Asset Protection – Creditor Remedy: Alter Ego/Sole Purpose

Under the alter ego/sole purpose remedy, an entity is established to hold title to a debtor’s personal assets, which were transferred to the entity without a business purpose, as a means to shield the assets from creditors (In Re Turner, 335 B.R. 140 (N.D. Cal., 2005), modified 345 B.R. 674 (N.D. Cal. 2006).

The entity is the “alter ego” of the debtor and the creditor is not limited to the charging order, but may be able to disregard the entity to prevent an injustice from occurring. In cases where the courts determined the entity was the debtor’s alter ego, the following facts were found to be determinative:

1. The debtor, not the shareholder, was in control of the entity;
2. The debtor paid his expenses (and wife/children’s expenses) directly from the entity;
3. There was poor recordkeeping, missing company documents;
4. The entity’s assets came from fraudulent transfers; and
5. The entity did not have a business purpose (i.e. fulfilled an economic venture) but was established to “hide” personal assets.

The case law for alter ego/sole purpose creditor remedy focuses on corporate entities but the same legal reasons, i.e., to prevent an injustice from occurring may justify this creditor remedy for an LLC and pre-empt charging order limitations on creditor recovery.

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