Alter Ego in Texas

Texas courts previously provided plaintiffs a number of ways to hold owners of business entities liable through the use of “alter ego” or “veil piercing” methods.  Since the Castleberry decision in 1986, the Texas legislature has limited the abilities of plaintiffs to hold owners liable.  The Texas Business Organizations Code limits the liability of owners in several ways.  An owner cannot be held liable for any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.  However, the Texas Business Organizations Code Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate

Although the Texas legislature passed the provision discussed above to limit Castleberry, Texas courts have attempted to harmonize the two, leading to what can be a confusing state of the law.  Texas case law has held that to prove the actual fraud element, a plaintiff must prove “dishonesty of purpose or intent to deceive” in relation to the contract issue.  Additionally, case law states that a plaintiff must show that the holder, beneficial owner, subscriber, or affiliate received a direct personal benefit.  Courts have held that there are essentially three ways that the corporate veil may be pierced in Texas: (1) where the corporation is the alter ego of its owners/and/or shareholders; (2) actual or constructive fraud; or (3) the corporation is used as a sham to perpetrate a fraud.  However, in addition to proving one of the above, the plaintiff must also prove the actual fraud by “dishonesty of purpose or intent to deceive” and the direct personal benefit as discussed above.

Additionally, pursuant to the statute, an owner cannot be held liable for any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality, including the failure to comply with this code or the certificate of formation or bylaws of the corporation or observe any requirement prescribed by the Texas Business Organizations Code or the certificate of formation or bylaws of the corporation for acts to be taken by the corporation or its directors or shareholders.

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