The Corporate Veil Meets the First Communion Veil

By Mike Appleton, Guest Blogger

Lawyers who do commercial litigation are familiar with the concept known as “piercing the corporate veil.”  A principal purpose for doing business in corporate form is to avoid personal liability for business debts.  But the veil of protection afforded by the corporate entity can be lost under certain circumstances, exposing a controlling shareholder to personal liability.  Although the application of the concept varies a bit from state to state, the general rule is that “courts will look through the screen of a corporate entity to the individuals who compose it in cases in which the corporation was a mere device or sham to accomplish some ulterior purpose, or is a mere instrumentality or agent of another corporation or individual owning all or most of its stock, or where the purpose is to evade some statute or to accomplish some fraud or illegal purpose.” Biscayne Realty & Insurance Co. v. Ostend Realty Co., 109 Fla. 1, 148 So. 460, 564 (1933).

In short, no majority shareholder would concede that his company is his alter ego.  Right?  Well, maybe not.  Recently some shareholders have been arguing, and successfully, that  their companies are indeed mere instrumentalities.

Thomas Monaghan is the founder and one-time owner of Domino’s Pizza.  He is also the sole shareholder of Domino’s Farms Corp., a for-profit company.  As a strict Catholic, Mr. Monaghan opposes all forms of contraception and objects to the contraception coverage mandate in the Affordable Care Act.  Since his company is not a religious organization and cannot qualify for an exemption from the mandate, he sued the Department of Health and Human Services seeking a declaration that the mandate violates his rights under the Free Exercise Clause and the Religious Freedom Restoration Act (“RFRA”), and enjoining its enforcement.  On March 14th, a federal judge in Michigan agreed and granted a preliminary injunction, finding that Mr. Monaghan’s company may assert his free exercise rights and that the mandate represents an unconstitutional burden on those rights.  Thomas Monaghan and Domino’s Farms Corp. v. Kathleen Sebelius, et al., No. 12-cv-15488 (E.D. Mich., March 14, 2013).

The court in Monaghan acknowledged that the Supreme Court has never ruled on whether a secular, for-profit corporation has free exercise rights under the First Amendment.  However, relying on two cases out of the Ninth Circuit, and a currently pending case challenging the same mandate, the court held that a corporation has standing to claim the free exercise rights of its owner “where the beliefs of a closely-held corporation and its owner are indistinguishable… .”

The first Ninth Circuit case is Equal Employment Opportunity Commission v. Townley Engineering & Manufacturing Co., 859 F2d 610 (9th Cir. 1988), in which the court upheld a ruling that an atheist employee could not be compelled to attend mandatory religious services at his place of employment, but reversed an injunction prohibiting the services.  In a footnote to its ruling, the court stated that the company had standing to assert the free exercise rights of a couple who owned 94% of the stock.  Twenty years later, the court in Stormans, Inc. v. Selecky, 586 F.3d 1109 (9th Cir. 2009), cited Townley for the proposition that a for-profit corporation may claim the rights of its owners under the Free Exercise Clause. Stormans involved a family-owned pharmacy that refused on religious grounds to stock Plan B contraceptives as required under rules adopted by the State of Washington.

Neither Stormans nor Townley addressed whether a for-profit corporation has free exercise rights under the First Amendment, and neither case concerned the contraception coverage mandate under the ACA.  But in Tyndale House Publishers, Inc. v. Sebelius, No. 12-1635 (D.D.C., Nov. 16, 2012), the court cited both the the Ninth Circuit cases to support its holding that a for-profit publisher of religious materials may assert the free exercise rights of its ownership group, a religious foundation and three trusts controlled by the Tyndale family, concluding that “when the beliefs of a closely-held corporation and its owners are inseparable, the corporation should be deemed the alter ego of its owners for religious purposes.”

