settlement).
Excluding defaults, and dropping pending motions, veil piercing litigation is a story of wild early success: plaintiffs prevailed — in one form or another – on approximately 85% of all veil piercing motions in our dataset. Many cases had their veil piercing claims still “alive” at the time of settlement. Indeed, using the most liberal definition, which includes settlement after motion practice as victory, 78% of cases resulted in plaintiffs realizing some value from their veil piercing claims.
But very few cases actually led to veil piercing, on the merits, outside of defaults: only 37 cases, out of 690, contained a judicially-enforced veil piercing on the merits. That’s around 6%.
Moving parties were less likely to win non-veil piercing discovery motions than veil piercing discovery (a 67% success rate versus 90% in resolved motions) and plaintiffs were less successful at fighting off motions to dismiss (61% plaintiff prevail rate versus 88%) and summary judgment (62% versus 90%). One explanation for this effect is that veil piercing motions (i.e., demanding VP discovery, or fighting of a motion to dismiss) are somehow not selected out of cases to the same degree that ordinary motions are: defendants either are too attached to them (think they are going to win when they won’t) or plaintiffs insufficiently so (think they lack settlement leverage when they have it).
The advantage of looking at success and failure at the motion-by-motion level is that it promises a chance to move the problem of selection back in cases to a moment where we wouldn’t reasonably expect for plaintiffs and defendants to have a realistic sense of their chances. We can fairly hypothesize that some independent variables — judicial demographics, plaintiffs and defendant characteristics, legal rules and planning — will affect the parties’ respective successes and failures on (say) the grant rate in motions to dismiss. As I’ll discuss in penultimate post in this series, that intuition turns out to be basically correct.
Confused? Read the paper!
October 8, 2009 at 7:24 am
Posted in: Contract Law & Beyond, Corporate Law, Economic Analysis of Law, Empirical Analysis of Law, Law Practice, Law School (Scholarship)
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Responses (2)
Jason Kilborn - October 8, 2009 at 5:54 pm
Is this a cautionary tale for defense litigators and defendants: don’t give up too early, as the ultimate merits success rate is onlhy 6%??? I’m just blown away by this paper and these results–it seems to turn the notion of limited liability on its head, dragging us back to the era of unlimited liability, at least for SMEs. Are these defendants caving too early when motions practice goes against them? Are the large numbers of defaults the real story–”so what?,” the defendants say, “I have no deeper pockets than my little corporation, so come get me”?
Dave Hoffman - October 8, 2009 at 6:12 pm
On the default front, I think a large fraction aren’t actually contested — the defendant never shows up because there are no corporate assets to be had. The default is then as a tool to get a bank attachment, which drives the parties (often multi-employer pension plan related) to settlement. I can check, but my rough guess is that at least half of the defaults arise in this context.
I do think that you can’t infer from the fact that only six percent of cases turn out to be adjudicated winners the conclusion that judges are ultimately going to be hostile to claims. That’s exactly the inference that selection prohibits! Maybe, if the parties didn’t settle, the ultimate win rate would look very different. As it is, in the 25 trial motions we’ve got represented about, about 15 are winners for the party seeking veil piercing (either resulting in the case advancing or an adjudicated piercing). 10 are loses.
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