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Alter ego liability in California also known as piercing the corporate veil

Alter ego liability in California is the topic of this blog post.  Alter ego allegations are also known in the legal field as corporate veil piercing allegations because they are used to “pierce the corporate veil” and allow a plaintiff to add an individual person, or persons, or even another corporation as a defendant and seek to hold them responsible for the debt of the main corporation.

Alter ego allegations are generally used against smaller corporations, particularly corporations with only one or two owners.   However, it may also be used against Limited Liablity Companies in California pursuant to California Corporations Code Section 17101(b).

The author also recently drafted a complaint with alter ego allegations against a California Limited Liability Company on the grounds that one of the managing members took the proceeds from a business loan and deposited them into their personal bank account.

There are two main requirements of alter ego liability in California as stated by a California Court of Appeal.

There must be such unity of interest and ownership that the separate personalities of the corporation and individual no longer exist, and that if the acts are treated as those of the corporation alone, it would sanction a fraud or promote injustice to uphold the corporate entity and allow the shareholders to escape personal liability for the debt. See Associated Vendors Inc. v. Oakland Meat Co.  (1962) 210 Cal. App. 2d 825, 836.

Another California Court of Appeal stated that alter ego liability is premised upon the notion that when a corporation is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves. See Kohn v. Kohn (1950) 95 Cal. App. 2d 708, 717-720.

The generic allegations used in California often include such allegations as,

“Defendants used the assets of Defendant ______ for their personal use and caused the assets of Defendant ___________ to be transferred to them without adequate consideration, and have withdrawn funds from the bank accounts of Defendant _________for their own personal use.”

Other allegations typically state that the individual or other corporate defendants have used the main corporate defendant as a mere shell, instrumentality, and/or conduit from which said Defendants have carried on their business as if the main corporate defendant did/does not exist, to such an extent that any individuality or separateness of the named Defendants has never existed, and that the activities of the main corporation were carried out without the required holding of directors’ or shareholders meetings, and no records or minutes of any corporate proceedings were maintained.

A party cannot totally avoid the possibility that someone may seek to hold them personally liable for the debts for a corporation which they own or control. However, if they just keep in mind the fact that if they want their business to be treated like a corporation they need to act like a corporation with totally separate bank accounts, hold all required directors’ and shareholders meeting, and keep accurate records and/or minutes of any corporate meetings.

Attorneys or parties in California who would like to view a portion of a sample California complaint with alter ego allegations can see below.

The author of this blog post, Stan Burman, is a freelance paralegal who has worked in California litigation since 1995.

The author’s website: http://www.legaldocspro.net

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Copyright 2012 Stan Burman. All rights reserved.

DISCLAIMER:

Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

These materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.

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