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What is Alter Ego Liability?

What is Alter Ego Liability?


THIS IS NOT Intended to Be Construed or Relied upon as COMPETENT LEGAL ADVICE—Readers are urged to obtain competent legal representation to review their facts. I am not an attorney and this is not legal advice. I’m trying to gather a few things in order for research…that’s all.

This is very similar to the notion of piercing the corporate veil (aside from certain technical distinctions that are being ignored for the purpose of this discussion). Owners of corporations (i.e., its shareholders) are generally not personally liable for debts, losses and liabilities of the business itself, because of limited liability. However, if those owners have acted in a way where their business is really just a shell, and not an entirely separate legal entity, a court may decide that the business is simply an alter ego, meaning the owners should be held personally liable because of their wrongful acts.

There are many things that a court will look at in determining whether alter ego liability should be applied. Typical factors include (but are not limited to) whether the company kept its own records, whether there were shares (for a corporation) or units (for an LLC) that were actually issued, whether the owners co-mingled their finances with the business entity, whether there were actually corporate directors or LLC managers running the business, how legal formalities were followed and whether the owners used the business for personal purposes. It is often a case-by-case situation, and the key here is that you should take every precaution to run your business in full compliance with the legally required formalities and use the business in a proper way in order to avoid such alter ego liability.

Uniform Fraudulent Transfer Act

Successor liability claims are often paired with alleged violations under a state law adaptation or adoption of the Uniform Fraudulent Transfer Act (“UFTA”),5such as the Delaware Uniform Fraudulent Transfer Act (“DUFTA”). Some typical factual scenarios that give rise to a successor liability claim mirror those for a claim under UFTA. For instance, a violation of DUFTA by transferring the assets of company A into company B to avoid liability, while the successor company B is a mere continuation of company A, as all of the assets were transferred, and company B retained the same management as company A, could trigger both exceptions three and four noted above as well as a fraudulent conveyance claim. See DEL. CODE ANN. tit. 6, § 1305.

DUFTA finds a fraudulent conveyance if the debtor made the transfer or incurred the obligation with “intent to hinder, delay or defraud any creditor of the debtor;” or “[w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation.” DEL. CODE ANN. tit. 6 §§ 1304(a)(2) and 1305(a); see also In re Hechinger Inc. Co. of Del., 327 B.R. 537, 551 (D. Del. 2005); China Res. Prods. (U.S.A.) v. Fayda Int’l, Inc., 856 F. Supp. 856, 863 (D. Del. 1994); In re MDIP, Inc., 332 B.R. 129, 132 (Bankr. D. Del. 2005). The debtor must also be engaged or about to engage in a business or a transaction for which the remaining assets of the debtor were “unreasonably small in relation to the business or transaction,” or intended, had a belief, or should have believed, that the debtor would “incur, debts beyond the debtor’s ability to pay as they became due.” In re MDIP, Inc., 332 B.R. at 132. If a creditor prevails on a claim under the DUFTA, the statute empowers the Court to appoint a receiver to take charge of the transferred asset or other property of the transferee. DEL. CODE ANN. tit. 6 § 1307(a).

Notably, intent under DUFTA can be found if the transfer or obligation was to an insider, if the debtor retained possession or control of the property transferred after the transfer, the transfer was of substantially all the debtor’s assets, the debtor removed or concealed assets, the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred, the transfer occurred shortly before or shortly after a substantial debt was incurred, or the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. DEL. CODE ANN. tit. 6 § 1304(b). All of these facts, if present, would be useful in framing a successor liability claim as well.
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Sources:

http://www.quizlaw.com/business_law/what_is_alter_ego_liability.php

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LIMITATIONS TO BANKRUPTCY ALTERNATIVES: SUCCESSOR LIABILITY, THE UNIFORM FRAUDULENT TRANSFER ACT, PIERCING THE CORPORATE VEIL, AND PERSISTENT LIABILITIES.1

Rafael X. Zahralddin-Aravena2
Elliott Greenleaf, Wilmington, Delaware

ALTER EGO liability

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Related:

ALTER EGO DOCTRINE: ‘Pierce the Corporate Veil’

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ALTER EGO DOCTRINE: ‘Pierce the Corporate Veil’

ALTER EGO DOCTRINE: ‘Pierce the Corporate Veil’


A doctrine of law which disregards the principle of limited liability enjoyed by a corporate entity when it is proven that, in fact, no separate identity of the individual and corporation exists. The alter ego principle may also apply to relationships between corporate entities and their subsidiaries.

  • Litigants often invoke the alter ego doctrine but are rarely successful. Still, under the proper circumstances, it can be a powerful and effective equitable device for litigants before and after judgment.
  • Where the Creditor Directs Management of an Affiliated Transferee. Where the borrower has transferred title to a different entity controlled by the lender (or lenders, as the use of such entities at foreclosure is common in the participation setting), liability for an (unanticipated) uninsured loss often flows upward to the controlling parties anyway. Lender liability, alter-ego and other theories may be applied. See § (K)(1), infra (use of affiliates and  environmental liability). For a discussion of the liability of the affiliated secured lender, see Talley, § XIII(A)(3), supra.
  • Piercing the corporate veil in business is when a corporation performs an act through their officers or board of directors in good faith, so the company isn’t doing the deed themselves. In other words piercing the corporate veil has to do with the corporation through it’s officers and through the board of directors NOT acting in compliance with the corporation articles of incorporation and corporate bylaws require. And when they do that, they do that at the peril of the officers and the board of directors.

read more on this paper… HERE

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