CORPORATIONS
SELF STUDY
Alter Ego: Piercing
the Corporate Veil
C
lients usually form cor-
porations for one simple reason: to insulate
themselves from liability. In some instances,
however, the corporate status is abused. In
those situations, the doctrine of alter ego
allows a litigant to “pierce the corporate veil”
and go after individual corporate officials,
holding them responsible for sins committed
in the corporate name. It is therefore highly
consequential for those alleging it, as well as
for those defending against it.
In the world of civil litigation, the alter ego
doctrine is often invoked, but it’s difficult to
establish. The trick is knowing when the doc-
trine applies, and what evidence is required
to prove it.
No, the alter ego doctrine is not a device
for taking stock of bipolar litigants, or those
with multiple personalities. Alter ego is a
legal theory that applies to a variety of defen-
dants, and it can greatly expand the scope of
liability to include entities and individuals
otherwise protected by the corporate veil.
Large, sophisticated companies with multiple
affiliated corporate entities can be brought
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42 NOVEMBER 2008 CALIFORNIA LAWYER
by DANIEL T. MCCLOSKEY
into suits and face significant expo-
sure on the ground that an affiliate is
not really separate—and is thus an
alter ego. Even entrepreneurs operat-
ing through a limited liability com-
pany can—at least in California—find
their liability shield challenged on
the basis of alter ego. And the tim-
ing of an alter ego claim can also
have repercussions. Given the doc-
trine’s importance, it is worthwhile
to explore it and take a look at recent
developments in this area of law.
TWO ELEMENTS,
MANY FACTORS
To establish alter ego, a plaintiff
must show that two conditions are
met: First, there must be such a
unity of interest and ownership
between the corporation and its
equitable owner that the separate
personalities of the corporation and
the shareholder (or other corporate
entity) do not in reality exist. Sec-
ond, there must be an inequitable
result if the acts in question are
treated as those of the corporation
alone. (See F. Hoffman-La Roche v.
Superior Court, 130 Cal. App. 4th
782, 796 (2005).)
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In discussing alter ego, courts
have often emphasized that it is a
“limited doctrine” that will be
invoked “only where recognition of
the corporate form would work an
injustice to a third person.” (Toma-
selli v. Transamerica Ins. Co., 25 Cal.
App. 4th 1269, 1285 (1994).) In
other words, alter ego is the excep-
tion, not the rule. Indeed, the very
purpose of establishing a corporate
form is to isolate and limit liability
to the corporation, as well as protect
its shareholders.
SUFFICIENT UNITY
OF INTEREST
The first issue—whether there is
such a unity of interest that the sep-
arate personality of the corporation
no longer exists—can be both enig-
matic and fact-intensive.
What is a unity of interest? The
usual assumption is that all affili-
ated corporations have a sufficiently
unified interest. But what about a
small, privately held corporation in
which the principal shareholder,
president, and CEO are the same
person? Such a situation certainly
seems to present a unity of interest.
However, as is often the case in liti-
gation, the answer is that old law-
yerly saw: It depends.
Courts have identified a number
of factors that are relevant, though
not dispositive, in determining
whether the requisite unity of inter-
est exists. Some or all of those factors
may be present in any given case:
Are funds commingled? Are cor-
porate formalities followed? Is the
corporation adequately capitalized?
Are transactions conducted at arm’s
length? Is there a failure to main-
tain minutes or adequate corporate
 CORPORATIONS
records? Are records of the separate
entities confused?
Common equitable ownership and
shared directors and officers between
the corporation and its alleged alter ego
are not alone sufficient to warrant a for-
mal alter ego finding, but those factors
can be significant when coupled with
other facts suggesting a lack of separate-
ness. Evidence that the corporation is
used as a mere shell, instrumentality, or
conduit for a single venture, or for the
business of an individual or another
corporation, will weigh heavily in the
determination of alter ego.
Parent-subsidiary and corporate-
affiliate relationships can also be sub-
ject to alter ego claims, but they still
require a showing of a sufficient unity
of interest. As courts have explained,
“[a] parent corporation is not liable on
the contract or for the tortious acts of
its subsidiary simply because it is a
wholly owned subsidiary. Some other
basis of liability must be established.
