Three ways the “alter ego” legal doctrine can help commercial collectors get payment

Three ways the “alter ego” legal doctrine can help commercial collectors get payment

On Behalf of | Apr 4, 2023 | commercial debt collection

You followed the right process. You filed suit, built a strong case, and received a court judgment in your favor. You move forward to collect the debt only to find out that the debtor entity cannot make payment.

Something does not add up. Upon further digging you realize the debtor has tied the assets up in a related entity.

Do you need to file another lawsuit to get payment? This may not be necessary. Instead, the legal doctrine of “alter ego” could apply.

What is the legal doctrine of “alter ego” and when does it apply?

Alter ego applies when you can establish an individual or debtor entity is the same as a related corporation. The debtor may try to use this corporation as way to shield their assets. When the creditor can establish that the legal theory of alter egos applies, they can bypass the shield, pierce the corporate veil, and hold that related entity responsible for the debt.

How can I establish that the related entity is an alter ego of the debtor?

The courts provide guidance on what you will need to establish that a related entity is, in fact, an alter ego of the debtor. To move forward with the claim, you will generally need to establish the following:

  • Closeness. First, that the debtor and the related entity are intertwined, that their interests and ownership are not separate. Factors that can help establish this claim include stock ownership, use of business location, commingling of funds and a disregard for corporate formalities.
  • Equity. You will also need to show that if the court allows the two to remain separate it will promote an injustice or fraud.

Finally, you will also need to show that because of this connection, the alter ego corporation was represented in the previous lawsuit.

How do I move forward to hold the alter ego corporation financially responsible for the debt?

Once you have a successful judgment you can file a motion with the court to amend the judgment and include the alter ego corporation. If approved, you can then move forward with collection efforts against this other entity.

It is important to note that actually establishing these factors and building a successful motion is not an easy feat. Creditors who believe a debtor has attempted to shelter assets in this manner are wise to reach out to legal counsel experienced in this niche area for assistance.