At Duffee + Eitzen, we understand that for most of our clients, a divorce is the most complicated business transaction they will ever navigate. While fair division of property is guided by state law, financial disputes within a divorce can quickly become complicated. That’s especially true when a couple in divorce has personal and business assets that may be commingled. In these matters, it’s critically important for attorneys to have expertise in the law surrounding complex property division.
For the September edition of the Dallas Bar Association’s Headnotes publication, Duffee + Eitzen partners Lisa Duffee and Jodi Bender and associate Devin Kerns contributed a guest article outlining strategies about “piercing the corporate veil” when a party in divorce attempts to use a business entity — their “alter ego” — to hide what would normally be a marital asset.
In “Shot to the Heart: From the Altar to Alter Ego,” they write:
Determining an alter ego claim is an issue of fact about the status of the property that allows the court to achieve an equitable result. For example, a court could divide financial accounts and real property owned by an LLC as part of a divorce rather than merely the LLC membership interest if a party successfully proves an alter ego claim.
So how does a party successfully claim alter ego? In the abstract, the theory applies when an entity is a mere tool or business conduit for an individual, and there is such unity between the corporation and the individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. While these words are vague, practitioners should be attuned to certain red flags that indicate a possible alter ego situation.
If an owner is the sole owner of an entity, an alter ego claim should be on your radar. In these circumstances, there is likely to be little separation between the entity and the owner, and the owner controls the entity completely
If personal and business property has been commingled or if personal expenses are being run through the entity like a personal ATM, you should seriously analyze a claim for alter ego.
A party going through a divorce may try to hide behind an entity, opening themselves up to a claim.
Is a party moving money in and out of an entity rapidly?
Does the entity engage in transactions that are totally unrelated to its business purpose (i.e. a mechanic’s shop dealing art)?
Is a party paying for their paramour claiming an entity expense? Do gambling payments or strip club charges show up on the entity’s account statements?
Has an entity been created to hide what would normally be a marital asset? Time to amend your pleading to add an alter ego claim.
Additionally, if you are on the defending side of an alter ego claim, the entity should consider hiring separate counsel and moving to dismiss the claim under Texas Rule of Civil Procedure 91a. While this rule normally does not apply to family law cases, judges have dismissed these civil claims against entities under the rationale that they do not fall within the family law exception.
Family law practitioners should carefully consider an alter ego claim as a remedy or risk leaving money on the table. You could be missing out on a big opportunity to add significant value to the community and advocate for your client.
Click here to read the entire article in Headnotes.