‘Stock ownership alone is not enough.’ ”
(Northern Natural Gas Co. of Omaha v.
Superior Court, 64 Cal. App. 3d 983,
991 (1976).) Consequently, courts
will impose liability “only where the
parent controls the subsidiary to such
a degree as to render the latter the
mere instrumentality of the former.”
(Institute of Veterinary Pathology, Inc. v.
California Health Labs., Inc., 116 Cal.
App. 3d 111, 119 (1981).)
FACT SENSITIVE
In the end, not every factor need be
shown. Alter ego is a highly fact-
sensitive doctrine. The analysis often
comes down to whether the corpora-
tion at issue is treated as a separate
entity generally and at all times, and
not simply for the purpose of shield-
ing its shareholders or corporate affili-
ates from liability.
Litigators on either side of an alter
ego claim need to consider what rele-
vant factors are present and how to
marshal the evidence to aid their posi-
tion. One of the most important prepa-
ratory steps is to identify the witnesses
who can testify regarding the underly-
ing alter ego factors. You will need
someone to explain under oath how a
person (or persons) manipulated the
corporation and misused it as their per-
sonal piggy bank. In addition, you must
identify the documents that are relevant
and probative to either establish or
diminish the alter ego claim.
Evidence regarding the unity of
interest can be the subject of lay or
expert testimony. In complex cases,
forensic accounting expertise may pro-
vide a true picture of a corporation’s
finances, and capitalization, and may
demonstrate—or refute—that corporate
financial records are maintained prop-
erly. In other cases, fact witnesses (often
from the alleged alter ego entity itself)
will have knowledge of the company’s
operations and structure and will be in
a position to supply evidence regarding
the extent to which the corporation is
truly separate from its shareholders or
corporate affiliates.
INEQUITABLE RESULT
The second element is similarly fact-
intensive. Assuming a lack of separ-
ateness, is it necessary to pierce the
corporate veil in order to avoid an
inequitable result? In this context, an
important issue concerns the meaning
of the word inequitable. Some courts
have explained that the “alter ego doc-
trine does not guard every unsatisfied
creditor of a corporation but instead
affords protection where some con-
duct amounting to bad faith makes
it inequitable for the corporate owner
to hide behind the corporate form.”
(Sonora Diamond Corp. v. Superior
Court, 83 Cal. App. 4th 523, 539
(2000).) Thus, “[d]ifficulty in enforc-
ing a judgment or collecting a debt
does not satisfy this standard.” (83
Cal. App. 4th at 539.) Indeed, if it did,
the limited liability protections of the
corporate form would be of little value:
A creditor would always pursue the
assets of the shareholders and affili-
ated corporations if a corporate debtor
could not or would not pay, rendering
the shareholders guarantors of all cor-
porate debt.
Courts frequently state that the cor-
porate form will not be recognized if to
do so would “sanction a fraud or pro-
mote injustice.” (See Webber v. Inland
Empire Investments, Inc., 74 Cal. App.
4th 884, 900 (1999).) The court made
clear in Webber that the focus is on
whether the corporation’s very purpose
is to defraud an innocent party. Other
cases seem to focus less on actual bad
faith on the part of the alleged alter ego,
and more on whether the result would
be unjust if the corporate veil is not
pierced. The injustice must flow from
the illusion of separateness created by
the alter ego relationship. Under either
approach, if wrongdoing or bad faith is
shown, it is much more likely that the
claimant will satisfy the “inequitable
result” requirement.
PROCEDURAL ALTERNATIVES
FOR RAISING ALTER EGO
In California there are two procedural
means for bringing an alter ego claim.
First, although it is not a cause of
action as such, the factual bases for
an alter ego claim can be alleged in
a complaint, along with other causes
of action against the defendant and
its claimed alter ego. Thus, the poten-
tially liable parties are all brought into
the suit at the outset, and the issue
of alter ego is litigated as part of the
underlying case.
