In Charles Youree, Jr. v. Recovery House of East Tennessee, LLC, the Tennessee Supreme Court reaffirmed the exclusive application of the Continental Bankers test to piercing the corporate veil, resolving decades of doctrinal confusion stemming from the proliferation of the so-called “Allen factors.”¹ The Court’s decision not only provides clarity to litigants and trial courts but also restores rigor to an equitable doctrine often misunderstood or inconsistently applied—especially in the context of default judgments.

There are two primary takeaways from the Court’s decision:

• Continental Bankers Is the Controlling Standard: Tennessee courts must apply the three-element test set out in Continental Bankers when evaluating veil-piercing claims, regardless of the relationship between the entities. The Allen factors may inform the analysis but do not operate as a separate legal standard.

• No Shortcuts in Default Judgments: Even when a defendant fails to answer a complaint, Tennessee trial courts have a continuing duty to ensure the admitted allegations state a valid legal claim. Here, the Supreme Court held that the plaintiff’s veil-piercing allegations were legally insufficient, and the default judgment should have been vacated.

Factual and Procedural Background

Charles Youree leased commercial property in Davidson County to Recovery Solutions Network, LLC (RSN), a Wyoming limited liability company.² RSN later defaulted on the lease. Youree obtained a $56,267.46 default judgment but was unable to collect.³ In 2020, he filed a second lawsuit against two other Wyoming LLCs—Recovery House of East Tennessee, LLC (RHET) and RHT Holdings, LLC (RHT)—alleging they were functionally the same as RSN and should be held liable under a veil-piercing theory.⁴

The complaint alleged that the three companies shared office space and employees, maintained overlapping ownership, and marketed together through a single website.⁵ The defendants failed to respond, and the trial court entered a default judgment.⁶ Thirty-one days later, the defendants moved to set aside the judgment under Rules 55.02, 59.04, and 60.02 of the Tennessee Rules of Civil Procedure.⁷ Although they initially cited excusable neglect, they later abandoned that argument and focused solely on whether the complaint failed to allege facts sufficient to support veil piercing.⁸

The trial court denied the motion, relying on the Allen factors and finding several were satisfied.⁹ The Court of Appeals reversed, holding that Continental Bankers provides the correct framework, not Allen, and that the complaint failed to allege facts meeting that test.¹⁰ The Supreme Court granted review.

Clarifying the Veil-Piercing Standard

At the heart of the appeal was whether courts should apply the Allen factors or the more structured test articulated in Continental Bankers Life Insurance Co. of the South v. Bank of Alamo.¹¹

In a unanimous opinion by Justice Bivins, the Court held that Continental Bankers remains the controlling standard for all veil-piercing claims in Tennessee, whether involving shareholders, affiliated companies, or parent-subsidiary relationships.¹² To pierce the veil under Tennessee law, a plaintiff must prove:

1. The entity exercised complete control over the debtor entity in the transaction at issue;
2. That control was used to commit a fraud, wrong, or other legal violation; and
3. The misuse of control proximately caused the plaintiff’s injury.¹³

The Court made clear that while the Allen factors may help inform the analysis, they are evidentiary guideposts—not a substitute for the three required elements. This distinction corrects a pattern of cases in which courts had conflated the two frameworks, or elevated Allen to equal footing with Continental Bankers.¹⁴

Default Judgments and Judicial Oversight

Another critical component of the ruling was the Court’s emphasis on judicial oversight in default judgments. The defendants had failed to answer the complaint, but the Court reiterated that default does not waive the requirement that the complaint state a legally sufficient claim.¹⁵

The complaint, the Court held, failed to allege any facts satisfying the second or third Continental Bankers elements. While it detailed shared employees and business addresses, it contained no allegations showing that the defendants misused control to commit a wrong or that any such misuse caused harm to Youree.¹⁶ Instead, the complaint relied on conclusory terms like “alter ego” and “instrumentality,” which the Court deemed “unhelpful rhetorical devices” absent specific factual support.¹⁷

The Court emphasized that not every failed business venture or unpaid debt justifies piercing the corporate veil. Because Youree knowingly contracted with RSN and did not allege deception or misuse of the corporate form, his inability to collect the judgment did not meet the standard required for equitable relief.¹⁸

Rule 59.04 as a Proper Procedural Path

Procedurally, the Court also clarified that because the judgment was not final at the time of the defendants’ motion, relief under Rule 59.04 was proper.¹⁹ The Court rejected Youree’s argument that the failure to pursue excusable neglect barred review of the complaint’s legal sufficiency.

Importantly, the Court noted that trial courts must conduct an independent review of the pleadings before entering a default judgment, even when the motion is unopposed.²⁰ This duty extends to ensuring that extraordinary equitable remedies like veil piercing are not granted without factual allegations that meet the required legal threshold.

The Path Forward

The Youree decision refocuses Tennessee’s veil-piercing doctrine on its equitable foundations and provides trial courts with a clear standard. The Allen factors may still serve as circumstantial indicators of control, but they cannot replace the essential showing that control was misused to cause injury.

Practitioners litigating veil-piercing claims in Tennessee must now plead and prove all three Continental Bankers elements, avoiding vague labels and ensuring that concrete allegations support each step. Trial courts, meanwhile, are reminded that even in the context of default, procedural shortcuts cannot override substantive requirements.

By resolving a doctrinal divide and reinforcing the duty of courts to police equitable relief carefully, Youree restores much-needed clarity and discipline to a complex area of corporate law.