When Sloppy Bookkeeping Becomes Alter Ego Liability: Community Property Meets Corporate Formalities
How commingling strengthens demand letters, marital fiduciary claims, and veil-piercing arguments in California family law
When a California spouse runs a business—whether as a sole proprietor, through a corporation, or via an LLC—the line between personal finances and business finances often blurs. Using the corporate credit card for family vacations, paying personal expenses through the company, or shuffling money between entities without documentation is commingling. In the right circumstances, it creates powerful leverage in demand letters and litigation by threatening two independent but overlapping consequences: marital fiduciary breach remedies and alter-ego/veil-piercing exposure.
Commingling is not just "messy bookkeeping"—it's evidence that supports multiple legal theories simultaneously:
| Type | What It Is | Legal Consequences | Example |
|---|---|---|---|
| Community Property Commingling | Mixing separate and community assets so characterization is unclear | • Destroys separate-property claims (presumption becomes community) • Triggers tracing analysis (Fam. Code § 2640) • May constitute § 1101 breach if done to hide community assets |
Spouse deposits inheritance (separate) into joint checking account with community funds, then uses blended account to buy stock in their business |
| Corporate Commingling | Mixing business and personal funds or treating corporate assets as personal property | • Evidence of "unity of interest" under alter-ego test • Undermines limited liability protection • Can support veil-piercing or reverse veil-piercing |
Spouse pays mortgage, car payments, family vacations with corporate credit card; no documentation as compensation or loans; corporate bank account used for personal expenses |
Courts emphasize that veil-piercing is exceptional and requires more than just commingling. However, the realistic threat in a demand letter is:
This creates settlement pressure independent of whether a court would ultimately pierce.
How California Family Code treats mixed separate/community assets, including:
California's two-prong test for veil-piercing:
How family courts use alter ego and reverse piercing:
How to credibly raise commingling/alter ego without overselling:
In California, all property acquired during marriage is presumed community property unless proven to be separate. When a spouse mixes separate and community funds—especially through a business entity—this presumption becomes a powerful tool for the non-managing spouse, and tracing failures can destroy separate-property claims.
Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.
This presumption applies to:
The spouse claiming an asset is separate property bears the burden of tracing and proving separate-property character. If tracing fails due to commingling, the asset is presumed community.
Benchguide 202: Property Characterization and Division
California Judicial Council guidance emphasizes that when separate and community funds are inextricably commingled such that tracing is impossible, courts presume the entire commingled mass is community property.
Example: Husband inherits $100K (separate) and deposits it into a joint checking account with $50K of community earnings. Over three years, numerous deposits and withdrawals occur with no clear records. Husband later claims business stock purchased from that account is separate property. Result: Tracing failure → presumption of community property applies → wife gets half.
In the division of community estate, a party is entitled to reimbursement for their separate property contributions to the acquisition of community property, unless:
To obtain reimbursement, the contributing spouse must trace their separate funds to the specific acquisition. Commingling makes tracing difficult or impossible, and poor record-keeping often defeats reimbursement claims.
When a spouse commingles separate funds into business accounts and cannot trace them to specific assets or transactions, they lose reimbursement rights and may be deemed to have made a gift to the community.
A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest is adversely affected.
If a spouse claims they "gifted" separate property to the community (or vice versa) to explain commingling, that transmutation is invalid without a signed written declaration. However, courts may infer a gift from conduct where:
When the managing spouse claims the business is "all mine—separate property," a demand letter can counter:
Spouses owe each other the highest good faith and fair dealing, and neither shall take unfair advantage of the other. This includes:
Courts have found § 721 breaches where the managing spouse:
When commingling rises to the level of a fiduciary breach that impairs the other spouse's community interest, § 1101 provides:
A demand letter can frame extensive commingling as evidence of § 1101 breach:
"Your commingling of community business funds with personal accounts, payment of family expenses through the corporation without disclosure, and failure to provide financial records constitute breaches of your fiduciary duties under Family Code § 721. If this pattern resulted in impairment of my community interest—which the evidence strongly suggests—I am entitled to remedies under § 1101 including 50%-100% of concealed assets plus mandatory attorney-fee awards."
California courts will disregard the corporate entity and treat the corporation and the individual (or multiple entities) as one when: (1) there is such a unity of interest and ownership that separate personalities no longer exist, and (2) treating them as separate would sanction fraud or promote injustice. Commingling is a central factor in proving unity of interest.
