• Post-Judgment Implementation of the Alter Ego Doctrine
  • July 6, 2015 | Author: David S. Brown
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • Frequently, in the course of post-judgment collections, creditors run across debtors who operate closely held corporations or limited liability companies. While most of these entities sufficiently put assets out of the reach of creditors, some are clearly nothing more than sham businesses, created to defraud creditors. In these cases, the United States Court of Appeals for the Sixth Circuit has outlined an avenue of collection through the alter ego doctrine.

    As the Sixth Circuit points out "veil piercing and alter ego concepts are distinct." Fisher v. Slone, 296 Fed. Appx. 494 (6th Cir. 2008). The court reasoned that, "[t]he former asks a court to hold A vicariously liable for B's debts, while the latter asserts that A and B are the same entity and therefore liability is direct." Id. (citing IUAU Local 600 v. Aguirre, 410 F.3d 297, 302 (6th Cir. 2005)). The Sixth Circuit's holding has not been questioned and additional courts have followed suit, finding that Ohio law does recognize alter ego doctrine as distinct from veil piercing. See United States of America v. Toler, 666 F. Supp. 2d 872 (S.D. Ohio 2009); Slone v. Lorenz, Bankr. S.D. Ohio 09-31913, 2011 Bankr. LEXIS 738 (March 8, 2011); United States of America v. Parenteau, S.D. Ohio 2:08-cr-180(1), 2013 U.S. Dist. LEXIS 146160 (Oct. 2, 2013).

    Thus, "[i]n Ohio, courts may consider a number of nonexclusive factors in deciding whether to disregard the corporate fiction under the alter ego theory". Fisher supra at 506. Those factors include: "(1) grossly inadequate capitalization; (2) failure to observe corporate formalities; (3) insolvency of the debtor corporation at the time the debt is incurred; (4) shareholders holding themselves out as personally liable for certain corporate obligations; (5) diversion of funds or other property of the company property for personal use; (6) absence of corporate records; and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholders." Id. (citing Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 605 (6th Cir. 2005); Carter-Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745, 749 (6th Cir. 2001)).

    Unfortunately, there is no simple way to impose the alter ego doctrine on a debtor's business post-judgment. A motion filed in the underlying lawsuit will be insufficient because the business must be properly served and given the opportunity to defend itself - just like any other defendant.

    With this in mind, a creditor can file a complaint for declaratory judgment pursuant to R.C. § 2721.02(A). Specifically, R.C. § 2721.02(A) states:

    (A) Subject to division (B) of this section, courts of record may declare rights, status, and other legal relations whether or not further relief is or could be claimed. No action or proceeding is open to objection on the ground that a declaratory judgment or decree is prayed for under this chapter. The declaration may be either affirmative or negative in form and effect. The declaration has the effect of a final judgment or decree.

    R.C. Chapter 2721, Ohio's Declaratory Judgment Act, provides for a special statutory proceeding in which a court is empowered to issue a declaratory judgment when presented with an actual controversy. A controversy, for purposes of a declaratory action, occurs "when there is a genuine dispute between parties having adverse legal interests of sufficient immediacy and reality to warrant an issuance of a declaratory judgment". Mid-American Fire and Casualty Company v. Heasley, 11th Dist. No. 2004-L-115, 2005-Ohio-6072. Additionally, the controversy must be justiciable - it must be definite and concrete, touching the legal relation of parties having adverse legal interests - it must be a real and substantial controversy admitting of specific relief through a conclusive decree, as distinguished from an opinion advising what the law would be upon a hypothetical statement of facts. Owen v. Bennett, 11th Dist. No. 2005-L-194, 2006-Ohio-5170.

    Thus, a complaint for declaratory judgment requesting the imposition of the alter ego doctrine must allege that: (1) the creditor is requesting the trial court to determine the relationship between the debtor and his/her entity for the purpose of post-judgment collections; (2) the parties interests are adverse as a determination that the entity is the alter ego of the debtor would allow the creditor to execute against the assets of that entity; and (3) there is sufficient immediacy involved as the alter ego entity could liquidate or transfer its assets at any time.

    Once a court issues a declaratory judgment stating that the debtor's business is the alter ego of the debtor, that business's assets will be subject to execution to satisfy the original underlying judgment. While this is not a simple process, it is a roadmap that should be considered when dealing with sophisticated debtors.