TBA Law Blog

TBA Law Blog

Court Clarifies Requirements for Holding Shareholders, Rather Than Company, Liable

Posted by: Azya Thornton on Jan 22, 2025

The Tennessee Supreme Court clarified in an opinion today that holding shareholders responsible for a corporation's actions, known as "piercing the corporate veil," requires three elements: control, wrongdoing and causation. According to a press release, the court also ruled that trial courts must ensure a complaint sufficiently articulates a claim for the relief sought before entering a default judgment. 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 respond, the trial court awarded him a default judgment. The companies later moved to set aside the judgment, arguing Youree’s complaint lacked sufficient factual allegations for piercing the corporate veil. The trial court denied the motion, but the Court of Appeals reversed the decision. The Supreme Court unanimously affirmed the Court of Appeals, holding that while a defendant’s failure to answer does admit the factual allegations in a complaint, it does not mandate a default judgment. Instead, courts must ensure that the admitted facts are sufficient to establish a valid claim. When applying the three-prong test to this case, the court found that Youree’s complaint did not contain sufficient factual allegations.

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