An important decision affecting businesses and business law in California came out of the Ninth U.S. Circuit Court of Appeals yesterday. The court rejected arguments that a corporation’s creditors should be prevented from suing shareholders in California state court under an “alter ego” theory if the company is going through bankruptcy.

This Ninth Circuit decision came about because of a ruling made by a federal judge based in San Francisco recently; saying the creditor of a small Northern California farm going through Chapter 11 did not have the option of bringing an alter ego claim against the owners of the farm. The federal judge claimed that only trustees – not creditors – were afforded the opportunity to make such a claim without having the claim constitute an attempt to pierce the corporate veil.

The appellate panel of judges took exception, noting that state law supersedes federal judgment on this issue. The panel stated that California law does not recognize any such alter ego or similar claims that, for the purpose of collecting on the full scope of a corporation’s debt, would allow a corporation or its shareholders to be viewed as true, complete alter egos for those actually at the helm. The panel said that because of the limited scope of what California law states could be attained from the farm owners, there was no reason why their creditor couldn’t sue them in attempt to collect for breach of contract.

The case discussed above is Ahcom, Ltd. v. Smeding, 09-16020.

Source: Metropolitan News-Enterprise “Court Allows Creditors to Pursue Bankrupt’s Shareholders” by Steven M. Ellis 10/22/10