Holding Shareholders of Deadbeat Corporations Personally Liable: The Alter Ego Doctrine

Defendant corporations causing multi-million dollar personal injuries and wrongful deaths may claim that the corporation is insolvent and cannot pay the bill for the damage it caused, hiding behind a veil of legal protections.  Suing a deadbeat corporation does not establish the right to collect its officers, directors, agents and employees.   But there is one exception for removing the legal protection of a deadbeat corporation and collecting from the parties that control it. It’s called “piercing the corporate veil.”

Corporate veils may be “pierced” and corporate misconduct can be attributed to controlling parties, in special and appropriate cases.  See Calder v. Jones (1984) 465 US 783, 789-790, and Vons Cos., Inc. v. Seabest Foods, Inc. (1996) 14 Cal. 4th 434, 458, fn. 7. 

Courts have recognized that if a state may exercise jurisdiction over a subsidiary corporation, it will also have jurisdiction over the parent corporation if the elements of the alter ego doctrine are present.  Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at 536–53.

There is no litmus test to determine when the corporate veil can be pierced; rather the result will depend on the facts and circumstances of each particular case.  Mesler v. Bragg Mgmt. Co.(1985) 39 Cal. 3d 290, 300. 

Nevertheless, there are two general requirements: “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Automotriz etc. de California v. Resnick (1957) 47 Cal.2d 792, 796.

The alter ego test encompasses a host of factors used by legitimate and illegitimate corporations.  Here is what to look for to determine if the corporate veil can be pierced when necessary to collect from a controlling owner:   

1.  commingling of funds and other assets;
2. failure to segregate funds of the separate entities;
3.  the unauthorized diversion of corporate funds or assets to other than corporate uses;
4. the treatment by an individual of the assets of the corporation as his own;
5. the failure to obtain authority to issue stock or to subscribe to or issue the same;
6. the holding out by an individual that he is personally liable for the debts of the corporation;
7. the failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entities;
8.  the identical equitable ownership in the two entities;
9. the identification of the equitable owners dominating and controlling two entities;
10. identical directors and officers of the two entities in supervision and management;
11. sole ownership of all of the stock in a corporation by one individual or the members of a family;
12.  the use of the same office or business location;
13. the employment of the same employees and/or attorney;
14.  the failure to adequately capitalize a corporation;
15.  the total absence of corporate assets, and undercapitalization;
16. the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation;
17.  the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest, or concealment of personal business activities;
18. the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities;
19. the use of the corporate entity to procure labor, services or merchandise for another person or entity;
20.  the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors;
21.  the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another;
22. the contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability;
23.  the use of a corporation as a subterfuge of illegal transactions; and
24. the formation and use of a corporation to transfer to it the existing liability of another person or entity.

The enumerated factors of who deadbeat corporations cheat may be considered “[a]mong” others “under the particular circumstances of each case . . .  * * *  No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine. . . .” Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 811–812 (citations omitted.)

In a 2020 case, Butler America LLC, the Court of Appeal found that the owner of a debtor, and the other entities he controlled, were alter egos of debtor.  In this case the owner controlled all of the entities and debtor, which all had the same office and shared employees, the owner used money paid to the debtor to pay employees of other entities, as well as paying for its defense of a creditor’s lawsuit, all of which came from another entity, and owner did not observe formalities required for keeping entities separate.  Butler America LLC v. Aviation Assurance Co., LLC (2020) 55 Cal. App. 5th 136.

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