The alter ego theory of corporate standing has been approved in a number of other cases challenging the contraception coverage mandate. Grote v. Sebelius, No. 13-1077 (7th Cir., Jan. 20, 2013); Korte v. Sebelius, 2012 U.S. App. LEXIS 26734 (7th Cir. 2012); Legatus v. Sebelius, No. 12-12061 (E.D Mich., October 31, 2012).  As a consequence, in none of these cases has the court found it necessary to discuss the free exercise rights of secular, for-profit corporations.

In my view, the application of the mere instrumentality doctrine to the Free Exercise Clause is illogical, unsound and, frankly, silly.  The contention that the religious views of a secular entity are indistinguishable from those of its owners makes no sense unless one assumes that a corporation actually has religious views, the very issue carefully avoided in these decisions.  And what does it mean to say that a company in the business of selling outdoor power equipment has religious beliefs?  It is reasonable to assume that most family-owned businesses (and most businesses are family-owned) reflect the religious views of their owners to some extent.  So should all laws of general application be subject to the veto of the owner of the dry cleaners down the street?  How can a company be the alter ego of its owners for religious purposes only?  What is the future of a social and political structure committed to cultural diversity and religious pluralism if employee benefits mandated by legislative enactments are unavailable to those who through mere circumstance happen to be employed by a company whose owners have subjective religious objections to those benefits?

Fortunately, there is a second line of cases developing that categorically rejects the alter ego theory of religious exercise.  In Hobby Lobby Stores, Inc. v. Sebelius, 870 F.Supp. 2d 1278 (W.D. Okla. 2012), the court squarely held that secular, for-profit companies do not have free exercise rights and are not classified as persons withing the meaning of the RFRA.  The rationale in that case has been followed in Conestoga Wood Specialties Corporation v. Sebelius, No. 12-6744 (E.D. Pa., Jan. 11, 2013), in which the court noted that it found no “historical support for the proposition that a secular, for-profit corporation possesses the right to free exercise of religion.”  The judge in that case also rejected an argument that the free speech language in Citizens United v. Federal Election Commission, 558 U.S. 2010 (2010) extended to include the Free Exercise Clause.  See also Briscoe v. Sebelius, No. 13-cv-00285  (D. Colo., Feb. 27, 2013) (“I find Judge Heaton’s analysis in Hobby Lobby clear, concise and persuasive.”); Gilardi v. SebeliusNo. 13-104 (D.D.C., Mar. 3, 2013) (“The Court finds that the corporate form is dispositive in this case and should not be disregarded.”)

There are literally dozens of pending cases seeking to avoid compliance with the contraceptive coverage mandate.  Plaintiffs are aggressively attempting to superimpose personal religious views on secular, for-profit entities.  There is no doubt that the Supreme Court will ultimately have to resolve the conflicting rulings in the lower courts.  For my part, I have never debated religious doctrine with the telephone company.  My supermarket was not in my First Communion class and my drugstore did not attend my wedding. One has to hope that the Supreme Court will bring some sanity and common sense to deliberations on this issue.

Finally, in pondering Mr. Monaghan’s mere instrumentality logic, I found myself imagining a field trip taken by the parochial school run by Garrison Keillor’s favorite Catholic church, Our Lady of Perpetual Responsibility, from Minnesota to Michigan to visit Domino’s Farms.  Then I imagined one of the children tripping and injuring herself on a defective kneeler in the farm chapel.  What, I thought, would Mr. Monaghan have to say about the applicability of the alter ego doctrine to this incident?

21 thoughts on “The Corporate Veil Meets the First Communion Veil

  1. I am wondering if some of these judges have stock in certain companies, are elected and received funds via campaign contributions, and/or if politicians, who appointed some of these judges, have influence in these court decisions (since politicians have received funds from corporations). Do you take cash, check, or money order?

  2. Well done Mark! It is interesting that these companies trying to “get religion” only want to get it to avoid taxes or prevent their employees from having insurance aid contraceptives. As you suggest, how is the corporate veil not pierced?

  3. Has anyone checked these corporations suing for free exercise of owners views to see if they have used the corporate veil in the other direction to protect the owners from lawsuits against the corporation?

