Lauren Gross

Document Type

Research Memorandum

Publication Date




At times, bankruptcy can seem like a game of cat and mouse between debtors and creditors. By filing for bankruptcy in the first place, debtors change the rules of the game with various bankruptcy mechanisms, such as the automatic stay provision set forth in section 361 of the United States Bankruptcy Code (the “Bankruptcy Code”). An important inquiry exists in what creditors can to do promote their interests in bankruptcy. An even more important inquiry lies in determining what doctrines may satisfy generally recognized principles of equity for all.

One option for creditors who deal with corporate entities is to assert a veil piercing theory in order to obtain access to more assets. According to established legal principles, corporations are recognized as legal entities, separate and distinct from their shareholders and managers. The debts and obligations of the corporation are the responsibility of the corporate entity, not the shareholders, who are liable only for the amount they voluntarily put at risk by investing it into the business. When the incentive value of limited liability is outweighed by the competing factor of basic fairness to parties dealing with corporations, courts may pierce the corporate veil and hold the owners, shareholders, or members personally liable for the debts of the corporation. Some factors courts consider when deciding whether to pierce the corporate veil or not are whether corporate formalities were adhered to, inadequate capitalization, and movement of funds for personal purposes. Courts may also pierce the corporate veil in the event of fraud.

Another legal theory that is very similar to a veil piercing claim is an alter ego claim. In order to prevail on an alter ego claim, a corporate entity must be so dominated by an individual and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s “alter ego.” Outside of a bankruptcy context, most practitioners pay little attention to the differences between corporate veil piercing and alter ego claims because the practical implications of each are the same. In both cases, the plaintiff gains access to the assets of another entity in addition to those of the defendant to satisfy the judgement. However, as the case law has developed, there seems to be a more notable distinction between whether a litigant asserts a veil piercing or alter ego theory in bankruptcy.



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