"piercing the Corporate Veil" in Family Law Cases: the Alter Ego Doctrine and Available Equitable Remedies

• Jurisdiction: California,United States
• Author: Alphonse F. Provinziano, CFLS
• Publication year: 2020
• Citation: Vol. 42 No. 2

"Piercing the Corporate Veil" in Family Law Cases: The Alter Ego Doctrine and Available Equitable Remedies

Alphonse F. Provinziano, CFLS

Alphonse Provinziano is a well known Beverly Hills Divorce and Family Law attorney. Mr. Provinziano is a Certified Family Law Specialist by the State Bar of California, Board of Legal Specialization. A graduate of UC Berkeley and Hastings Law School, he is the principal of Provinziano & Associates. For more information visit: http://www.Provinziano.com

During the divorce process in California, the assets of the community¹ are accounted for through the use of financial disclosure forms for the purpose of dividing the assets. All property acquired during marriage from marital funds is considered community property. However, there are times when assets that would usually be owned by the community are held or acquired by another entity, whether by trust, by a corporation, or by a limited liability company. Determining whether or not those assets should properly be part of the community, rather than the separate property of the business, requires a factual analysis of the case in question through the framework of the alter ego doctrine. If this doctrine applies, then the court would "pierce the corporate veil" to disregard the separate existence of the corporate entity and to find an equitable solution for the wronged party, with the potential for a significant impact on the party that wrongfully withheld community property.

The Alter Ego Doctrine

The purpose of the alter ego doctrine, as discussed in the case Communist Party v. 522 Valencia, Inc., , is when:

a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the corporation.²

The court then elaborated on the doctrine, noting that the two main requirements in determining whether or not the alter ego doctrine applies are:

1. there is such a unity of interest and ownership between the corporation and the individual or organization controlling it that their separate personalities no longer exist; and
2. failure to disregard the corporate entity would sanction a fraud or promote injustice.³

While this two-pronged framework is relatively straightforward, determining the meaning of "unity of interest" is a fact-intensive determination that requires an in-depth analysis of the relationship between the opposing party spouse and the company in question. The court in Associated Vendors, Inc. v. Oakland Meat Co., listed a variety of factors used in determining whether or not to apply the alter ego doctrine, and to then subsequently "pierce the corporate veil," based upon their review of various court cases. While no one factor was deemed controlling, the Vendors court noted that in all the cases, several of the factors were present.⁴ These factors are depicted on the graph below.

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A) Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses.	B) Treatment by an individual of the assets of the corporation as his or her own.	C) Failure to obtain authority to issue shares or to subscribe to or issue shares.	D) Holding out by an individual that he or she is personally liable for the debts of the corporation.	E) Failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entity.
F) Concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest, or concealment of personal business activities.	G) Use of a corporation as a mere shell, instrumentality, or conduit for a single venture or the business of an individual or another corporation.	H) Failure to adequately capitalize a corporation, the total absence of corporate assets, and undercapitalization.	I) Use of the same office or business location; the employment of the same employees or attorney.	J) Identical equitable ownership in two entities; identification of the equitable owners of two entities with their domination and control; identification of the directors and officers of two entities in the responsible supervision and management; sole ownership of all of the shares in a corporation by one individual or the members of a family.
K) Disregard of legal formalities and the failure to maintain arm's length relationships among related entities.	L) Use of the corporate entity to procure labor, services, or merchandise for another person or entity.	M) Diversion of assets from a corporation by or to a shareholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another.	N) Contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions.	O) Formation and use of a corporation to transfer to it the existing liability of another person or entity.

An important and oft-cited California case to involve both family law matters and the alter ego doctrine is Kohn v. Kohn. This court, which disregarded the corporate entity to the extent its purpose was to lower the husband's assets for alimony purposes, summarized the law in California as such:

although a corporation is usually regarded as an entity separate and distinct from its stockholders, both law and equity will, when necessary to circumvent fraud, protect the rights of third persons and accomplish justice, disregard this distinct existence and treat them as identical." The issue is not so much whether, for all purposes, the corporation is the "alter ego" of its stockholders or officers, nor whether the very purpose of the organization of the corporation was to defraud the individual who is now in court complaining, as it is an issue of whether in the particular case presented and for the purposes of such case justice and equity can best be accomplished and fraud and unfairness defeated by a disregard of the distinct entity of the corporate form.⁵

Sanctions Under California Family Code section 1101 due to Piercing the Corporate Veil

There is an unpublished case, while not controlling, where at the trial court level and on appeal the facts supported an extreme equitable remedy to counteract the actions of the husband meant to deprive the community of a valuable asset by awarding the wife the entire house based on piercing the corporate veil and the alter ego doctrine. In Cerrato v Cerrato (unpublished),⁶ the husband incorporated his separate contractor business shortly after marriage in a now-defunct way of operating with shares issued to the "bearer" of stock certificate. Title to the family home was purchased during the marriage with title vested in the name of the corporation. Two days after purchasing the...