Alter Egos and Successor Liability

Solution: Pursuant to CCP Section 187, Creditor can add the new company to the judgment. This is not easy, and requires quite a bit of evidence, usually through Debtors Examinations – but the new company can be put on the hook for the judgment, because it is a “mere continuation” of the old. (See Mclellan v Northridge Townhomes – homeowners association got a judgment against it, shut down the association and opened it up under a new entity which was the same homeowners association. Thanks in party to this HOA’s silly attempt to avoid the debt- we now have successor liability)

Alter Ego/Veil Piercing, Company –> Individual

Joe Debtor , a well off person, uses DebtorCorp  to conduct business. He is the sole owner and operator of DebtorCorp. The corporation has no insurance, and little in the way of assets other than simply providing construction services, let’s say.  Creditor, One of DebtorCorps workers gets badly injured while working a job and gets a judgment against DebtorCorp. Joe Debtor decides to call it quits and shut down DebtorCorp, and move onto other things. Creditor is left twiddling his thumbs.

Solution: Same as above, the Court may rule (if circumstances are right) that it is inequitable/unfair to limit the Creditor to collect from a defunct corporation with no assets, when the rich owner gets off scot free. (See Minton v Caveney)

Reverse Veil Piercing, Individual —> Company

Joe Debtor, who owes millions of dollars, has little if anything in his own name. He and his wife have an LLC which has the family assets in it, but Debtor and Wife do not make any disbursements to themselves, because they know the creditors would garnish those. Creditors hit a wall, because all of the debtors assets are in this LLC (and there are many of the), and no monies are coming from LLC to Debtor/Wife. It’s basically a stalemate.

Solution: Same as above, Court may rule that the LLC can be pierced, because it is unfair to creditors for Debtor to be able to use and enjoy his assets in the LLC, while creditors are forced to go back to their room without supper. (See Curci v. Baldwin)

There are so many details and variations of Alter Egos and Veil Piercings, that an entire book of law could be written on it.  Each case is a different story in its details, but the crux of the narrative is always the same: Alter Egos are the story of a BAD DEBTOR who is using the corporate entity UNFAIRLY, to defraud or mislead creditors, for his/her own benefit. The exact requirements are simple to enumerate, but difficult to apply, and they are as follows:

(1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding;

(2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist;  and

(3) an inequitable result will follow if the acts are treated as those of the entity alone.

If this sounds vague and difficult to pin down, that’s because it is; each case is different, and Alter Egos are not about checking boxes in a list of legal factors; they are a story of a bad debtor abusing corporate privileges in some way which unfairly robs creditors of a remedy, and unfairly allows the bad debtor to escape liability. Putting this story together requires  work and expertise. But when done right, these remedies can completely demolish a debtors fraudulent house of cards – one of the most fun parts of the job.

Los Angeles Collection Attorneys since 2011, The Evanns Collection Law Firm has been enforcing judgments for years, and knows the ins and outs of Alter Egos. We keep up with the constantly changing case law regarding alter egos and judgment enforcement (This is one of those constantly evolving areas in judgment collection law).  Phone calls are always free and no obligation. Call now at 213-292-6888.

Alter Ego Case Law (Updated Periodically)

–Creditors Inability to enforce judgment, by itself, can satisfy “inequitable result” analysis (Relentless Air Racing v Airborne Turbine)

–Debtors Trust can be added as an alter ego, just like a corporation or LLC (Greenspan v. LADT)

–DebtorCo, which had no assets, signed all contracts/incurred all liabilities using DebtorCo, but assets were secretly held in other companies owned by same owners, and these companies did nothing but hold assets. These other secret companies may be able to be added as alter egos (Tuho Towa v Morgan Creek).