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Piercing the Corporate Veil

8 Jul, 2014 By: Frank R. Fasel


As an Orange County attorney, the drive up to the San Fernando Valley to take and defend three days of depositions was brutal. Even leaving at 5:30 a.m. each day, my attempt to beat traffic was futile at best. The upside was that I had ample time to ponder that day’s deposition.

On the second day, I was to depose the person most knowledgeable (PMK) of the cross-defendant, a corporation. The case is an employee discrimination, wage and hour, wrongful termination action. My client is the defendant and cross-complainant, an individual who sold the business to the defendant and cross-defendant corporation. I am seeking indemnity.

I had a few areas I wanted to probe establish my client’s cross complaint for indemnity but otherwise figured my questioning would be brief and uneventful. That all changed when opposing counsel plopped a six-inch stack of documents in response to my document request in an obvious attempt to throw me off. As I quickly flipped through the pages, the majority of which were utter nonsense, I hit the jackpot – the corporate records. Once my questioning began, the gentleman I was deposing did not know what hit him. His attorneys’ frantic and baseless objections did nothing to protect his corporation’s veil from the piercing spear I was about to throw.

I had to wonder what his attorneys were thinking. Did they not review his corporate documents? Did they not see that my client was listed as secretary without his knowledge? Did they not prepare for the fact that no bylaws were adopted, no minutes signed, no organizational meeting held, no notice of annual meetings nor annual meetings held? The PMK did not even know who the incorporator was. As jaws dropped and my adversaries panicked, one thing was apparent: the corporation was no longer going to protect the deponent’s personal assets.

My point is not about how to depose a PMK, but rather how to keep your corporation from falling prey to alter ego allegations, thus exposing the officers’ personal assets. California law recognizes an alter ego relationship, such that a corporation's liabilities may be imposed on an individual, only when two conditions are met: (1) there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; and (2) an adherence to the fiction of the separate existence of the corporation would sanction a fraud or promote injustice (S.E.C. v. Hickey [9th Cir. 2003] 322 F.3d 1123, 1128; 335 F.3d 834).

In order to clear yourself of those conditions you need to follow a few simple guidelines to protect yourself, primarily and most importantly: [1] Notice and hold annual meetings; [2] File a statement of information; [3] Open a corporate bank account and do not commingle funds; [4] Do not pay for personal items on the corporate credit card; [5] Do not pay for personal items with the corporate check book; and [6] Keep a corporate binder with adopted bylaws, minutes and all other corporate documents.

Although this list is not exhaustive, following these guidelines should keep you protected. Remember that if your corporation is ever sued, the plaintiff may subpoena bank records, credit card statements and the like. If those records reflect a pattern of personal use, it only gives the judge or jury more reason to allow the plaintiff to go after your personal assets. Additionally, all corporate records are discoverable, so make sure everything is in order at all times.

Frank R. Fasel is founding partner at Fasel & Associates in Costa Mesa, Calif. He can be reached at (714) 966-2008 or via E-mail at frf@fasellaw.com.
 


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