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

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 dejure (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. (1962); Automotiz del Golfo de California v. Resnick; Las Palmas Associates v. Las Palmas Center Associates; First Western Bank & Trust Co. v. Bookasta