How to Get Paid if the Corporation is Broke

Suing a Small Corporation for Injuries or Breach of Contract

Very often, I have cases where we sue a small corporation for injuries or breach of contract, and after we win a large judgment, the owner(s) close down the business so we can’t collect on the judgment.  That’s very frustrating.

But, I’ve found some satisfying success collecting on these judgments nonetheless.  How? We go after the owner(s) under the alter ego theory. Under this theory, the court can find that the corporation is a sham, a way for the owner to protect himself but without complying with the requirements that the corporation be treated as a separate entity from the owner.  If the court finds that the owner is the alter ego of the corporation, the court will amend the judgment to make the judgment enforceable against the owner personally.

The Alter Ego Theory for Sham Corporations

The requirements to prove alter ego are pretty straightforward.  First, you have to prove that the corporation is not treated as a separate entity by the owner.  There are many ways to do that.  For example, you can prove that the owner commingles corporate monies with his own by, for instance, paying his personal bills with corporate checks.  Or that the owner didn’t contribute enough capital into the corporation when it was formed to give the corporation a fair chance of paying its bills.  Or, that the owner didn’t follow simple corporate formalities, like maintaining corporate minutes.

The next thing you have to prove is that allowing the owner to benefit from the corporate shield will permit a fraud or other injustice.  For example, if your judgment against the corporation is for fraud, and the owner then shuts down the business so you can’t collect, that would allow the owner to defraud you with impunity.  Without showing more than a simple debt that the corporation can’t pay, you won’t be able to meet this burden.  But, if you can show a fraud or some other clearly unfair circumstance, you’ll meet this hurdle.

And there’s one final aspect to the alter ego rule that can be very appealing.  Generally, a plaintiff is required to plead in her complaint all of her legal theories against the defendants.  However, the courts allow a plaintiff to assert alter ego liability against the owner even after judgment is entered against the corporation – i.e., after the case is over.  So, the owner may be lulled into a half-hearted defense of the case because he plan to shut down his business if he loses, and then after you win the case, you can ask the court to amend the judgment to add the owner as another judgment debtor.

Keep this tool in your arsenal.  I’ve used it successfully several times – and it has always proved invaluable in the right circumstances.