Piercing the Corporate Veil – The Instrumentality Rule

The North Carolina Business Court recently ruled on a Motion to Stay Arbitration, pending a substantive ruling on whether Plaintiffs may be found liable to the Defendants under the Instrumentality Rule in Cold Water Springs Ventures, LLC v. Gilead Sciences, Inc.,

Gilead joined Plaintiffs, Cold Water Springs, as respondents in an arbitration action pending before the American Arbitration Association. Plaintiff’s are former investors, shareholders and directors of Old Kryo, Inc., a North Carolina Corporation. In September 2010, NC Kryo entered into a contract with the Gilead, which contained a mandatory arbitration clause. NC Kryo dissolved after purportedly assigning Gilead’s contract to GA Kryo without written consent from the defendant. In October 2013, Gilead initiated the arbitration against GA Kryo and the Plaintiffs in an action for breach of contract.

The ” instrumentality rule” applied by the North Carolina courts in determining whether to pierce the corporate veil consists of three elements: “(1) the domination and control of the corporate entity; (2) the use of that domination and control to perpetrate a fraud or wrong; (3) the proximate causation of the wrong complaint of by the domination or control.” Mansfield v. Pierce, 1998 U.S. App. LEXIS 17086 (4 ^th Cir. N.C. July 27, 1998).

The Court stated that Gilead had not yet made specific allegations on which Plaintiffs might be held liable under the instrumentality rule and concluded that justice required further inquiry into whether Gilead’s allegations and appropriate evidentiary showing support the contention that Plaintiffs can be compelled into arbitration. The Court further stayed arbitration pending a ruling on the “piercing the veil” basis of the arbitration.

Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10.