In Hacker v. Fabe, the California Court of Appeal for the Second Appeals District affirmed the trial court’s piercing of an LLC veil where the managing member of the LLC manipulated LLC assets and destroyed the LLC’s records. The claim involved unpaid wages brought by the Labor Commissioner against Ms. Fabe’s former employer 1538 Cahuenga Partners, LLC. Hacker, the managing member of the LLC, testified that documents relating to Cahuenga’s earnings from 2005 through 2010 were in his possession and control at some point in time, but he had destroyed them. In piercing the LLC veil, the trial court decided Mr. Hacker’s complete control over Cahuenga, his control over the litigation, sharing of attorneys with Cahuenga, his transfer of the LLC to a third party immediately after judgment was entered, and destruction of the relevant records of the assets, supported the alter ego doctrine and piercing the LLC veil.
In Troyk v. Farmers Group, the court noted in California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be a unity of interest in ownership between the corporation and its equitable owner so that the separate personalities of the corporation and shareholders do not, in reality, exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.
In Associated Vendors, Inc. v. Oakland Meat Co. (1962), the court analyzed a number of cases in which the corporate entity had been disregarded and produced the following list of factual circumstances, which can serve as a checklist for
determining whether the alter ego doctrine might be applicable:
- Commingling of funds and other assets, failure to segregate funds of the separate entities, and unauthorized diversion of corporate funds or assets to other than corporate uses;
- Treatment by an individual of the assets of the corporation as his or her own;
- Failure to obtain authority to issue stock or to subscribe to or issue the same;
- Holding out by an individual that he or she is personally liable for the debts of the corporation;
- Failure to maintain minutes or adequate corporate records and confusion of the records of the separate entities;
- Having identical equitable ownership in the two entities, identical individuals having domination and control of the two entities, identical directors and officers of the two entities in supervision and management, or sole ownership of all of the stock in a corporation by one individual or the members of a family;
- Use of the same office or business location or employment of the same employees or attorney;
- Failure to adequately capitalize the corporation, or the total absence of corporate assets;
- Use of a corporation as a mere shell, instrumentality, or conduit for a single venture or the business of an individual or another corporation;
- Concealment and misrepresentation of the identity of the responsible ownership, management, and financial interests or concealment of personal business activities;
- Disregard of legal formalities and failure to maintain arm’s length relationships among related entities;
- Use of the corporate entity to procure labor, services, or merchandise for another person or entity;
- Diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another;
- Contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability or use of a corporation as a subterfuge for illegal transactions; and
- Formation and use of a corporation to transfer to it the existing liability of another person or entity.
Hacker v. Fabe suggests that the fifteen factors described in Associated Vendors should be increased by at least one more, the destruction of records. This factor suggested that there was no separate personality between Hacker and the LLC.
If any of the factors listed apply to your LLC or corporation, contact qualified business counsel to help put your business house in order so that, in the event of a claim, you do not lose your residential home and assets due to a claim against the company.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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