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October 25, 2010

9th Circuit Rules Alter Ego Cannot be Prosecuted by Trustee, at Least in California

AHCOM v. Smeding, --- F. 3d ---  (9th Cir. October, 2010)

Issue:   May a creditor bring an action to pierce the corporate veil without bankruptcy court approval? 
         
Holding:   Yes.   

appeal from District Court

Judge J. Clifford Wallace,

AHCOM was a creditor of Nuttery Farms, Inc. (“NFI”)  NFI filed chapter 11.  The creditor ignored the bankruptcy and sued NFI’s shareholders in district court under an alter ego theory.  The district court dismissed the case saying that alter ego as alleged in the complaint was a “claim that harms not just Ahcom but all creditors and thus this claim is exclusively the property of the trustee.”

The 9th Circuit reversed.  “The trustee may assert only claims belonging to the debtor corporation and ‘has no standing generally to sue third parties on behalf of the estate's creditors.’”  “When the trustee does have standing to assert a debtor's claim, that standing is exclusive and divests all creditors of the power to bring the claim.”  But under California law, “a trustee ‘cannot maintain an action against defendants on an alter ego theory absent some allegation of injury to the corporation giving rise to a right of action in it against defendants,’ without which ‘the asserted cause of action belongs to each creditor individually, and [the trustee] is not the real party in interest.’”

The opinion explained that the Davey Roofing and Folks rulings that a trustee can seek to pierce the corporate veil where “all creditors are affected” are wrong.  “[We] conclude that California law does not recognize an alter ego 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.”    

October 25, 2010 in 9th Circuit Briefs | Permalink

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