Distinguishing Two Similar Asset Protection Issues: Piercing The Corporate Veil And Attacking Successor Business As Alter-Ego Of A Debtor Business

I got a call from a Florida businessman who owned a business Jacksonville which had been sued. The court awarded a judgment against the business, but there is no judgment against the owner personally.  The owner is  considering closing down the debtor business and starting a new company doing similar kinds of things for similar clients. The owner asked me if the creditor could “pierce the veil” of the new business.

The question as phrased points out a subtle distinction between the concepts of piercing the corporate veil and that of attacking a successor corporation under the theory of alter-ego and business continuation. The legal  issue in this caller’s situation is not one of “piercing the veil” but is whether the proposed new business would be considered a continuation of the debtor business and merely the alter ego of the debtor business. When a newly formed business starts off its operations with the assets of a prior business the creditor of the prior business should be able to  execute upon the same assets under the theory that  the new business is alter ego of the prior business. Alter-ego theory would apply  when a  new business has, for example, the same ownership,  physical assets, customers, a similar name, the same location and  phone numbers, and other forms of goodwill transferred from a debtor business.

Piercing the corporate veil theory, on the other hand, typically  applies when a creditor wants to penetrate a corporate shield to obtain a personal judgment against the business owner. It is very difficult to pierce a corporation in Florida and most other states. There are two grounds to pierce the veil. First, a creditor can obtain a personal judgment against an owner who set up a corporation in order to defraud creditors. Second, a creditor can pierce the corporate veil when an owner operates a corporation as a sham and as an alter-ego of the owner. An example is an owner who pays personal expenses such as his mortgage and credit card bills directly out of corporate bank accounts. Such practices would indicate that the owner is treating the corporation monies as his personal funds and is not respecting the corporations separate legal existence.

The laws on these topics is much more complicated than discussed in the two paragraphs above. There is overlap between piercing the veil and business continuation concepts. I am trying to point out that the issue of piercing the corporate veil and the issue of business continuation/alter ego are typically applied in different contexts and are separate legal theories.

Last updated on May 22, 2020

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