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Loan Out Companies (Part II): Corporate Forms and the Alter Ego Doctrine
We wrote recently in Part I of this series about Mirage Entertainment, Inc. v. FEG ENTRETENIMIENTOS S.A., Case No. 18cv581 (US Dist. SDNY August 29, 2018). That case involved a cross-lawsuit and claims filed by Mariah Carey’s loan out company — Mirage Entertainment, Inc. — against two South American concert promoters. Mirage Entertainment signed three contracts with the promoters to have Carey give performances in Argentina and Chile. Carey owns and operates Mirage Entertainment as her loan out company.
Loan out companies are common in the entertainment industry and they are used for handling the details of contracting for performances by an artist, musician, or other performer. The artist/performer is employed by the loan out company and the company makes the contracts and arrangements and pays the performer a salary. One of the purposes of creating and using a loan out company is to protect the performer from personal liability if there is a contract dispute — or some other misfortune like an accident. The corporate form shields the personal assets of the performer since only corporate assets can be seized by creditors if there is a lawsuit and a judgment. If you want a loan out company created for you, a good San Diego corporate attorney can help.
However, for the corporate shield to be effective, the corporation must be properly created, organized, and maintained. The Mirage Entertainment case is interesting for its discussions of the corporate shield and how/when the corporate shield might be disregarded. Ms. Carey was sued by the concert promoters personally. However, all of the contracts at issue were signed by the company. Ms. Carey did not sign any of the contracts personally. Her lawyers asked the judge to dismiss her from the case because, under the law, generally you cannot be sued for breach of contract if you are not a signatory to the contract.
In response, the concert promoters claimed that the loan out company was a sham company, was fraudulent, and was created to commit fraud on Ms. Carey’s creditors. Under California law, if it can be shown that a corporation is not created and used properly and if the corporation is used to defraud creditors and to unjustly defeat the claims creditors, then the courts will disregard the corporation. This is generally known as the “alter ego” doctrine. If the courts apply the doctrine, then the creditors will be able to seize the personal assets of the owners of the company.
In the Mirage Entertainment case, the court evaluated two aspects of the alter ego doctrine – a shareholder’s “domination” of her corporation and whether the domination works to be a fraud on creditors. Basically, the “fraud” involves abusing the corporate form and some wrongful or unjust act. The court noted that Carey was Mirage’s Chief Executive Officer and sole shareholder. However, that was not sufficient since even if those two facts showed “domination,” more was needed. Among the facts that the court discussed were these:
- Did Carey fail to abide by corporate formalities such as shareholders meetings, keeping minutes, appointing directors, and more?
- Was there evidence that Carey comingled corporate and personal funds?
- Was there any self-dealing by Carey in her operation of the company?
- Was there something here more than a breach of contract?
Based on a review of the pleadings and papers filed by the lawyers, the court held that no facts had been alleged that would justify disregarding the corporate form. Carey personally was dismissed from the case. The court made it clear that just because an individual is the sole member, shareholder, or a controlling person in company does not, by itself, justify piercing the corporate veil even where the function of the company is to furnish the personal services of an artist like Carey. The law allows corporations to be created for these purposes and something egregious was needed before the court would label the company as a “sham.”
Contact San Diego Corporate Law Today
For more information about the alter ego doctrine and how to property set up and manage a California corporation or limited liability company, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services including formation of corporate entities of all types. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named “Best of the Bar” for four years running by the San Diego Business Journal. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters.
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