In one case, a court refused to pierce the veil of an operating corporation under the undercapitalization theory, even though most of the business's assets were owned by a separate holding entity. At stake was liability for a series of promissory notes in default.
The court found that there was a legitimate business purpose behind the arrangement. Because the holding company owned the assets, creditors could rely on the credit of the holding entity through personal guarantees from the holding entity, for example. Thus, it was unnecessary to place ownership of most of the capital within the operating entity. In short, there was nothing fraudulent about the arrangement. Absent any fraud, the undercapitalization theory will not apply.