Alter-Ego Theory of Recovery - What is it and When is it Effective?

In a case out of Oakland County, Elkins v Benner, (Docket Nos. 331701, 332664 & 333114), the plaintiff Elkins argued the alter-ego rule to make the defendant Nancy Benner, spouse, responsible for her ex-husband/disbarred attorneys’ failure to pay the agreed upon referral fee. The defendant filed a motion for summary disposition. In addition to opposing defendant’s motion for summary disposition, plaintiff filed a motion to amend his complaint to add or clarify claims and to impose a constructive trust on the proceeds of the sale of the defendant’s home. The Michigan Court of Appeals disagreed with the alter-ego argument but upheld the arguments on conversion and the Uniform Fraudulent Transfer Act.

Facts: Plaintiff-Elkins, an attorney, alleges that defendant-Nancy’s former husband, Brian Benner, failed to pay a referral fee ($169,000) for a client that Elkins referred to Benner. Elkins’ theory was that Benner misappropriated client funds, including funds for the attorney referral fee that Benner owed plaintiff, and that defendant-Nancy acted in concert with Benner to defraud Elkins through a sham divorce and property settlement, and that she was unjustly enriched by Benner’s misdeeds.

The Alter-Ego Rule

Elkin’s complaint alleges that defendant-Nancy acted as Benner’s alter ego to misappropriate client funds and shield those funds from creditors, and therefore, defendant could be held personally liable for the attorney referral fee that Benner agreed to pay plaintiff. The trial court agreed with her that Elkins failed to state a “claim for alter ego because there’s no corporate entity involved.”

The trial court refused to allow plaintiff to amend his complaint to further clarify this claim because “there is no such thing as alter ego, and you don’t plead any specificity as to that anyways, as to the fraud you allege.” We agree with the trial court that there is no basis in this situation for applying the alter-ego rule to allow the imposition of liability on defendant for Benner’s alleged misdeeds.

The alter-ego theory allows a court to disregard a corporate entity in order to impose liability on a person or a subservient corporation for the corporation’s misdeeds. The theory allows a defendant who is the victim of fraud, illegality or injustice to pierce the corporate veil to seek justice.

In this case, Elkins argues that the rule can be extended to individuals. The lower court disagreed saying a spousal relationship is not enough to hold one spouse liable for the illegal acts of the other. There must be evidence of some legal relationship besides the marriage for the rule to apply. The MCOA agreed and affirmed the lower court’s denial of the Alter-ego claim.

Conversion

Plaintiff Elkins argued that he had a claim for statutory conversion (MCL600.2919a) because he had an intangible property right to the referral fee, which Benner converted and defendant Nancy aided that conversion.

First, the court looked to the Rules of Professional Conduct for guidance, concluding the rules and case law support the reasoning that an action for conversion can be brought where one attorney fails to turn over another attorney’s referral fee. Second, although Benner can be held liable for converting the alleged referral fee, can Elkin’s show a legal basis for imposing liability on Nancy, Benner’s ex-wife?

The statute does allow liability be placed on a party who knowingly receives converted property. The MCOA stated that Elkins alleged enough facts to argue that Nancy knew and participated in a scheme to convert client funds for personal use, therefore the matter was remanded for further proceedings

The Uniform Fraudulent Transfer Act

The trial court also denied plaintiff’s motion to amend his complaint to add a claim under the UFTA. Plaintiff’s proposed amended complaint alleged that defendant and Benner conspired to use their divorce property settlement to facilitate the transfer of property from Benner to defendant to shield the property from Benner’s creditors, including plaintiff. The trial court erred in ruling that plaintiff was precluded from challenging the property settlement as an improper transfer of marital assets under the UFTA because such a challenge amounted to an improper collateral attack on the divorce judgment. While defendant argues that the property transferred to her through the divorce is property held as tenants by the entirety, and therefore, cannot be the subject of any claim under the UFTA, the status of the property was not addressed or decided below and cannot be ascertained on the basis of the current record. Thus, the MCOA reasoned that it was not apparent that any amendment to add a claim under the UFTA would be clearly futile. The trial court did not identify any basis other than futility to deny plaintiff’s motion to amend. Because the record fails to demonstrate that a claim under the UFTA would be futile, the MCOA reversed the trial court’s order denying plaintiff’s motion to amend his complaint to add a claim under the UFTA.

Conclusion: The MCOA affirmed in part and reversed in part the trial court’s order granting defendant’s motion for summary disposition and denying plaintiff’s motion to amend his complaint, vacated the trial court’s orders granting defendant’s motion for sanctions and denied plaintiff’s motion for sanctions, and remanded for further proceedings.