Intervening for Alter-Ego Liability

In Perez v. E-Smart Technologies, Inc. (U.S. District Court, N.D. California, Case No. C 14-00835 RS), Richard Barrett, a former COO of E-Smart, motioned the court to intervene and impose alter-ego liability on another officer. Prior to the motion, the plaintiff Secretary of Labor had issued final orders under the whistleblower protection provisions of the Sarbanes-Oxley Act (18 U.S.C. §1514) holding that E-Smart constructively discharged Barrett for raising complaints concerning the accuracy of E-Smart's public filings. Barrett sought to intervene to recover damages and costs against E-Smart’s control person, Mary Grace, who he claimed diverted E-smart funds for personal use. The court found that Barrett’s intervention motion satisfied the four-part test under Fed. R. Civ. P. 24 but did not determine the issue of alter-ego liability.

The court laid out three factors to determine whether to apply alter-ego liability: (1) the amount of respect given to the corporate identity by shareholders; (2) the degree of injustice in recognizing the corporate identity; and (3) the fraudulent intent of incorporators. Alter ego liability is imposed if the former and at least one of the two latter factors are present.

Although the record raised sufficient questions to grant the motion to intervene, the court did not rule on the substantive issue and continued the case.