Tuesday, December 6, 2005

Case Law Development: Should Piercing the Corporate Veil Theory be Applied to a Spouse's Separate Corporate Property?

The Idaho Supreme Court rejected a novel "piercing the corporate veil" theory that would allow a right of reimbursement to the community for the value of a spouse's separate corporate interest when that corporation was the "alter ego" of a spouse. 

The general rule in Idaho provides that property owned before marriage is separate property but that the marital community may be entitled to reimbursement is that separate property has been improved by the community effort.  However, if the separate property is a spouse's corporation, the Idaho court had recognized only two situations in which the right of reimbursement arises: "if the community was not adequately compensated for a spouse's labor devoted to the separate property corporation" or "if the separate property corporation unreasonably or fraudulently retained earnings instead of distributing profits as dividends."

Wife had argued that husband's corporation (a farming corporation formed one year before the marriage that had grown from a value of about $150,000 to over a million dollars) was the husband's alter ego and the property should be subject to the general rule of reimbursement.  The magistrate agreed, ordering Husband to reimburse the community $750,000 for the Husband's efforts that enhanced the value of the corporation.  The Supreme Court of Idaho reviewed cases from a number of other community property states accepting the theory of piercing the corporate veil in property distribution but declined to adopt the theory. 

Neibaur v. Neibaur, 2005 Ida. LEXIS 177  (December 2, 2005)
Opinion on the web at http://www.isc.idaho.gov/opinions/neibaur.pdf (last visited December 5, 2005 bgf)

http://lawprofessors.typepad.com/family_law/2005/12/case_law_develo_7.html

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