By Michael P. Sampson (part 6 of 8)
Alter Ego Basis for Jurisdiction: Piercing the Corporate Veil
The two-step process for establishing long arm jurisdiction does not apply when a spouse is traveling under a different theory: the alter ego basis for jurisdiction. The spouse may allege the entity is the other spouse’s alter ego and good reasons support the Florida court’s piercing the corporate veil of the entity.
In a family court action, a court may pierce the corporate veil if a spouse can prove both that the entity is a “mere instrumentality” or alter ego of the other spouse and that the other spouse engaged in “improper conduct” in the formation or use of the entity.
A corporation is a separate legal entity, distinct from the persons comprising them. See Gasparini v. Pordomingo, 972 So. 2d 1053 (Fla. 3d DCA 2008); Am. States Ins. Co. v. Kelley, 446 So. 2d 1085 (Fla. 4th DCA 1984) Those who seek to pierce the corporate veil carry a heavy burden. Eagle v. Benefield-Chappell, Inc., 476 So. 2d 716 (Fla. 4th DCA 1985).
It’s not enough to establish alter-ego that companies use the same logo and intellectual property under a licensing agreement. See, e.g., Schumacher Group of Delaware, Inc. v. Dictan, Case No. 3D20-1571 (Fla. 3d DCA September 8, 2021). In Schumacher, a Delaware holding company wasn’t the alter ego of affiliated entities. The companies kept separate books and records. They had separate boards of directors. The holding company didn’t control the affiliates’ business operations. So…what facts establish a nonresident entity is the alter ego of a Florida resident?
When Have Courts Found Nonresident Alter Egos Are Subject to Florida’s Jurisdiction?
Florida courts have permitted a nonresident shareholder of a resident corporation to be subjected to jurisdiction, when the claimant alleges that basis and evidence establishes the nonresident entity has operated as the mere instrumentality (or “alter ego”) of the resident shareholder or entity and the other party engaged in improper conduct in the formation of the entity. See Bellairs v. Mohrmann, 716 So. 2d 320 (Fla. 2d DCA 1998); Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla.1984). See also Abdo v. Abdo, 263 So. 3d 141 (Fla. 2d DCA 2018) (trial court lacked personal jurisdiction over two business entities to whom siblings transferred websites, where plaintiffs failed to make any specific allegations the entities breached a fiduciary duty, aided and abetted such a breach, or conspired to facilitate one).
Sufficient Allegations Required to Pursue Piercing the Corporate Veil Under the Alter Ego Basis for Jurisdiction
To establish an alter ego basis for jurisdiction, a suing spouse must allege facts sufficient to “pierce the corporate veil” of the entity. See Parisi v. Quadri de Kingston, 314 So. 3d 656 (Fla. 3d DCA 2021).
In Parisi, in an ancillary probate action, the decedent’s sister and personal representative of her estate attempted to allege civil conspiracy by (i) an Argentine man, (ii) his alleged “alter-ego” Delaware limited liability company, and (iii) a Miami cohort. The PR alleged they conspired to steal her dying sister’s Miami Condo. The court discussed the requirements for specifically pleading alter-ego, then dismissed the PR’s complaint against the nonresident with leave to amend.
See also WH Smith, PLC v. Benages & Associates, Inc., 51 So. 3d 577 (Fla. 3d DCA 2010) (reversing denial of motion to dismiss because the plaintiff failed to establish personal jurisdiction under the alter ego theory); Woods v. Jorgensen, 522 So. 2d 935 (Fla. 1st DCA 1988). See also Hobbs v. Don Mealey Chevrolet, Inc., 642 So. 2d 1149 (Fla. 5th DCA 1994); Qualley v. International Air Serv. Co., 595 So. 2d 194 (Fla. 3d DCA 1992).
Elements for Piercing the Corporate Veil
To “pierce the corporate veil,” a spouse should specifically plead and must prove three factors:
(1) the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;
(2) the corporate form must have been used fraudulently or for an improper purpose; and
(3) the fraudulent or improper use of the corporate form caused injury to the claimant.
