Presenting a live 90 ‐ minute webinar with interactive Q&A Leveraging Substantive Consolidation, Piercing the Veil and Alter Ego in Bankruptcy Proceedings h V il d Al E i B k P di Maximizing Creditor Recovery From or Asset Protection for Debtor's Shareholders and Related Entities WEDNES DAY, JULY 10, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Kavita Gupta, Partner, Gupta Ferrer , Newport Beach, Calif. Teddy M. Kapur, Pachulski Stang Ziehl & Jones , Los Angeles Kathlene Burke, Kathlene Burke , New Y Kathlene Burke, Kathlene Burke , New Y ork ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Leveraging Substantive Consolidation, Piercing the Veil and Alter Ego in Bankruptcy Proceedings Maximizing Creditor Recovery From or Asset Protection Maximizing Creditor Recovery From or Asset Protection for Debtor’s Shareholders and Related Entities Kavita Gupta, Gupta Ferrer LLP , Newport Beach, California Teddy M. Kapur, Pachulski Stang Ziehl & Jones LLP , Los Angeles, California Kathlene M. Burke, Restructuring Attorney , New York, New York
O tli Outline Alter Ego / Corporate Veil Piercing Alter Ego / Corporate Veil Piercing Theory Factors Reverse Veil Piercing Pursuing Shareholders Under Alter Ego / Corporate Veil Pursuing Shareholders Under Alter Ego / Corporate Veil Piercing Theories Creation of the Bankruptcy Estate The Automatic Stay Injunction Standing g Issues to Consider Substantive Consolidation Theory and Authority of the Court Effects of Consolidation Factors Considered and Methodologies Employed by Courts Best Practices for Debtors and Creditors Substantive Consolidation v. Alter Ego / Corporate Veil Piercing 6
T dd M K Teddy M. Kapur Pachulski Stang Ziehl & Jones LLP Los Angeles, California tkapur@pszjlaw.com (310) 277-6910 (310) 277 6910 7
Alter Ego / Corporate Veil Alter Ego / Corporate Veil Piercing 8
D Doctrine of Limited Liability t i f Li it d Li bilit Generally a corporation’s shareholders officers directors and shareholders, officers, directors and employees are not personally liable for actions taken on behalf of the corporation. corporation. 9
Alter Ego / Corporate Veil Piercing Alt E / C t V il Pi i Courts may pierce the corporate veil of limited C t i th t il f li it d liability and disregard the corporate form to hold shareholders, officers and directors individually liable if they abuse the corporate privilege liable if they abuse the corporate privilege. “The purpose of alter ego liability and piercing the corporate veil is to prevent an independent t il i t t i d d t corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law ” Bd of Trs v or otherwise to evade the law. Bd. of Trs. v. Foodtown, Inc., 296 F .3d 164, 171 (3d Cir. 2002) (citations omitted). 10
Alter Ego / Corporate Veil Piercing Alt E / C t V il Pi i Delaware: (1) companies operated as a single Delaware: (1) companies operated as a single economic unit; and (2) the presence of an overall element of injustice or unfairness. In re Autobacs Strauss, Inc. , 473 B.R. 525, 555 (Bankr. D. Del. , , , ( 2012). California: (1) there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased, and (2) an adherence to the fiction of the separate existence of the corporation would sanction a fraud or promote of the corporation would sanction a fraud or promote injustice. SEC v. Hickey , 322 F .3d 1123, 1128 (9th Cir. 2003). 11
Alt Alter Ego Factors E F t Courts will evaluate a number of C t ill l t b f factors to determine whether an alter ego relationship exists alter ego relationship exists. Fact-driven inquiry. The factors are Fact driven inquiry. The factors are not exclusive or exhaustive, and courts consider the totality of the circumstances. i 12
Alt Alter Ego Factors E F t 1. Subsidiary was undercapitalized. Undercapitalization / unreasonably small a) capital is conceptually distinct from capital is conceptually distinct from insolvency. An entity has unreasonably small capital b) if it cannot generate enough cash flow to sustain operations standing alone. Courts consider whether the entity had Courts consider whether the entity had c) c) access to capital markets in order to raise money. 13
Alt Alter Ego Factors E F t 2. Subsidiary was insolvent. Per § 101(32), a corporation is “insolvent” a) when it’s in a “financial condition such that when it s in a financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation ” valuation . . . . “Fair valuation” - uses “a going concern b) basis unless the business is wholly inoperative, defunct, or dead on its feet or i ti d f t d d it f t if liquidation in bankruptcy was clearly imminent on the transfer date.” Autobacs , 473 B.R. at 553 (citations omitted). 3 3 ( i i i d) 14
Alt Alter Ego Factors E F t 3. Companies failed to observe f corporate formalities. Did the entity keep corporate records, Did th tit k t d a) have properly functioning officers and directors, and observe other corporate , p formalities? Did the entity have formal board b) meetings and minutes? Were d ? corporate actions authorized by written consent without meeting? written consent without meeting? 15
Alt Alter Ego Factors E F t 4. Subsidiary did not pay dividends to the parent. 5. A siphoning of the subsidiary’s h f h b d ’ funds by the dominant stockholder. I Improper taking of funds that the t ki f f d th t th a) owner was not legally entitled to receive. 6. Absence of corporate records. 16
Alt Alter Ego Factors E F t 7. Corporation was merely a façade f for the operations of the dominant stockholder stockholder. Courts infer a façade when a parent a) corporation exercises significant control p g over a subsidiary’s operations and finances. Commingled assets and operations Commingled assets and operations - use use b) b) of common employees, bank accounts, and facilities without arm’s-length transactions. i 17
F Fraud, Injustice or Unfairness d I j ti U f i Pierce veil to avoid an inequitable result. Pi il t id i it bl lt Conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form. Some courts focus on whether corporation’s very purpose is to defraud an innocent party. Others focus less on bad faith of alleged alter ego, and more on whether result would be unjust if veil is not pierced. p 18
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