Alter Ego Details

A corporation, or a company, is an organization that has one and only objective: to generate profit. Inside the corporation, there are many figures that keep the corporation alive, such as the shareholders. Shareholders inject money into the corporation, ensuring the corporation is operating at full efficiency, generates even more money, and brings the money back to the shareholders. However, true ownership of the company usually lies in the hands of its founder, or its biggest shareholder.

When a company can’t pay its debt, they file bankruptcy under different options. Whichever bankruptcy options the debtor (the bankrupt company) took, it’s not always beneficial for the creditor (a company or person that the debtor owed money to). If granted, the chapter 7 bankruptcy filing will grant a full discharge on the debtor’s debt after four months of the court process. The court will also prevent the creditor – who already lost a lot of money from the unpaid debt – from sending any kind of communication to the debtor.

Of course, this is an absolute loss for the creditor. To prevent the massive loss of unpaid debt, the creditor will file an appeal to address the debt to the person instead of the (bankrupt) company. The person is the most impactful person in the company, which usually is the company's founder or the company's biggest shareholder. That person is the alter ego of the company. By shifting the debts from the company to the alter ego, the creditor has a big chance that the court will enforce the alter ego to pay their debts to the creditor, instead of absolving it via the company’s bankruptcy filing.

Real World Example of Alter Ego

According to The Hollywood Reporter, Benaroya Pictures had a plan to create a movie titled “Wake,” where a sociopath tried everything he could to connect with his eccentric, forgotten family. They chose veteran actor Bruce Willis for the main role. When Benaroya Pictures offered him $8 million, Bruce Willis accepted the deal. Unfortunately, Benaroya Pictures didn’t secure enough funding and only paid Bruce Willis $3 million, resulting in a breach of contract between Benaroya Pictures and Bruce Willis.

To complete the contract as agreed, Willis wanted Benaroya Pictures to pay him an additional $5 million. So, Willis filed a demand for arbitration at Judicial Arbitration and Mediation Services (JAMS), saying that Benaroya Pictures breached the contract and committed fraud. Companies that are expecting financial trouble, often transfer their assets to company shareholders' personal accounts to avoid paying debts. Understanding this, Willis requested that the arbitrator declared Michael Benaroya (the company's owner) as the alter ego of Benaroya Pictures, which was fulfilled.

The arbitration went in Willis’s favor as he was already doing preparation and research for the film. However, both parties decided to appeal to Los Angeles Superior Court to settle the issue. Still, Willis’s argument was nullified when the Court decided that they should be the ones to determine whether Michael Benaroya was the alter ego of Benaroya Pictures, not the arbitrator. As a result, Bruce Willis’ demands were denied.