Extension of Alter-Ego Theory to Nonprofit Corporation
The alter ego theory has been extended to allow a trial court to inquire whether a non-profit corporation is the alter ego of a spouse in a dissolution proceeding to achieve equitable distribution. See Barineau v. Barineau, 662 So. 2d 1008 (Fla. 1st DCA 1995) (reversing final summary judgment entered for not-for-profit religious organization and remanding for determination of whether the corporation was engaged in improper conduct involving assets that a court could rightfully consider and account for in equitable distribution).
Consequences of Failing to Allege Sufficient Facts for Alter Ego: Dismissal of Entity
Absent necessary allegations by a spouse in a pleading attempting to bring in an entity on an alter-ego theory, the pleading may be dismissed. See In re: Big Foot Properties, Inc., Case No. 3:11-BK-6868-JAF, Adv. No. 3:12-ap-168-JAF (Bankr. M.D. Fla. 2012).
The alter-ego remedy is not available to a spouse who has not alleged and cannot establish that the other spouse used the corporate form to prevent execution on a liability that did not yet exist when the entity was used. Braswell. See also Noah Technologies, Inc. v. Rice, Case No. 2:14-cv-325-FtM-29DNF (M.D. Fla. November 18, 2014) (stating court was unaware of any cases applying the “reverse alter ego” theory to pierce corporate veil in jurisdictional contexts).
Joinder of an Entity “Inextricably Intertwined” with a Spouse
Distinct from alter-ego, in the divorce context, is joinder of a corporate entity inextricably intertwined” with a spouse. See Hoecker v. Hoecker, 426 So. 2d 1191 (Fla. 4th DCA 1983) (error to dismiss corporation from dissolution action, given husband’s testimony, “I’m the company,” and evidence of the parties’ conduct that demonstrated a blending of marital and business partnerships).
Likewise, in Rosenberg v. North American Biologicals, Inc., 413 So. 2d 435 (Fla. 3d DCA 1981), the husband’s intimacy with the defendant corporations made the wife’s actions against them inextricably woven into the dissolution proceeding. Accordingly, the trial court incorrectly found the wife had to bring and litigate her actions against the corporation, even if viable, in a separate lawsuit.
Outsider Reverse Corporate Piercing Theory
Another legal theory for joining a corporation, related to the alter ego theory, may apply. When a corporation’s controlling shareholder has formed or used an entity to defraud creditors, by evading liability for pre-existing obligations, a spouse may invoke the “outsider reverse corporate piercing theory.”
Under such circumstances, one spouse may seek to hold the entity liable for the debts of the other spouse who formed or used the entity to hide assets and avoid preexisting personal liability. See Braswell v. Ryan Investments, 989 So. 2d 38 (Fla. 3d DCA 2008) (denying reverse veil piercing because taking title to assets in corporate name preceded the former wife’s claims and former husband’s obligations); Estudios, Proyectos e Inversiones de Centro Am., S.A. (EPICA) v. Swiss Bank Corp. (Overseas) S.A., 507 So. 2d 1119 (Fla. 3d DCA 1987) (piercing the corporate veil on evidence that a corporation was formed to secrete the controlling shareholder’s personal assets and defraud his creditors).
Checklist for challenges to Alter Ego Allegations:
Has the pleading alleged the alter ego theory for jurisdiction over the entity?
- What allegations supporting piercing the corporate veil because the spouse is a “mere instrumentality” or alter ego of the entity?
- What dominance or control of the entity has the spouse exerted? Does such dominance or control reflect that the entity has no independent existence?
- What allegations have been made that the spouse engaged in improper conduct in the formation or use of the entity faced with preexisting obligations, such as a device to defraud creditors (including the other spouse) or to defeat equitable distribution of marital assets?
- Where is the entity’s principal place of business and what is its market?
- Does the entity own property, have a business agent or conduct business in Florida?
- How have the finances and business operations of the entity been kept independent from the affairs of the spouse who is the owner or control person?
- What separate management, bank accounts, observation of corporate formalities, and other facts support this independence?
- How are decisions made and by whom?