For alter ego defendants, liability
will hinge first on the alter ego finding
and then on the merit of the underlying
claim. Alternatively, alter ego can be
raised after judgment has been rendered
against a corporate defendant. Under
provisions in the Code of Civil Proce-
dure, upon proper motion a judgment
can be amended to add additional
judgment debtors if it is shown that
the proposed judgment debtors are alter
egos of the original corporate judgment
debtor—and that they controlled the
underlying litigation. (See Cal. Code
Civ. Proc. § 187.) With control of the
litigation established, the alter egos are
deemed to have been “virtually repre-
sented” in the lawsuit (NEC Electronics,
Inc. v. Hurt, 208 Cal. App. 3d 772, 778
CALIFORNIA LAWYER NOVEMBER 2008 43

(1989)). The purpose of the virtual-
representation doctrine is to ensure the
protection of the alter ego’s due process
rights. To prevail under section 187, the
judgment creditor plaintiff must both
prove the two elements of alter ego and
establish that the new defendant effec-
tively controlled the litigation of the
original judgment debtor.
What does control of the litigation
mean for purposes of satisfying due
process? Courts have explained that
“[c]ontrol of the litigation sufficient to
overcome due process objections may
consist of a combination of factors, usu-
ally including the financing of the litiga-
tion, the hiring of attorneys, and control
over the course of the litigation.” (NEC
Electronics, 208 Cal. App. 3d at 781.)
Generally, some “active defense of the
underlying claim” is required (208 Cal.
App. 3d at 778.) If so, one wonders
whether a default judgment that by
definition was not actively defended
could ever be amended to add an alter
The alter ego analysis often comes
down to whether the corporation is
treated as a separate entity generally
and at all times.
ego. On the other hand, if the decision
to take the default judgment emanated
from the alleged alter ego, perhaps the
standard could be met.
A prior judgment against a corpora-
tion “can be made individually binding
on a person associated with the cor-
poration only if the individual to be
charged … had control of the litigation
and occasion to conduct it with a dili-
gence corresponding to the risk of per-
sonal liability that was involved.” (208
Cal. App. 3d at 778–79.)
Either procedure can be an effective
means of invoking the alter ego doc-
trine. Bringing a motion under section
187 adds the additional hurdle of having
44 NOVEMBER 2008 CALIFORNIA LAWYER
to prove control of the litigation. On the
other hand, the facts suggesting alter
ego may not be evident at the outset of
the lawsuit, and may not become appar-
ent until the plaintiff seeks to collect on
its judgment. If the facts indicating alter
ego are discovered before trial and while
there is still time to amend the complaint
to add the new defendants to the action,
a plaintiff must make a tactical decision
whether amending the complaint is
preferable to bringing a motion later to
amend the anticipated judgment.
CONSEQUENCES FOR
ARBITRATION
The right of an alleged alter ego to com-
pel arbitration is coextensive with the
rights of the entity with which it is
alleged to have a unity of interest. That
is the essential finding of a recent Cali-
fornia decision concerning arbitration
and alter ego claims.
Generally, only signatories to arbi-
tration agreements can enforce them by
compelling arbitration of
claims subject to the agree-
ment. Until recently, no
reported California case
discussed the rule when a
nonsignatory individual,
sued as an alter ego of a
signatory corporation,
moves to compel arbitra-
tion. In Rowe v. Exline (153
Cal. App. 4th 1276 (2007)),
the court allowed a nonsig-
natory (an alleged alter ego) to enforce
an arbitration provision. Given the
stated public policy in favor of arbi-
tration in federal and state court, this
decision further enhances the ability
of an alleged alter ego to defend itself
in arbitration if the claims are within
the scope of the arbitration clause. The
limits on discovery and on exemplary
damages in arbitration, as compared
with state court, can make that option
worth considering for individuals fac-
ing alter ego claims.
REVERSE ALTER EGO
Outside California some courts have
permitted, as an extension (or reversal)
CORPORATIONS
of alter ego doctrine, “third party” or
“outside reverse piercing of the corpo-
rate veil.” Under this theory, rather than
piercing the veil to reach shareholder or
affiliated corporate assets, the doctrine
works in reverse: A creditor reaches
corporate assets to satisfy claims against
an individual shareholder. However, a
recent California appellate decision
rejected this view, finding the reasoning
behind reverse piercing to be “flawed,”
and stating that “a third party creditor
may not pierce the corporate veil to
reach corporate assets to satisfy a share-
holder’s personal liability.” (Postal
Instant Press, Inc. v. Kaswa Corp., 162
Cal. App. 4th 1510, 1512–13 (2008).)
