Article courtesy of Jeff Dutson of King & Spalding
Making its best Eerie “guess,” Fifth Circuit finds that Texas law requires more than proof of undercapitalization to survive a defendant’s motion for summary judgment but leaves open the question of whether it is possible to pierce the veil of a non-profit corporation in Texas.
Ledford v. Keen, 9 F.4th 335 (5th Cir. 2021)
Non-Texas resident Plaintiff was injured by a run-away horse and rider at a local Texas rodeo and, within the applicable statute of limitations, brought negligence suit in Federal Court under diversity jurisdiction against the owner of the land, the operators, including a Texas non-profit corporation (“KRC”), and the rider. KRC did not carry liability or other insurance at the time of Plaintiff’s injuries, and during discovery, Plaintiff learned that KRC was historically undercapitalized. Outside of the applicable statute of limitations, Plaintiff filed an amended complaint adding the directors of KRC (the “Directors”) individually as defendants on the original claims and adding a count to pierce the corporate veil against the Directors for allegedly running KRC as a sham and a fraud. The Directors filed two similar motions for summary judgment arguing that all of Plaintiff’s claims against the Directors were time-barred, that there was no basis for tolling the statute of limitations, and that Plaintiff could not pierce KRC’s veil because it was a non-profit or otherwise under Texas law. The District Court granted the motion on all three grounds and Plaintiff appealed.
The Fifth Circuit found that Plaintiff had appropriately advanced at the District Court an argument that the combination of the filing of the complaint against KRC and the Director’s alleged sham tolled the statute of limitations for filing a claim against the Directors once the claims against KRC had been filed. Since tolling was possible if the veil could be pierced, the Fifth Circuit then turned to the veil-piercing issue. At trial the only evidence that the Plaintiff put forward to support veil-piercing was KRC being historically undercapitalized; no evidence of abuse by the Directors was submitted at trial. Looking at Texas state appellate court precedent, the Fifth Circuit made its best Eerie “guess” that Texas law requires more than just a showing that the defendant entity was historically undercapitalized to support a veil-piercing claim. Since no other evidence of abuse was presented to the District Court, the Fifth Circuit upheld the District Court’s determination that Plaintiff had failed to provide sufficient evidence to support a claim for piercing the veil under Texas law and that since the veil could not be pierced, there was nothing to support Plaintiff’s grounds for tolling, and all claims against the Directors were appropriately dismissed as time-barred.
As the District Court only suggested and did not hold that KRC’s corporate form as a non-profit corporation in and of itself insulated the Directors of KRC from veil piercing, the Fifth Circuit did not address this argument. This remains an open question under Texas law, with both the Fifth Circuit and the District Court hinting that veil-piercing may not be available at all in the non-profit context in Texas.