Opinion ID: 6177
Heading Depth: 2
Heading Rank: 2

Heading: Texas Law Regarding the Alter Ego Theory

Text: 8 The fundamental concept of corporate law is that the corporation is a wholly separate, legal entity. As such, the corporation, and not its shareholders, is liable for its own debts and torts. Krivo Indus. Supply Co. v. National Distillers and Chem. Corp., 483 F.2d 1098, 1102-03 (5th Cir.1973). Nonetheless, under Texas law, courts do not hesitate to ignore the corporate form when it has been used as part of a basically unfair device to achieve an inequitable result. Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex.1986). In the landmark Castleberry case, the Texas Supreme Court listed six situations in which Texas courts may pierce the corporate veil: 9 (1) when the fiction is used as a means of perpetrating a fraud; 10 (2) where a corporation is organized and operated as a mere tool or business conduit of another corporation; 11 (3) where the corporate fiction is resorted to as a means of evading an existing legal obligation; 12 (4) where the corporate fiction is employed to achieve or perpetrate monopoly; 13 (5) where the corporate fiction is used to circumvent a statute; and 14 (6) where the corporate fiction is relied upon as a protection of crime or to justify wrong. 15 Castleberry, 721 S.W.2d at 272. 16 To better understand Castleberry, 2 we have interpreted the case as establishing three broad categories in which a court may pierce a corporate veil: (1) the corporation is the alter ego of its owners and/or shareholders; (2) the corporation is used for illegal purposes; and (3) the corporation is used as a sham to perpetrate a fraud. Villar v. Crowley Maritime Corp., 990 F.2d 1489, 1496 (5th Cir.1993); Fidelity & Deposit Co. v. Commercial Casualty Consultants, Inc., 976 F.2d 272, 274-75 (5th Cir.1992). Thus, alter ego is but one of several methods for piercing the corporate veil. The Castleberry court defined alter ego as when a corporation is organized and operated as a mere tool or business conduit of another corporation. Castleberry, 721 S.W.2d at 272; see also Harrell v. DCS Equip. Leasing Corp., 951 F.2d 1453, 1458-59 (5th Cir.1992); Pan Eastern Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1130-33 (5th Cir.1988). The Castleberry court further established that alter ego is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes. Id. 17 The Castleberry decision significantly curtailed shareholders' rights relative to common law corporate disregard theory. In response, 3 the Texas legislature amended its Business Corporation Act in 1989 to read, in part: 18 A. A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted shall be under no obligation to the corporation or to its obligees with respect to: 19