The Alter Ego Doctrine Yields Conflict of Interest

American journalist Ambrose Bierce defined a corporation in his The Devil's Dictionary as "an ingenious device for obtaining individual profit without individual responsibility".  The alter ego doctrine is one tool that the courts use to address a perceived want of individual responsibility on the part of a corporate owner.

In most cases, creditors try to use the doctrine to reach past the corporation and into the pockets of its owner.  The alter ego doctrine, however, has its roots in equity and it must be used to prevent an inequitable result.  This was illustrated by the Court of Appeal's holding in Hub City Waste Services, Inc. v. City of Comption, (July 19, 2010).  In that case, the City of Compton sought termination of a solid waste collection franchise granted to HUB, a company organized by Michael Aloyan who served as its sole shareholder, officer and director.   Although Mr. Aloyan was not a city employee, he had advised the city (through another company) pursuant to a management agreement.   The city argued that the franchise violated Cal. Govt. Code § 1090 which prohibits city officials, among others, from having a financial interest in any contract made in their official capacity.  The trial court found, and the Court of Appeal agreed, that Mr. Aloyan was HUB's alter ego.  Thus, Mr. Aloyan had a personal financial stake in the franchise agreement.

The Court of Appeal's opinion also contains a cautionary note for attorneys.  In discussing whether Mr. Aloyan was a city official, the court noted that Section 1090 has been applied to attorneys who render professional services to a city even though they may have common law status as an independent contractor.  See People v. Gnass, 101 Cal. App. 4th 1271 (2002), Campagna v. City of Sanger, 42 Cal. App. 4th 533 (1996), and Schaefer v. Berinstein, 140 Cal. App. 2d 278 (1956).