The “Alter-Ego” Theory aka “Piercing the Corporate Veil”

[Originally published 2005, republished March 6, 2007 at California Corporate Lawyer]

Are you considering filing a complaint against a California Corporation
for money owed to you or your clients? Who can be held liable? Can only
the corporate entity be named as a defendant? Can individual
shareholders, directors or officers also be named as defendants? Can the
alter-ego doctrine be applied to non-profit corporations?

Generally,
California corporate law encourages business ventures, risk-taking, and
entrepreneurial activity by limiting liability exposure to the assets
of the corporation.
But this is not an absolute protection. Courts
will disregard the corporate entity, allowing for individual
shareholders, directors or officers (i.e. the “alter-egos”) to be held
liable in certain circumstances. This is also known as “piercing the
corporate veil.”

It is well settled that California courts can pierce the corporate veil when both of the following two requirements are met:

(1)
Unity of Interests – The shareholders in question have treated the
corporation as their “alter ego,” rather than as a separate entity; and

(2)
Inequitable Result – Upholding the corporate entity and allowing for
the shareholders to dodge personal liability for its debts would
“sanction a fraud or promote an injustice.” Automotriz del Golfo de California v. Resnick (1957)

In
California, courts apply a factor-by-factor test to determine whether
“alter-ego” liability is appropriate. These factors are laid out in the
case of Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962).

1) Did the individual Defendant(s) act in bad faith?
2)
Did the individuals contract with another with the intent to avoid
performance by using a corporate entity as a shield against personal
liability?
3) Did the individuals divert assets from a corporation by
or to a stockholder or other person or entity to the detriment of
creditors?
4) Domination of the corporation by a few key individuals?
5) Did the individuals and corporation use the same office or business location?
6) Did the individuals and the corporation employ the same attorney?
7) Did the individuals use the entity to procure labor, services and merchandise for another person or entity?
8) Did the individuals fail to adequately capitalize the corporation?
9) Did the individuals fail to maintain minutes or adequate corporate records?
10) Will there be an inequitable result if the court fails to pierce?

The
burden of establishing alter-ego liability is on the plaintiff. Absent
factors supporting individual liability, courts are reluctant to pierce
the corporate veil because “alter-ego liability is fundamentally at odds
with the general rule that de jure (ie. as a matter of law) corporation
is a legal entity separate from its founders and owners; and the law
specifically permits owners to incorporate a business for the very
purpose of shielding them from its liabilities.” Las Palmas Associates
v. Las Palmas Center Associates; Rutter Guide.

However,
California courts have “followed a liberal policy of applying the
alter-ego doctrine where the equities and justice of the situation
appear to call for it.” First Western Bank & Trust Co. v. Bookasta
(1968). In practice, the alter-ego doctrine is usually applied “where
there are only a few shareholders and they have not respected their
corporation’s separate identity.” When evaluating alter-ego liability,
courts do not make a distinction between forms of corporations, and the
doctrine applies equally to non-profit corporations and for-profit
corporations.

Case References: Associated Vendors, Inc. v. Oakland Meat Packing Co.; Automotiz del Golfo de California v. Resnick; Las Palmas Associates v. Las Palmas Center Associates; First Western Bank & Trust Co. v. Bookasta

Note:
The information contained is not legal advice and does not establish an
attorney-client relationship. Our contact information is included and
we always offer a free consultation. For more information about ALTER-EGO LIABILITY or PIERCING THE CORPORATE VEIL other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG 2005.

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Christopher M. Adishian, Esq.

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Licensed since 1994

Member at firm Adishian Law Group, P.C.

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