In an opinion released Wednesday, the Tennessee Supreme Court clarified that holding shareholders responsible for the actions of a corporation, known legally as “piercing the corporate veil,” requires three separate elements: control, wrongdoing and causation. The Court also held that trial courts must ensure that a complaint sufficiently articulates a claim for the relief sought before entering a default judgment.
The plaintiff, Charles Youree, Jr., filed a lawsuit seeking to hold two companies responsible for a monetary judgment he had obtained against another company. When the two companies failed to answer the complaint, the trial court awarded Mr. Youree a default judgment. The companies later moved to set aside the default judgment so that the case could be litigated on the merits. The companies argued that the trial court never should have entered a default judgment because Mr. Youree’s complaint lacked sufficient factual allegations about the elements required for piercing the corporate veil. The trial court denied the motion, leaving the default judgment in place, but the Court of Appeals reversed the trial court’s decision.
In a unanimous opinion, the Supreme Court affirmed the Court of Appeals. The Court held that a defendant’s failure to answer does serve to admit the factual allegations in a complaint, but it does not mandate a default judgment. Instead, before entering a default judgment, trial courts must ensure that the admitted facts are legally sufficient to establish a valid claim against the defendant. The Court examined Mr. Youree’s complaint and determined that it did not contain sufficient factual allegations about all three elements required to pierce the corporate veil. Consequently, the Court vacated the default judgment and returned the case to the trial court for further proceedings.
To read the Supreme Court’s opinion in Youree v. Recovery House of East Tennessee, LLC, authored by Justice Jeff Bivins, visit the opinions section of TNCourts.gov.