One of the benefits of forming a corporate entity is that it shields the owner from liabilities of the company. Alter ego refers not to a cause of action, but generally to a liability doctrine where an owner of a company can be held responsible for certain debts of the company. In 1986, the Texas Supreme Court held in Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986), that the corporate fiction could be disregarded if the corporate form was used as a sham to perpetrate a fraud, and found that constructive fraud was sufficient to prove such a sham. Constructive fraud is not as stringent a standard compared to having to prove actual fraud. The Branscum Court held that actual fraud usually involves dishonesty of purpose or intent to deceive; while constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests. Branscum at 273. Shortly after the Branscum decision, the legislature amended Texas’ corporation statutes to provide a stricter standard for imposing owner liability for corporate debts in certain situations. Under the current statute, a corporate owner is not responsible for any contractual obligation of the corporation, or any matter relating to or arising from such obligation under any theory unless it is proved that owner caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the plaintiff primarily for the direct personal benefit of the owner. Tex. Bus. Orgs. Code § 21.223. However, this does not limit an owner’s liability when the owner expressly assumes, guarantees, or agrees to be personally liable for the obligation at issue, or some other statute provides for such liability. Id. § 21.225. The Branscum case and the current statute impose different standards for imposing owner liability. The statute amendments came after the Branscum opinion, but the statute indicates that it applies to “contractual obligations” and any matters relating to or arising from such obligations. Most courts that have examined this issue in depth, have determined that Branscum applies to tort only claims. AvenueOne Properties, Inc. v. KP5 Ltd. P'ship, 540 S.W.3d 643, 648 (Tex. App. 2018, no pet.); Bates Energy Oil & Gas v. Complete Oilfield Servs., 361 F. Supp. 3d 633, 664–66 (W.D. Tex. 2019).  But when the claim, regardless of being one of fraud, DTPA, or negligence arises from a contractual obligation it is subject to the statute. Menetti v. Chavers, 974 S.W.2d 168, 174 (Tex. App.–San Antonio 1998, no pet.).

Alter Ego

© 2020 Mark Courtois

© 2020 Funderburk Funderburk Courtois, LLP.   All rights reserved.

Unless otherwise noted, attorneys in the firm are not certified by the Texas Board of Legal Specialization.

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