## Facts

- Aaron I. Michaelson formed Michaelson Properties, Inc. (MPI), a closely held corporation, with $1,000 paid-in capital; he was its sole shareholder and president.
- MPI and Perpetual Real Estate Services, Inc. (PRES) formed two condominium-conversion partnerships, allocating contributions and liabilities by agreement.
- For the first venture, MPI agreed to provide a $1 million letter of credit, supported by a personal indemnity from Michaelson and his wife.
- For the second venture, the partnership borrowed $24 million from PRES’s affiliated bank; the Michaelsons personally guaranteed $750,000, and later personally guaranteed MPI’s $1.05 million debt to PRES when MPI could not fund its share of additional capital.
- The condominium project later generated construction and warranty claims; purchasers sued the partnership, and the litigation was settled for $950,000, which PRES paid.
- MPI did not contribute to the settlement and had previously distributed project profits to Michaelson as dividends.
- PRES sued MPI for contractual indemnification and sued Michaelson personally, seeking to pierce MPI’s corporate veil under an alter-ego theory.

## Issues

1. Under Virginia law, what must a plaintiff prove to pierce a corporation’s veil and hold a shareholder personally liable?
2. Did the district court err by instructing the jury that veil piercing could be based on “injustice or fundamental unfairness”?
3. Under the correct Virginia standard, was the evidence sufficient to support piercing MPI’s veil as a matter of law?

## Decision

- The Fourth Circuit reversed the judgment imposing personal liability on Michaelson and remanded with instructions to enter judgment in his favor on the veil-piercing claim.
- The court held that Virginia requires more than a showing of “injustice” or “fundamental unfairness”; it requires proof that the corporation was used as a sham to disguise wrongs, obscure fraud, or conceal crime.
- The jury instructions misstated Virginia law by omitting the requirement of wrongful use of the corporate form.
- The evidence, even viewed favorably to PRES, did not show that Michaelson used MPI to perpetrate fraud or comparable wrongdoing; it showed a failed business venture with risk allocation addressed through negotiated guarantees.

## Legal Principles

- Virginia veil piercing requires a two-part showing: (1) the corporation is the shareholder’s alter ego (undue domination and control), and (2) the corporate form was used as a device or sham to disguise wrongs, obscure fraud, or conceal crime.
- Dominance, single ownership, imperfect corporate formalities, or limited capitalization may bear on the alter-ego inquiry but do not alone justify veil piercing.
- “Injustice” or “fundamental unfairness,” without proof of wrongful use of the corporation, is an insufficient basis to disregard limited liability.
- In contract cases, the presumption of respecting the corporate form is especially strong where sophisticated parties negotiated risk allocation, including specific personal guarantees; veil piercing cannot be used to expand liability beyond that bargain absent fraud or similar wrongdoing.

## Conclusion

The court held that Virginia’s veil-piercing doctrine is narrow and demands proof that the shareholder used the corporation as a sham to commit or conceal a legal wrong; because PRES proved neither wrongful use of MPI nor an instruction applying the correct standard, Michaelson could not be held personally liable for MPI’s contractual obligations.


Perpetual Real Estate Servs., Inc. v. Michaelson Props., Inc., 974 F.2d 545 (4th Cir. 1992)