Piercing the Alter Ego Law - Alter Ego 1. Background of Alter Ego • Meaning (Latin, "the other I")

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  • Piercing the Corporate Veil and Alter Ego US and Mexican Law

    Panelists: • Hon. Louise D. Adler,

    Judge of the U.S. Bankruptcy Court

    • Ali Mojdehi, Cooley LLP

    • Manuel Perez-Freyre, Baker McKenzie

    • Mary R. Robberson, Higgs, Fletcher & Mack

  • Alter Ego

    1. Background of Alter Ego • Meaning (Latin, "the other I"). • In law, a doctrine by which a court of law holds individual shareholders liable for a corporation's debts if the

    corporation is deemed to be nothing more than an "alter ego" of the corporation's owners.

    • Also referred to as “piercing the corporate veil.” “Veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.

    • Utility: An equitable doctrine used to address fraud and to ensure the interests of justice are served.

    2. Context and where it is applicable • Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts

    or actions of a corporation.

    • Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.

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  • Legal Principles U.S. Law

    • In the United States, different theories, most important "alter ego" or "instrumentality rule", attempted to create a piercing standard. Mostly, they rest upon three basic prongs—namely: • "unity of interest and ownership": the separate personalities of the

    shareholder and corporation cease to exist, • "wrongful conduct": wrongful action taken by the corporation, and • "proximate cause": as a reasonably foreseeable result of the wrongful action,

    harm was caused to the party that is seeking to pierce the corporate veil.

    • Alter Ego is a question of state law. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation's home state.

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  • Legal Principles U.S. Law (continued)

    • Factors that a U.S. court may consider when determining whether or not to pierce the corporate veil include the following: • Absence or inaccuracy of corporate records; • Concealment or misrepresentation of members; • Failure to maintain arm's length relationships with related entities; • Failure to observe corporate formalities in terms of behavior and documentation; • Intermingling of assets of the corporation and of the shareholder; • Manipulation of assets or liabilities to concentrate the assets or liabilities; • Non-functioning corporate officers and/or directors; • Significant undercapitalization of the business entity (capitalization requirements vary based on

    industry, location, and specific company circumstances);

    • Siphoning of corporate funds by the dominant shareholder(s); • Treatment by an individual of the assets of corporation as his/her own; and • Was the corporation being used as a "façade" for dominant shareholder(s) personal dealings

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  • Legal Principles – Mexican Law

    1. Background of Alter Ego and Piercing the Corporate Veil in Mexico: • Recently in Mexico the theory of Alter Ego and Piercing the Corporate Veil has been

    recognized by means of a series of precedents issued by the Collegiate Circuit Courts. • In Mexico mercantile entities are ruled by Federal Laws and therefore, the criteria for

    piercing the corporate veil is determined in accordance with such laws.

    2. Relevant cases include: • The Coca Cola Export Corporation Case (November 2008). • Importadora y Distribuidora Ucero Case (November 2012). • Spectrasite Communications Case (August 2013).

    • In one of the precedents the Court stated that all actions against the contractual good faith are considered to be an illicit act.

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  • Legal Principles – Mexican Law

    3. Factors that a Mexican Court may consider when determining whether or not to pierce the corporate veil include the following:

    • Actions/acts undertaken by the Company: • committing fraud against third parties; or • violating the application of the law; • avoiding the application of the law; • avoiding obligations; and • in general, implementing actions for illicit purposes.

    • If the company carries out activities in violation of the contractual good faith; • To discover the illegality of the acts carried out in the companies;

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  • Legal Principles – Mexican Law

    Preliminary legal aspects for the Case Study: 1. Relevant aspects for the recognition and enforcement of foreign judgments in Mexico1:

    • Mexican Courts have exclusive competence in matters relating to lands and waters located in Mexico.

