Law
4:17 pm
Tue August 5, 2014

Hobby Lobby Ruling May Have Poked A Hole in The 'Corporate Veil'

Originally published on Wed August 6, 2014 9:47 am

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Transcript

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Contraceptive coverage under the Affordable Care Act was at the center of the Supreme Court's Hobby Lobby ruling this past June. That ruling will likely have broader implications for all types of businesses. In fact, some legal scholars are raising concerns that the decision may inadvertently tear a hole in an important legal concept called the corporate veil. As NPR's Wade Goodwyn reports, the veil is the legal barrier that separates and protects the assets of owners and shareholders from a corporation's creditors.

WADE GOODWYN, BYLINE: Have a seat everyone please. I know it's summer but let's learn something to make our mommas proud. Today we're going to talk about a legal concept that's a key pillar of corporate law. It's called the corporate veil, it's a simple idea.

GREG CRESPI: The general rule of law is that you can't go after the shareholders of a corporation and hold them personally liable for corporation debts. The liability stops with the corporation.

GOODWYN: Everybody got that? Greg Crespi is a veteran corporate law professor at SMU. The professor says, that without the corporate veil nobody would ever invest in a business venture because nobody would be willing to risk their own house and money if it failed. Dr. Crespi wrote an academic paper that was used by Hobby Lobby's lawyers.

CRESPI: My article was cited with reference to this theory that the Greens, who own Hobby Lobby, who have individual religious freedom rights - no one argues with that - wanted to collapse the corporation to sort of bring its behavior under their religious freedom rights.

GOODWYN: This is where it starts to get tricky because if the Supreme Court has confirmed that closely held corporations have religious rights what then do those corporations believe? The answer is nothing, of course, because a corporation isn't raised Catholic or Jewish. It's a legal entity. So in order to exercise its newfound religious freedoms, a corporation must import religious beliefs from a real person or a group of people. The question is, when an owner decides to assert my corporation myself, our religious beliefs are one, has he then torn a hole in his corporate veil? Professor Crespi.

CRESPI: And if the owner himself, as in Hobby Lobby, has asserted, the corporation and I are one, complete congruence, we're not separate - that could be turned around conceivably against them when a creditor of the corporation is trying to sue and the owner now wants to put some distance between himself and the corporation.

GOODWYN: The issue was addressed at an amicus brief filed in the Hobby Lobby case by 44 corporate and securities law professors from around the country. The essence of a corporation is its separateness from its shareholders, the law professors wrote. This Court should reject the values passed through concept. To do otherwise would run contrary to established principles of corporate law. Aaron Katz is a partner at Ropes and Gray which prepared the amicus brief.

AARON KATZ: I don't think what the Supreme Court thinks it has done here is torn the corporate veil.

GOODWYN: Katz believes the Supreme Court intended to recognize that corporations indeed have religious rights without any associated burden or vulnerability. But the Supreme Court also has a long history of not being able to control the consequences of its rulings. Aaron Katz.

KATZ: There's always a risk that when the Supreme Court reaches what it views as a narrow decision, lower courts will see it differently.

GOODWYN: But Mark Rienzi, the lawyer representing Hobby Lobby in the lawsuit, says, the agitation around torn corporate veils is much ado about nothing.

MARK RIENZI: They're just wrong.

GOODWYN: Rienzi says, the Supreme Court's ruling didn't bestow upon corporations any rights or privileges those corporations didn't already enjoy. The decision just confirmed what was already there.

RIENZI: All the court did in Hobby Lobby - they simply said, hey, a business is allowed to make decisions on all sorts of bases, including religion. The business world is not a religion-free zone. So some people can exercise religion there if that's what they choose to do and when they choose to do it, we don't suddenly erase the corporation.

GOODWYN: But other legal scholars believe it's more of an open question. Nadelle Grossman is professor of corporate law at Marquette Law school and an expert on the corporate veil. Grossman says, the Supreme Court's ruling has created a possible legal path for corporate creditors that didn't exist before.

NADELLE GROSSMAN: I do think that this absolutely creates an increased risk for a shareholder who is willing to opt for attributing their personal views and beliefs down to the corporation. Do I think that makes an easier or better argument for creditor purposes? Yes, I do think so.

GOODWYN: Corporate creditors are often highly motivated to recover as much of the debt they're owed as the law will allow in bankruptcy proceedings. Has the Hobby Lobby decision torn the corporate veil? It's only a matter of time before a corporation that's asserted his religious freedoms goes bankrupt, owing lots of money to somebody, then the legal interpretations will be off and running in federal bankruptcy court. Wade Goodwyn, NPR News, Dallas. Transcript provided by NPR, Copyright NPR.