  4. There is also the issue of what constitutes a “religious belief.” Can somebody claim it is their faith that demands they discriminate against non-Christians, or refuse to hire blacks? The Christian religion was a widely accepted and respected justification for slavery in the USA, when that was happening, and still is widely used by believers in anti-Semitism.

    The country does not have an official religion, and somebody’s faith can be personal, so there is no “official source” to which one can appeal, and no way for the defendant (or prosecutor) to argue with an owner and say, “That isn’t part of your religion.” There is also no need for logical justification for a belief, or consistency between claimed beliefs. If you want to believe in flying horses or men that walk on water or talking animals, feel free.

    Allowing corporations “religion” is a get out of jail free card, it lets them do anything, claim anything, and flout any law that irritates them or costs them money.

  5. Excellent job, Mike A.

    It also raises the issue of corporate personality as it relates to Citizens United. If a corporation doesn’t have Free Exercise rights, then why do they have Free Speech and the ability to contribute to political campaigns way beyond the limits set for individuals? If they do have Free Exercise, then that’s another step toward personality and if corporations are going to be considered people, there is a strong argument to be made for disposing of limited liability as a matter of equity.

    There’s a phrase about having cake and eating it too that comes to mind.

  6. Something Mr. Appleton doesn’t ask, but I think should have been addressed:

    If a corporate entity is indistinguishable from the majority shareholder(s) for purposes of free exercise, then why wouldn’t those same corporations and the jurisdictions they’re in see them as indistinguishable from each other when it comes to any other question – negligent homicide, for example? In these cases, isn’t the logical conclusion that the corporate veil is, for all practical purposes, not just pierced but removed almost entirely?

  7. This is just one of the many problems we face because we have tied health insurance to employment. It is this entanglement, and the many rules surrounding how health insurance is to be managed that is a large cause of the mess we are in. Recent attempts (primarily the Affordable Care Act) to bring health insurance to everyone have only made this entanglement worse.

  8. I’m wondering if many of these suits were brought during the initial stages of the Republican Party’s efforts to undermine the health care push thus undermine the success of the sitting President as we saw them doing in so many other instances involving female health and reproductive issues. Thus many of these business owners were doing what they considered to be the correct political thing for their party … i.e. the Diebold model … in the run-up to the 2012 election.

    The RNC has admitted that that push scared females and lost them many votes during the election and have since backed off big time. This loss was a huge surprise to them as noted in the article mespo contributed this weekend.

    However, now, as in the Diebold matter, the originators are left holding the ball. Thus women are continuing to be reminded of the RNC’s original stance and the RNC finds itself having to issue papers like the Project in an attempt to win voters back to their ticket. But the continuing publicity as the original suits make their way through the system is in direct opposition to their new re-branding efforts. In other words, a giant cluster-fu*k.

    As Mike A. writes: ” … the application of the mere instrumentality doctrine to the Free Exercise Clause is illogical, unsound and, frankly, silly. The contention that the religious views of a secular entity are indistinguishable from those of its owners makes no sense unless one assumes that a corporation actually has religious views, the very issue carefully avoided in these decisions.”

    Perhaps some of these Judges who are issuing favorable rulings are simply trying their best to tow the line hoping to save the Party from the on-going embarrassment of what was and has proved to be a very flawed election strategy.

  9. Then I would say this. If a female employee gets pregnant while employed and has the child then the company is liable for child support for life. How are them apples schmucko? Logic has its ending in a final resting place for the corporate ego.

  10. No BarkinDog. Take it to the logical conclusion. The owner of the company is liable for child support for life. Pierce his corporate tale.

  11. Mike A.

    Excellent work!

    Recently I was trying to explain the conflicts in deeming corporations persons by virtue of being a collection of persons.

    I tried to explain that ‘real persons,’ in business law, can unwittingly form a partnership by default; whereas two corporations could never do so. After all, if corporations were truly composed of ‘persons’ then why don’t the rules of partnership apply?

    I bring it up only because it seems to echo your problem with another non-corporate characteristic, i.e. ‘alter ego’, being abused to further the inane legal fiction that corporations are persons.

Comments are closed.