Alter Ego Doctrine
•August 26, 2021
By Alessio Sciarra
As a general principle, corporations are deemed as legal entities separate from their shareholders, officers, and directors[1]. This implicates not only that corporations have legal rights and liabilities distinct from their shareholders or directors, but also that the shareholders and directors are not liable for corporate obligations.[2] Intuitively, the corporate veil, which limits owners' personal liability, is one of the principal reasons incentivizing individuals to form a corporation. [3]
"Alter-ego" is equitable doctrine developed by courts to disregard the corporate status of a corporation and hold shareholders personally liable for the corporation's actions.[4] The alter ego theory was developed to alleviate the harshness arising from the mere application of the corporate veil doctrine on creditors or tort claimants suing corporations[5]. Alter-ego doctrine pierces the corporate veil when there is evidence of a unity between the corporation and the individuals so that holding only the corporation liable would be unfair.[6]
Being an exception to a general principle, the alter-ego doctrine is applied in limited circumstances[7]. Typically, alter-ego is applied in two scenarios: (1) when a parent corporation controls and directs a subsidiary corporation,[8] and (2) when a corporation is used by shareholders for personal business in order to escape their personal liability for their actions[9]. The alter-ego doctrine is also commonly known as the "mere instrumentality" doctrine because the corporation operates as an instrument for the personal advantage of its parent corporation, stockholders, or directors[10]. Although developed in connection with corporations, the alter-ego theory also applies to limited liability companies which share with the corporation the characteristics of being entities separate from their members and shielding members and managers from personal liability for companies' debts.[11]
In Florida, the landmark case on the alter ego theory is the Supreme Court case Dania Jai-Alai Palace, Inc. v. Sykes.[12] In this case, the Supreme court created a two-prong test to decide whether the alter ego theory applies. The court recognized that in order to successfully assert the alter ego doctrine it is not sufficient a lack of separateness between the corporation and the shareholder because "the corporate veil may not be pierced absent a showing of improper conduct". Accordingly, the veil of corporation can be only pierced if it is proved that 1) a corporation is a mere instrumentality or alter-ego of the defendant and 2) the corporation was formed or used for an improper purpose. In addition to the above requirements, plaintiff must prove that the fraudulent or improper use of the corporate form caused injury to the plaintiff[13].
The cases following Dania Jai-Alai Palace, Inc., better clarify the requirements of alter ego doctrine in Florida. As to the first requirement, to determine whether a corporation is alter ego it is necessary to analyze the modality in which the owners used the corporation. In Hilton Oil Transp. v. Oil Transp. Co., the court recognized a list of 15 factors that are relevant in determining whether a corporation or a limited lability company is a mere instrumentality.[14] The most common and recurring patterns are: the absence of formalities that are part of corporate existence, like for example the issuance of stock, the elections of directors, the keeping of the corporate records and so forth; an inadequate capitalization; overlap in ownership, officers and directors; common office space, address and telephone numbers of corporate entities; the amount of business discretion displayed by the allegedly dominated corporation; failure to keep corporate and personal assets separate; the diversion of company profits to the individual for his personal use; financing of subsidiary by parent; informal intercorporate loan transactions and parent and subsidiary's filing of consolidated income tax returns[15]. Another factor often considered in the alter ego scenarios, although not expressly mentioned in Hilton Oil Transp. v. Oil Transp, is the fact the corporation is made up of one or two shareholders.[16]
To satisfy the mere instrumentality or alter ego requirements, the plaintiff first must prove that "the shareholder dominated and controlled the corporation to such an extent that the corporation's independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation."[17] For example, in Woods v. Jorgensen, the court held that the defendant corporations did not have any separate assets or identity and are merely shell corporations totally controlled by appellant[18]. In Raber v. Osprey Alaska, the court found that conducts such as commingling funds of the corporation with funds of other corporations or with personal funds and using the assets of the corporation for personal purposes, are sufficient evidence to establish that shareholders were alter egos of the corporation.[19]
The second requirement of alter ego doctrine introduced by Dania Jai-Alai Palace is that the corporation or limited liability company was formed or used for an improper purpose[20]. The importance of the improper conduct requirement for purposes of piercing the corporate veil is well described in Houri v. Boaziz, where the court held: "even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation's separate identity was lawfully maintained."[21] Under Florida case law, improper conduct has been found when the corporation was organized to mislead or defraud creditors[22] or used fraudulently with aim of perpetrating a fraud upon creditors[23]. The fact that the company was at the outset formed for a legitimate commercial purpose, does not preclude per se the application of the alter ego doctrine when the company is later improperly used a means to commit a fraud against creditors.[24]
Finally, it is paramount to underline that the alter ego doctrine is not itself a cause of action that allows the plaintiff the sue companies' shareholders or directors.[25] In fact, a plaintiff cannot go to court seeking to pierce the corporate veil unless the corporation itself was already found liable, and at the same time the plaintiff did not get satisfaction from the judgment because the corporation was insolvent or otherwise unable to comply with the judgement.[26] This is because the alter ego doctrine originated in the courts of equity and the injustice or the inadequacy of remedy under the law is an essential prerequisite to seek relief in a court of equity[27].
[1] Supra note 1.
[3] Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984).
[4] Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1036 (1991).
[5] Marilyn Blumberg & Cane Robert Burnett, Piercing the Corporate Veil in Florida: Defining Improper Conduct, Nova L. Rev. 664, 665 (1997).
[6] Sparks v. Booth, 232 S.W.3d 853, 868 (Tex. App.-Dallas 2007, no pet.); Glassell Producing Co. v. Jared Res., Ltd., 422 S.W.3d 68, 84 (Tex. App. 2014).
[7] Molenda v. Hoechst Celanese Corp., 60 F.Supp.2d 1294, 1300 (S.D. Fla. 1999).
[8] Supra note 2 at 667.
[10] NetJets Aviation, Inc. v. LHC Communications, LLC 537 F.3d 168 (2d Cir. 2008).
[11] Id.; Kaycee Land & Livestock v. Flahive, 46 P.3d 323 (Wyo. 2002).
[13] See Houri v. Boaziz, 196 So. 3d 383 (Fla. 3d DCA 2016).
[14] Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141, 1151-52 (Fla. 3d DCA 1995).
[16] Supra note 13; Elizabeth Diane Clark, Piercing the Corporate Veil in Florida:The Requirement of "Improper" Conduct, 16 STETSON L. REv. 59,61 (1986).
[17] WH Smith, PLC v. Benages & Assocs., 51 So. 3d 577, 582 (Fla. 3d DCA 2010) (citing Gasparini v. Prodomingo, 972 So. 2d 1053, 1055 (Fla. 3d DCA 2008).
[18] Woods v. Jorgensen, 522 So. 2d 935, 937 (Fla. 1st DCA 1988),
[19] See Raber v. Osprey Alaska, Inc., 187 F.R.D. 675, 679 (M.D. Fla. 1999)
[22] Acquisition Corp. of Am. v. Am. Cast Iron Pipe Co., 543 So. 2d 878, 881–82 (Fla. 4th DCA 1989).
[23] Id; See Walton, 632 So. 2d at 180.
[24] See Harrell v. Accurate Orthotics & Prosthetics, Inc., 529 So. 2d 358, 359 (Fla. 2d DCA 1988).
[25] See Turner Murphy Co. v. Specialty Constructors, Inc., 659 So. 2d 1242, 1245 (Fla. 1st Dist. Ct. App. 1995).
[26] Supra note 2; Elizabeth Diane Clark, Piercing the Corporate Veil in Florida: The Requirement of "Improper" Conduct, 16 STETSON L. REv. 59,61 (1986).
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