Master Fourth Circuit pierced the corporate veil to hold a dominant shareholder personally liable for corporate debts based on undercapitalization and misuse of the corporate form. with this comprehensive case brief.
DeWitt Truck Brokers v. W. Ray Flemming is a seminal Fourth Circuit case on piercing the corporate veil (PCV). Applying South Carolina law, the court articulated a now-classic, multifactor framework for determining when equity requires disregarding the corporate entity to impose personal liability on a controlling shareholder. The opinion remains one of the most frequently cited authorities in business associations courses for identifying and applying PCV factors.
The decision is significant because it balances respect for limited liability against the need to prevent injustice when the corporate form is used as a façade. By setting out concrete factors—such as undercapitalization, disregard of corporate formalities, and siphoning of funds—the case provides a practical checklist for litigants and courts assessing whether a corporation has been operated as a mere instrumentality of its owner.
540 F.2d 681 (4th Cir. 1976)
DeWitt Truck Brokers, Inc., a trucking broker, arranged and paid for the shipment of perishable produce at the request of W. Ray Flemming Fruit Co., a closely held corporation wholly dominated by its namesake, W. Ray Flemming. DeWitt paid carriers for freight charges and invoiced the corporation for reimbursement. The corporation failed to pay substantial freight bills. Evidence showed the corporation was grossly undercapitalized in light of its produce-trading business, had scant corporate records, and did not observe corporate formalities. Flemming exercised complete control, used corporate funds for personal purposes or to repay himself on shareholder “loans,” preferred himself over outside creditors, and continued to incur obligations despite the corporation’s insolvency. DeWitt sued to recover unpaid freight charges and sought to pierce the corporate veil to hold Flemming personally liable. The district court declined to impose personal liability, and DeWitt appealed.
Under South Carolina law, may a court pierce the corporate veil to hold a dominant shareholder personally liable for a corporation’s debts where the shareholder has so dominated and misused the corporation—through undercapitalization, disregard of formalities, and siphoning of funds—that recognizing the corporate entity would work an injustice?
Courts may pierce the corporate veil when the corporate form is used to defeat public convenience, justify wrong, protect fraud, or achieve inequitable results. The inquiry is fact intensive and considers whether the corporation is the mere instrumentality or alter ego of its dominant shareholder and whether adherence to the corporate fiction would promote injustice or fundamental unfairness. Relevant nonexclusive factors include: (1) gross undercapitalization for the corporation’s undertaking; (2) failure to observe corporate formalities; (3) nonfunctioning of officers and directors other than the dominant shareholder; (4) absence or inadequacy of corporate records; (5) insolvency at the time of the challenged transaction; (6) siphoning or diversion of corporate funds by the dominant shareholder; (7) nonpayment of dividends; (8) use of the corporation as a façade for the operations of the dominant shareholder; and (9) whether recognition of the corporate entity would result in inequity or injustice.
Yes. The court pierced the corporate veil and held W. Ray Flemming personally liable for the corporation’s debt to DeWitt.
Applying South Carolina law, the Fourth Circuit emphasized that limited liability is the norm but may yield when the corporate form is misused to perpetrate injustice. The court identified multiple, converging PCV factors. First, the corporation was grossly undercapitalized for a high-risk, high-volume produce operation—an indicium that the shareholder sought to externalize ordinary business risks to creditors. Second, corporate formalities were disregarded: records were inadequate, and the corporation functioned essentially as a one-person enterprise with nonfunctioning officers or directors. Third, Flemming exercised complete domination and treated corporate funds as his own, including paying himself in preference to outside creditors through purported shareholder “loans,” reflecting siphoning of corporate assets. Fourth, the corporation was insolvent when it incurred or failed to pay the obligations to DeWitt, yet it continued to deal on credit. Finally, allowing Flemming to shelter behind the corporate form would produce inequity, because DeWitt paid carriers and relied on the ongoing course of dealing while Flemming used the corporation as a façade to shield himself from foreseeable liabilities inherent in the business. The court rejected the argument that absence of common-law fraud precluded relief. PCV does not require an independent tort; rather, a sufficient showing of domination plus misuse of the corporate entity and resulting injustice warrants piercing. Considering the totality of circumstances, the court concluded the corporation was Flemming’s alter ego and that equity required imposing personal liability.
DeWitt is a cornerstone case for veil piercing. It supplies a widely adopted multifactor test and clarifies that no single factor is dispositive; instead, courts look to the totality and to whether recognizing the entity would promote injustice. For students, the case illustrates how undercapitalization, disregard of formalities, and self-dealing combine to justify personal liability, and it underscores that veil piercing is an equitable remedy grounded in fairness rather than a rigid formula.
South Carolina law applied, because the corporation was organized and operated there and the dispute centered on obligations arising from its operations. The Fourth Circuit applied South Carolina’s equitable veil-piercing principles.
No. While fraud can justify piercing, DeWitt confirms that an independent tort or fraud is not required. A showing of domination plus misuse of the corporate form that would result in injustice or fundamental unfairness is sufficient.
Generally no. DeWitt treats undercapitalization as a powerful factor, especially when tied to the business’s risks, but it is typically considered alongside other factors—such as disregard of formalities, siphoning of funds, and insolvency—to determine whether equity warrants piercing.
The court treated the practice as evidence of siphoning and self-dealing by the dominant shareholder, supporting alter ego status. Preferring insider repayments over outside creditors indicated misuse of the corporate form and weighed heavily toward piercing.
Ensure adequate capitalization for the business’s foreseeable risks, observe corporate formalities (separate accounts, records, functioning directors/officers), avoid commingling and insider preferences, and treat the corporation as a distinct entity. Doing so mitigates the risk that a court will view the corporation as a mere instrumentality and pierce the veil.
Insolvency at the time obligations were incurred or unpaid supported piercing because it showed the corporation could not meet its debts and continued to transact, shifting risk to creditors while the shareholder insulated himself. Insolvency, combined with other factors, strengthened the equity case for piercing.
DeWitt Truck Brokers v. W. Ray Flemming Fruit Co. stands as a leading authority on when equity permits courts to disregard the corporate form. By synthesizing a set of nonexclusive factors and insisting on a showing of injustice, the decision offers a clear analytic framework that respects limited liability while guarding against its abuse.
For practitioners and students alike, DeWitt’s lesson is twofold: limited liability is a privilege that depends on honoring the separateness of the corporate entity, and courts will intervene when that separateness is exploited to the detriment of creditors. The case remains a touchstone for applying veil-piercing doctrine in closely held and one-person corporations.