As we have written before here, California courts have elaborated a two-part test for use in considering whether or not to allow a creditor to pierce the corporate veil in a collection effort.
This test requires the creditor pursing the assets of an individual debtor to prove that:
- There is a “unity of interest and ownership” between the debtor and the corporate entity; and
- That it would be unfair if acts in question are treated as those of the corporation alone.
This is obviously a fairly vague and elastic “test.”
California courts have thus also enumerated a series of factors for use in determination of whether or not this Alter Ego Test is met. Some are more or less useful to the pursuit of the corporate assets of individual debtors.
These factors include:
- The commingling of funds or assets;
- The treatment of the assets of the corporation by the individual as his or her own;
- The failure to obtain authority to issue stock;
- Representations by the individual that he or she is personally liable for the debts of the corporation, and/or the failure to maintain minutes or adequate corporate records and general confusion of the two parties;
- Identical equitable ownership in two entities;
- The use of the same business or office location for two entities or the same directors or officers;
- The failure to adequately capitalize the corporation;
- The use of the corporation as a mere shell for the single business venture of the individual or another corporation;
- The concealment and misrepresentation of the identity of the responsible ownership of the corporation;
- The disregard of legal formalities and failure to operate the corporation at arm’s length;
- The use of the corporate entity to procure labor or services for the individual or another entity;
- The diversion of assets between the parties to the detriment of creditors, or the manipulation of assets and liabilities to concentrate them in one entity;
- The contracting with another with intent to avoid performance by the use of a corporate entity as a shield against personal liability;
- The creation of the corporate entity to transfer existing personal liability.
This is a non-exhaustive list, and all of these factors needn’t be considered by a California court in any one case.
These “unity of interest” factors essentially represent the idea that a court may examine a variety of circumstances in determining whether or not corporate assets are reachable by an individual’s personal creditors.
The 2nd component of the Alter Ego Test reinforces the underlying proposition that the piercing of the corporate veil is limited to those cases in which the individual (or parent corporation) has acted in bad faith.
The concept of “bad faith” is one that appears nowhere in the U.S. Bankruptcy Code but is often discussed in bankruptcy case law.
An individual debtor who happens to trip over one too many of California’s alter ego factors may be found by a Bankruptcy Court to exhibit bad faith.
So when is it useful in a Chapter 7 or Chapter 13 bankruptcy case for a creditor to attempt to pierce the corporate veil?