How to Prove Liability to a Related Corporate Entity if There Is Intent to Defraud Customers

Is It Possible to Prove Liability to a Related Corporate Entity if There Is Intent to Defraud Customers?

Discovering fraudulent activities that involve multiple related companies can be alarming and complex. When such deceit affects customers, proving liability across corporate entities becomes a crucial yet challenging task. This post explores how victims and their legal representatives can navigate these waters and potentially hold related companies accountable.

Understanding Corporate Veil and Fraud

Typically, companies are treated as separate legal entities, a concept known as the “corporate veil.” This principle protects shareholders and affiliated companies from being liable for a company’s debts or liabilities. However, this protection can be pierced if a company is found to be a facade for fraudulent activities.

Legal Strategies to Connect and Hold Related Companies Accountable

1. Piercing the Corporate Veil: This legal action involves proving that the corporate structure was merely a facade for conducting fraud. If it can be demonstrated that the separation of entities was not maintained—through commingling of assets, identical boards directing both companies, or one acting under the complete control of the other—courts might allow creditors to go after the parent or sibling companies.

2. Constructive Fraud Claims: This involves proving that inter-company transactions were made without receiving adequate value in return, especially when such transactions happen at a time close to the debtor company’s insolvency. This is often used to challenge transactions meant to siphon assets to related entities.

3. Actual Fraud Claims: Demonstrating actual intent to defraud involves proving that transactions between related entities were made with the deliberate intent to deceive creditors or to avoid financial obligations. Evidence such as internal communications suggesting such intent can be pivotal.