The Kaswa decision is welcome news
to entrepreneurs who do not want their
company to become a target for its
shareholders’ judgment creditors.
Despite alter ego being a bedrock
principle of the common law for many
years, the legal issues and policies
affected by it are dynamic. As new
corporate schemes emerge, alter ego
principles will likely morph with the
times. Effectively representing corpo-
rate defendants or plaintiffs in business
litigation of any stripe requires an
understanding of the many permuta-
tions and potential applications of alter
ego. In addition, companies large and
small need to understand how to best
manage their operations and activities
to minimize their exposure to alter
ego claims.
Though the alter ego doctrine may at
times appear to be the seed of extensive
litigation, the lesson to be learned is
quite simple. Clients who respect the
corporate form—and corporate formali-
ties—should face no problem. Those
who don’t—majority shareholders
who control corporate activities and
use the corporation as a personal bank
account—will indeed have to pay the
piper in litigation if their misuse of a
corporation’s separate identity causes
injustice to third parties. CL
Daniel T. McCloskey is of counsel to Greenberg
Traurig’s Silicon Valley office in East Palo Alto,
where he litigates complex business and intel-
lectual property disputes.
 CORPORATIONS

SELF-ASSESSMENT TEST NOVEMBER 2008

Alter Ego: Piercing the Corporate Veil

1 Alter ego is a doctrine reserved
for bipolar litigants who exhibit
multiple personalities.
❑ True ❑ False
2 Alter ego is designed to deal with
the improper use of a corporate
shield to thwart liability.
❑ True ❑ False
3 To establish alter ego, a plaintiff
must prove that all of the various
alter ego factors are present.
❑ True ❑ False
4 A sufficient unity of interest
between the corporation and alter
ego is one of the elements required
to establish alter ego.
❑ True ❑ False
5 If a corporation and its alleged alter
ego share the same directors and
officers, alter ego will be shown.
❑ True ❑ False
6 To find alter ego, there must be an
“inequitable result” if the acts in
question are treated as those of the
corporation alone.
❑ True ❑ False
7 Alter ego is a highly fact-sensitive
determination.
❑ True ❑ False
8 Showing that it is difficult to
enforce a judgment is sufficient
to satisfy the inequitable result
requirement for alter ego.
❑ True ❑ False
9 If certain requirements are met,
California Civil Code section 187
permits a plaintiff to amend a
judgment to add an alter ego
judgment debtor.
❑ True ❑ False
10 If wrongdoing or bad faith can be
shown, it is much more likely that
a claimant will satisfy the inequi-
table result requirement.
❑ True ❑ False
11 To add a defendant as a judgment
debtor on the basis of alter ego,
a plaintiff must prove that the new
defendant controlled the under-
lying litigation that resulted in
the judgment.
❑ True ❑ False
12 The reason courts require proof
that a new defendant controlled
the litigation before adding the
defendant to an existing judgment
is to safeguard the equal protection
rights of the new defendant.
❑ True ❑ False
13 Generally, adding an alter ego
defendant to a judgment requires
evidence of active control of the
underlying litigation.
❑ True ❑ False
14 Alter ego has no application to an
arbitration agreement.
❑ True ❑ False
15 Alleged alter egos of signatories
to an arbitration agreement can
compel arbitration.
❑ True ❑ False
16 The Kaswa case held that a third-
party creditor may not pierce the
corporate veil to reach corporate
assets to satisfy a shareholder’s
personal liability.
❑ True ❑ False
17 In California, limited liability com-
panies are not subject to the alter
ego doctrine.
❑ True ❑ False
18 A parent corporation is not
liable on the contract or for the
tortious acts of its subsidiary
simply because it is a wholly
owned subsidiary.
❑ True ❑ False
19 The following are all relevant to
alter ego: commingling of funds,
observing corporate formalities,
and use of another’s trademark.
❑ True ❑ False
20 One purpose of establishing a cor-
porate form is to isolate and limit
liability to the corporation.
❑ True ❑ False

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“Alter Ego: Piercing the Corporate Veil” originally published in the November 2008 issue of California Lawyer.
CALIFORNIA LAWYER NOVEMBER 2008 45
Reprinted with permission. © 2009 Daily Journal Corporation, San Francisco, California.