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'Personal' Alter Ego Claims in Bankruptcy

BY Thomas B. Walper, Mark Shinderman
August 01, 2003

With corporate fraud and bankruptcy filings on the rise, creditors are increasingly looking to related entities, corporate shareholders, directors and officers to pay their claims when the corporation goes belly-up. Unfortunately, bankruptcy courts have made it virtually impossible for creditors to maintain individual alter ego claims against the debtor's shareholders and affiliates. As a result, crafting an alter ego claim that will survive an attack by the bankruptcy trustee (or the bankruptcy court itself) requires finesse.

Test of Determination

The vast majority of courts agree on the test to employ in determining whether an individual creditor has standing to bring an alter ego action against the debtor's shareholders. If the injury alleged is “general” – that is, if the estate and its creditors are similarly injured – then the alter ego action is properly brought by the debtor-in-possession or the bankruptcy trustee. By contrast, if the injury is “personal” to a particular creditor, and no other creditor has been similarly injured, the alter ego action is properly brought by the individual creditor. Not surprisingly, many creditors have tried (and failed) to plead sufficiently personal injuries to wrest control of the alter ego action from the trustee. This begs the question: what type of injury is personal enough to confer standing on an individual creditor? The answer depends on three things: 1) the state law governing the alter ego claim; 2) the trustee's interest in the alter ego action; and 3) the equities of the case. If state law does not confer standing on the debtor to pierce its own corporate veil, then a creditor alter ego suit is permissible.

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