Tuesday, April 22, 2014

FYI: 9th Cir Says CA Law Does Not Allow Independent/Substantive Cause of Action for Piercing Corporate Veil

Tuesday, October 26, 2010

The United States Court of Appeals for the Ninth Circuit recently reversed and remanded a district court's ruling that a claim against a corporation's shareholders on an alter ego theory belongs solely to the corporation's bankruptcy trustee.  The Ninth Circuit remanded the case for further proceedings based on its holding that California law does not recognize an independent claim or cause of action that will allow a corporation and its shareholders to be treated as alter egos for purposes of all the corporation's debts.
 
 
A California corporation breached a contract to deliver almonds to plaintiff, who then brought and prevailed in a foreign arbitration against the California corporation.  The plaintiff then sued the California corporation's shareholders in California state court to collect the arbitration award, seeking to pierce the corporate veil with an alter ego theory.  The plaintiff did not sue the California corporation, which had petitioned for bankruptcy soon after the arbitration.  The shareholders removed the suit to federal court and filed a motion to dismiss, arguing that the plaintiff's claim would harm not just the debtor corporation but all creditors and thus the claim was exclusively the property of the bankruptcy trustee.  The district court agreed and the motion to dismiss the suit was granted.  This appeal followed.
 
The issue on appeal was whether the claims against the shareholders could be brought by the plaintiff, a creditor of the corporation, or only by the bankruptcy trustee. 
 
The Ninth Circuit noted that the shareholders' motion to dismiss was based on a theory that the plaintiff was improperly trying to sue for general conduct that harmed all creditors, and the alter ego claim was therefore a general claim that belonged to the bankruptcy trustee.  Accordingly, the Court first examined whether such an independent alter ego claim exists under California law. 
 
In so doing, the Court ruled that a bankruptcy court and a bankruptcy appellate panel in the Ninth Circuit had misread a California appellate court opinion to imply a general alter ego claim.  Instead, the Ninth Circuit read the same California appellate opinion as simply an attempt to distinguish rights of action that are property brought by the trustee from those that are not. 
 
Ultimately, the Court held that California law does not recognize an independent claim or cause of action that will allow a corporation and its shareholders to be treated as alter egos for purposes of all the corporation's debts.  However, the Court noted that California recognizes the ability of creditors to pierce the corporate veil as a procedural matter.  Accordingly, the Court remanded the case for further proceedings.




Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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