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Creditors Pursuit of a Debtors Shareholders under Alter-Ego Liability Theory Gaining Traction in Courts According to ABI Journal Article

Alexandria, Va. — A recent article in the December/January ABI Journal found that creditor lawsuits against shareholders improperly using corporations to limit their own personal liability, known as “alter-ego liability,” are gaining traction in the courts. In her article titled “Chasing the Money: Pursuing a Debtor’s Shareholders under Alter-Ego Liability Theory,” Kavita Gupta of Winthrop Couchot PC (Newport Beach, Calif.) examined recent decisions in the Fifth and Ninth Circuits that have challenged prior court rulings that held that the bankruptcy trustee had exclusive standing to pursue alter-ego liability claims against a corporate debtor’s shareholders. “Creditors can, in certain cases, proceed with their alter-ego claims against corporate shareholders despite the corporation’s bankruptcy filing,” Gupta writes. Although one or more individuals can assume the corporate form to do business as a separate legal entity, the corporate form must be used for legitimate business purposes, according to Gupta. “When the corporate form is abused, a court may disregard it, rendering the shareholders personally liable for acts done in the corporation’s name,” Gupta writes. “Any party, even the corporation itself, can sue a corporation’s shareholders under an alter-ego liability theory to hold them personally liable for the corporation’s legal obligations.” Bankruptcy trustees previously held exclusive standing to pursue “alter-ego” claims when the automatic stay had suspended a liability claim against the shareholders of a company, but Gupta found recent rulings that have allowed creditors to pursue such lawsuits. “Both the Fifth and Ninth Circuits have recently shifted away from the view that a trustee has exclusive standing to pursue ‘general’ alter-ego claims or alter-ego claims asserting a ‘generalized injury’ to the corporation,” Gupta writes. Creditors may have a potential “vehicle for a possible recovery from a corporate debtor’s shareholders because certain alter-ego actions against the shareholders are not subject to the automatic stay,” Gupta writes. “Moreover, the automatic stay does not shield a debtor corporation from having to respond to discovery that is reasonably calculated to lead to admissible evidence against the shareholders for alter-ego liability.” To obtain a copy of “Chasing the Money: Pursuing a Debtor’s Shareholders under Alter-Ego Liability Theory,” published in the December/January issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org.