Piercing the corporate veil is a poetic term for an attempt by a creditor to legally prove that a corporate entity lacks a separate identity from its owner or principal.
In Chapter 7 or Chapter 13 bankruptcy matters, it is sometimes necessary to prove that an individual filing for bankruptcy is a mere “alter ego” of a corporate entity.
This may be necessary in order to either recover assets that have been fraudulently transferred from the bankrupt individual to the corporation or to prove bad faith in a motion to dismiss the bankruptcy case.
Chapter 7 and Chapter 13 bankruptcy are forms of bankruptcy that allow individuals acting in good faith to obtain a Federal injunction known as a discharge that relieves them of the legal obligation to pay most of the debt owed prior to the filing of the bankruptcy case.
Bankruptcy is a Federal legal process.
That is, it operates under a Federal statute called the U.S. Bankruptcy Code that preempts state law in terms of the question of whether or not a pre-bankruptcy debt is owed and whether or not a judgment ordered by a California state court may be executed.
However, the Bankruptcy Code does not answer every conceivable legal question that may arise in a bankruptcy proceeding.
When an issue that is not preempted by the Bankruptcy Code arises in a bankruptcy proceeding, the U.S. Bankruptcy Court considering the matter will turn to the law of the state in which the bankruptcy case was filed for guidance.
What, then, does California law have to say about piercing the corporate veil?
And when is the doctrine of alter ego useful for a judgment creditor in a Chapter 7 or Chapter 13 bankruptcy case?