News and Articles

Business Owners May Be Liable for Business Debts and Transactions Through the Alter-Ego Doctrine

Erin Lloyd - Thursday, December 03, 2015

The chief purpose of forming a corporate entity is to protect the business owner’s personal assets. Incorporation protects these individuals from being held personally liable for their company’s debts and obligations. However, the use of corporate form is a privilege, and abuse of its protections can have serious consequences.

For example, when a corporate entity is so dominated by an individual that it primarily transacts the individual’s business instead of its own, it will be called the individual’s alter-ego and the corporate form will be disregarded to achieve an equitable result, Rohmer Associates v. Rohmer, 36 A.D.3d 990 (3rd Dept. 2007).

In order to prevail on an alter-ego claim, a plaintiff must establish that there was such a “unity of interest and control” between the individual defendant and the entity, or between two entities, that they cannot really be said to be separate. See Rohmer Assoc. Inc. v. Rohmer, 830 N.Y.S.2d 356, at *1 (App. Div. 2007). An alter-ego determination by a court does not technically make one entity vicariously liable for the debts of another. Rather, it results in disregarding the separateness of the entities as a legal fiction and treats them as one in the same entity for all purposes. This is applied to limited liability companies as well as traditional corporations.

“Alter-Ego” Liability Does Not Require a Showing of Fraud

It is not necessary to allege or prove fraud in order to pierce the corporate veil under the alter-ego theory. What is required is proof that a corporation is being used by an individual to accomplish his own and not the corporation’s business, and that the business owner’s control is being used to perpetrate a wrongful or unjust act. The question is whether the corporation is being used as a “shell” by the individual business owner to advance his own purely personal interests at the expense of another party, typically a judgment creditor, Port Chester Electrical Construction Corp. v. Atlas, 40 N.Y.2d 652 (1976). In making an alter-ego determination, a court is concerned with reality and not form. Wajilam Exports v. ATL Shipping, 475 F.Supp.2d 275 (S.D.N.Y. 2006). The focus is on the actual conduct of the dominating business owner and the impact of that conduct on innocent parties such as judgment creditors.

New York Courts Evaluate a Number of Different Factors

The factors relied upon by New York’s courts in applying the alter-ego theory include the use of alleged corporate funds for personal purposes, commingling corporate and personal funds, shuttling funds between personal and corporate accounts, the use of common telephone numbers and office space, using the corporation as a “shell” to advance personal rather than corporate interests, and otherwise abusing the corporate form.

When the use of an incorporation entity privilege of is abused, business owners may be held liable through the alter-ego doctrine in the State of New York. As with any legal transaction matter, individuals are encouraged to consult with an attorney before taking any official action, as every situation is unique and should be independently analyzed.

For more information, business owners can contact us here

December 2015 Newsletter

Yogi Patel - Wednesday, December 02, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) The nation-wide increase in the usage of arbitration clauses in employment agreements; (2) Negotiating a more favorable employment offer/agreement; (3) The "Alter Ego" doctrine; and (4) New York City's Fair Chance Act.

 

Arbitration Agreements
In recent years, there has been a nation-wide spike in the usage of arbitration clauses by employers in their employment agreements. The motivation for employers to include such clauses is that they typically require employees to settle any grievances through arbitration, effectively preventing them from bringing an action in court. The clauses also usually require that all disputes be brought individually, which can have the effect of prohibiting employees from bringing class action suits. In the wake of United States Supreme Court decisions upholding the validity of arbitration clauses that prevent employees from bringing a collective suit, many employers are now requiring that all employees agree to arbitration as a term of employment. Employers and employees are advised to consider the implication of this trend, as employers may seek to include arbitration clauses while employees may seek to negotiate the removal of this term when possible.


Negotiating A More Favorable Employment Offer/Agreement
Many employees may not be aware that when they are offered a new position, they often have significant leverage at their disposal to negotiate for better terms of employment. Prospective employees who bring years of experience or unique skills and knowledge should not sell themselves short at the bargaining table, especially prior to accepting an offer of employment. From increases in salary, stock options and other benefits, to more favorable terms of severance, grounds for termination, and restrictive covenants, employees should consider what they can gain through such negotiations. An in-depth article addressing terms that an employee should consider negotiating as well as how to negotiate effectively so that an employer is not "put-off" by your ask is now available here on our website.


"Alter Ego" Liability
The number one reason why business owners form corporate entities is to insulate their personal assets from the liabilities of the company--if the business has an issue that causes it to owe money, the owner's house, bank account, and other personal property cannot be used to pay the company's debt. However, when a business owner abuses this protection and primarily uses the entity for her own personal gain rather than to transact the corporation's business, a court may find that the business is actually the "alter ego" of the owner. Upon such a finding, the owner and the business are treated as one and the owner's personal assets become at risk. To find out more about the factors New York courts look at under an "alter ego" analysis and the consequences of a determination stripping a business owner of the protections of her corporation, please read a more in-depth article posted here on our website.


New York City's Fair Chance Act
On October 27, 2015, the New York City Fair Chance Act went into effect. The law makes it illegal for employers to ask applicants about a criminal record before making a job offer. The Act bans reference to criminal histories or background checks in employment ads, job applications and during interviews. An in-depth article analyzing the Act and an employers obligations under the new law are now available here on our website.


Readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.


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