Although piercing the corporate veil is one of the most litigated issues in corporate law, over the past forty years Tennessee courts, litigators and law students have discussed, argued and learned the incorrect test.  In Youree v. Recovery House of East Tennessee, LLC, 705 S.W.3d 193 (Tenn. 2025), a Tennessee Supreme Court decision from January 2025, our high court straightened out the mess.

To pierce the corporate veil, Youree held that three elements must be shown:

(1) Control over the entity, not only of finances, but of policy and business practice in respect to the transaction under attack, so that the entity, as to that transaction, had no separate mind, will, or existence of its own;

(2) The control must have been used to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of a third party’s rights; and

(3) The control and fraud, wrong, violation, or injustice must have proximately caused the injury or unjust loss complained of.

The party attempting to pierce the corporate veil must show all three factors are present. The analysis follows a path: First, prove domination. Second, prove that domination was used to perpetuate an abuse. Third, show the plaintiff’s injury resulted from the abusive domination.

The Youree court did not invent a new test, but instead re-affirmed the original test laid out in a 1979 case, Continental Bankers. Over the years, however, Continental Bankers was diluted. Courts had, to varying degrees, also applied an 11-factor balancing test derived from a federal case, colloquially called “the Allen factors.”  In some cases, Tennessee courts wholly ignored the three-element Continental Bankers test, while others mentioned that case but proceeded to apply the 11 Allen factors.

Youree held that the three-element Continental Bankers test is the sole method to pierce the veil. The Allen factors can be helpful at varying points of the analysis, but those factors are not the test. Further, the Youree court dismissed the idea that some cases had perpetuated that the three-element Continental Bankers test only applied to parent/subsidiary corporate relationships, and did not apply to other corporation/shareholder relationships. Those cases have and always have been an incorrect interpretation of Continental Bankers. Also, there is no distinct test for finding a corporation to be a “sham,” “alter ego,” or “instrumentality” of another — those are just “rhetorical devices and picturesque terms.”

Since Youree was an appeal from a default judgment, the court was given the opportunity to determine whether the complaint’s allegations were sufficient, under Tennessee’s liberal pleading standard, to state a claim for piercing the veil.  The court discarded conclusory allegations that the defendant was a “functional alter ego[]” and “instrumentality or business conduit,” and found that allegations of shared offices, employees, and ownership were inadequate to show the domination element.  Further, the court explained that merely being unable to pay a debt does not satisfy the abuse element, because insulation from liability is a legitimate purpose for forming a corporation.

For any counsel defending or pleading a claim to pierce the corporate veil, Youree is required reading. Corporate lawyers and current law students should review it carefully as well. The opinion is full of allusions to the sort of evidence that could serve to pierce the veil but was missing in Youree. Especially when there is a complex corporate structure — where distinct corporations benefit from the reduced transaction costs of working with affiliates, while seeking to realize the benefits of limited liability — it is very likely that some of the Allen factors would be satisfied despite the absence of real abuse of the corporate form.  Adept defense counsel will ensure that if an arguable case for domination is present, potential claims will be stopped at steps two (abuse) or three (injury) of the analysis.

Naudia Gray, an associate at Chambliss, Bahner & Stophel PC, provides strategic counsel to businesses of all sizes, guiding them through various transactional matters, including business planning, corporate governance, risk management, and mergers and acquisitions.