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Carl Kanowsky: A look at the appearance of conflicts

Posted: February 18, 2011 1:55 a.m.
Updated: February 18, 2011 1:55 a.m.
 

Recently, there’s been a brewing controversy over some alleged conflicts of interest with members of the William S. Hart Union High School Board.

Some folks contend that since member Gloria Mercado-Fortine works for one corporation (Desert Sands Charter High School) that shares directors and officers with another corporation (Mission View Charter School) that supplies services to the school district, an improper conflict of interest exists.

Critics allege that since the two corporations have some similar directors and officers, they must be considered alter egos of each other. This, in essence, is what is known as piercing the corporate veil. 

Under state law, the assumption is that corporations are separate, distinct entities from one another.

One of main motivations to forming different corporations is to keep the liabilities of one company from being inflicted on another. A goal of avoiding shared liability doesn’t take away this separateness.

As the United States Supreme Court has said, “The fact that incorporation was desired in order to obtain limited liability does not defeat that purpose . ... Limited liability is the rule not the exception; and on that assumption large undertakings are rested, vast enterprises are launched and huge sums of capital attracted.” 

Even though the law favors keeping corporations separate from each other, that does not mean that someone can abuse this privilege with impunity. If keeping with the legal fiction of separate entities leads to a gross injustice, the courts will “pierce the corporate veil” and hold the offending parties responsible despite the existence of the corporation. 

So, when is it OK to say that two corporations are so related that you can say one is the alter ego of the other?

Well, it is surprising difficult and complicated. There is no “litmus test” to determine conclusively whether piercing is justified or not.

Rather, a court examining the question starts with certain principles established by the Supreme Court. “There are, nevertheless, two general requirements: (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) that if the acts are treated as those of the corporation alone, an inequitable result will follow.” 

While these are nice, lofty sentiments, the question comes up — how do you apply these requirements? If two corporations share officers and directors, is that enough to ignore their separate corporate existence?  What about if they use the same bank or are located at the same address — does that end the investigation?

Sadly, no. The Court of Appeal in Greenspan v. LADT, LLC (a case which was just published) used a whole panoply of factors (a minimum of fourteen) to decide an alter ego case.

These includes things like commingling of funds, failure to maintain adequate corporate records, same officers and directors for both entities, failure to adequately capitalize, the disregard of legal formalities, the diversion of assets from one corporation to another, and the use of the corporation as a mere shell, along with almost a dozen other considerations.

After you’ve looked at all of these items can you then come to a conclusion?

Again, no.  “This long list of factors is not exhaustive. The enumerated factors may be considered “[a]mong” others “under the particular circumstances of each case. No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine. ...” 

You can now see why an “alter ego” case is a trial attorney’s dream file. The attorney gets to conduct extensive discovery, file numerous motions and can always argue that the other side hasn’t proven enough to win its case. These are complicated, intense, fact-driven cases that can take months to resolve.

Now, I know that the court of public opinion may not be as exacting as a court of law. But obviously sharing officers and directors is not, on its own, a sufficient basis to assert alter ego.

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by e-mail at cjk@kanowskylaw.com. Kanowsky’s column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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