Court Confirms Application of "Alter Ego" Doctrine to Pierce the Veil of a Nonprofit Parent Corporation

Michael W. Peregrine, of McDermott Will & Emery LLP, writes in Health Lawyers Weekly (December 14, 2007), "The Return of Alter Ego": "In the recent decision, Network for Good v. United Way of the Bay Area, the San Francisco Superior Court applied the hoary legal concept of alter ego to allow a small charity to “pierce the corporate veil” of a United Way affiliate and attribute millions of dollars in liability to the larger parent organization. In so doing, the court confirms application of alter ego and related “ascending liability” theories to the nonprofit sector. It also raises a significant “yellow flag” to nonprofit organizations, including health systems, in their efforts to streamline system governance and management, and achieve system-based operating efficiencies. Indeed, some control practices utilized by nonprofit systems to achieve efficiencies through subsidiary operations may unintentionally expose the parent to greater liability based upon Network for Good-type facts. As such, the decision is a useful guide for nonprofit corporate counsel."

Peregrine continues: "The particular relevance of alter ego treatment, and of the Network for Good decision, lies in efforts by nonprofit organizations and systems (e.g., health systems) to transition from the traditional (but looser) holding company governance and management model, to the (tighter) corporate enterprise model. The attributes of the latter model include greater influence and (in some cases) outright control at the “top”/parent level over system assets, governance, management, and quality. Sometimes referred to as “systemness,” this model reflects the goal of acting more like a single integrated organization rather than as a collection of independent entities under common control."

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