    • The judgments have not been rendered as a consequence of the exercise of a action in rem;

    • That the judge or the court had jurisdiction. • That the defendant had been summoned or serviced in a personal manner (right to a

    hearing). • To be res judicata in the country rendered. • That the obligation requested to be carried out is not contrary to the public order in

    Mexico.

    1. Article 568 of the Federal Code of Civil Procedures and Article 1,347-A Commercial Code.

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  • Case Study

  • Case Study

    • Merits Appeal: Kismet Acquisition, LLC v. Diaz-Barba et al. (In re Icenhower), 757 F.3d 1044 (9th Cir. 2014) • Appeal from the United States District Court for the Southern District of California, Barry T.

    Moskowitz, District Judge, Presiding. D.C. Lead Case No. 3:08–cv–01446–BTM–BLM

    • Sanctions Appeal: Kismet Acquisition, LLC v. Diaz-Barba et al. (In re Icenhower), 755 F. 3d 1130 (9th Cir. 2014) • Appeal from the United States District Court for the Southern District of California, Barry T.

    Moskowitz, District Judge, Presiding. D.C. Lead Case No. 3:08–cv–02326–BTM–BLM

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  • Background and Facts

    • The Icenhowers (the “Debtors”) purchased an interest in Vista Hermosa, a coastal villa in Jalisco, Mexico from the Lonies (the “Original Owners”). The investment was purchased in a fideicomiso trust – an arrangement wherein a Mexican bank holds title to a coastal property and a foreign national is granted the right to use it.

    • The Original Owners sued Debtors in the Southern District of California, on a note, seeking, inter alia, a determination of the parties' respective rights and interests in the Villa interest and injunctive relief.

    • On November 24, 2003, the district court entered judgment for the Original Owners, directing Debtors either to pay damages of $1,356,830.32 or to return the Villa interest.

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  • The Players

    Original Owners

    sue Debtor on a note regarding

    Villa

    Debtor sets up H&G to

    avoid summary

    judgment in litigation by

    Lonies

    H&G takes ownership

    of Villa

    Original Owners obtain

    judgment against Debtor

    Debtor files bankruptcy

    in San Diego

    H&G sells the Villa to D&B

    (Mexican citizens

    residing in San Diego)

    Bankruptcy Trustee sues Debtor & H&G for fraudulent

    transfer

    Trustee finds out about

    post- bankruptcy sale to D&B

    and sues D&B

    Kismet purchases the Litigation from

    Bankruptcy Trustee

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  • Factual Background

    • On March 4, 2002, while the Original Owners' action against him was pending, Debtor purchased H&G, a shell company created by Laughlin International, Inc. The same day, Debtor agreed to transfer, inter alia, the Villa interest to H&G for $100,000 and H&G's assumption of $140,000 of debt.

    • The bankruptcy court later found: • “[N]o evidence that H&G paid any of the recited consideration;” • After the sale, Debtor retained “absolute control over the operation of the Villa

    Property” and “the right to all rental income from the villa;”

    • H&G was not capitalized beyond the $3,424 contributed by Debtor; • Craig Kelley, H&G’s president and sole officer and director, served in a purely titular

    capacity and took orders from Debtor; and

    • “H&G had no real corporate existence apart from [Debtor]” and “had no business purpose other than as a sham company to hold the Debtors' assets.”

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  • Factual Background

    • Debtor filed for bankruptcy protection on December 15, 2003. • In a closing ceremony in San Diego on June 7, 2004, H&G sold

    the Villa interest to D&B (Mexican citizens residing in San Diego) for $1.5 million. Although H & G was represented by Mr. Kelley, the closing was controlled by Debtor.

    • Prior to the closing, numerous red flags had arisen, including: • Although the Villa interest was purportedly sold by H&G, Debtor was able to

    lower the purchase price to account for a debt he personally owed D&B.

    • D&B were on notice of Debtor’s bankruptcy and of the possibility of litigation to avoid Debtor’s transfer of the Villa interest to H&G and to tie Debtor to H&G.

    • The V