California Supreme Court — Foundational alter ego formulation
The Test: To disregard the corporate entity, plaintiff must show:
Key principle: Alter ego is an equitable remedy, not a separate cause of action. It allows a plaintiff who has a valid claim against an individual to reach corporate assets (or vice versa) by showing the corporate form was misused.
California Court of Appeal — Alter ego as last resort
Holding: Alter ego is a remedy of last resort. Mere ownership and control, even 100% ownership, is not enough. Courts require substantial evidence of misuse of the corporate form to achieve an inequitable result.
Practice tip: Don't over-plead alter ego. Focus on specific conduct (commingling, lack of formalities, undercapitalization, self-dealing) tied to harm, not just "he owns the company."
California Court of Appeal — Most comprehensive alter ego factor list
Background: Associated Vendors remains the most-cited case for the specific factors courts examine when determining whether unity of interest exists. While no single factor is dispositive, the presence of multiple factors strengthens the alter ego claim.
When drafting a demand letter raising alter ego based on commingling, focus on these Associated Vendors factors with specific examples:
Even if unity of interest is shown, courts require proof that recognizing the corporate entity as separate would sanction fraud or promote injustice. Examples include:
In marital disputes, the "inequitable result" is often:
Courts reject alter ego arguments when:
While alter ego is the doctrinal framework, veil piercing describes the remedy: allowing a claimant to pierce through the corporate entity to reach individual assets (regular piercing) or, less commonly, to reach into the entity to satisfy claims against the individual owner (reverse piercing). California family law increasingly uses both in marital dissolution and creditor cases.
CLA Family Law News, 2020
Core Principle: Family courts can apply alter ego doctrine to reach assets held in corporations, LLCs, or trusts when a spouse uses those entities to shield community property from division or to hide assets from disclosure.
Why family courts use piercing:
Result: If piercing succeeds, the court treats the corporate assets as the individual spouse's assets for purposes of property division, support calculations, and breach remedies.
Scenario: Husband owns 100% of "ABC Corp," formed during marriage. He pays himself a minimal salary ($50K/year) but uses corporate accounts to pay for $200K/year in family living expenses (mortgage, cars, vacations). Corporate records are nonexistent. Wife files for divorce.
Wife's strategy:
Likely result: Court finds unity of interest, treats ABC Corp assets as husband's assets, includes them in community estate division, and may award § 1101 penalties for breach.
Reverse veil piercing allows a creditor or claimant with a judgment against an individual to reach into the entity's assets to satisfy that claim. It's less common than regular piercing and subject to strict limitations, especially where there are innocent co-owners.
California Court of Appeal — Reverse piercing of Delaware LLC in California
Facts: Plaintiff obtained a judgment against husband and wife. They owned 99% and 1% of a Delaware LLC, respectively. Plaintiff sought to execute on LLC assets via reverse veil piercing.
Holding: California Code of Civil Procedure § 187 allows courts to use equitable remedies, including reverse veil piercing, to enforce judgments. The court applied alter ego principles and allowed reverse piercing because:
Significance: Curci confirmed that reverse piercing is available in California, particularly for LLCs, where ownership is highly concentrated and there are no innocent co-owners to protect.
California Court of Appeal — Limits on reverse piercing with innocent co-owners
Facts: Creditor sought to reverse-pierce an LLC to reach assets for judgment against individual member. LLC had multiple members, including an innocent spouse who was not liable for the debt.
Holding: Court of Appeal reversed trial court's grant of reverse piercing, emphasizing:
Practice tip: Reverse piercing works best in single-member or spousal-owned LLCs where both spouses are already liable for the underlying debt. It's much harder where third parties have interests in the entity.
Reverse piercing is realistic leverage in a demand letter when:
Don't threaten reverse piercing when: Multiple unrelated members exist, entity has legitimate business purpose, or alternative remedies (charging orders, foreclosure on membership interest) are available.
Delaware courts are generally more protective of the corporate form than California courts. Key principles:
When a California spouse owns a Delaware corporation or LLC, the internal-affairs doctrine means Delaware law governs corporate governance—including veil piercing. However:
| Situation | Regular Veil Piercing | Reverse Veil Piercing | Best Alternative |
|---|---|---|---|
| Spouse hides community assets in wholly-owned corp | ✓ Yes — Pierce to reach corporate assets for division | Not needed (regular piercing accomplishes goal) | § 1101 breach + alter ego |
| Spouse owes community debt; assets held in single-member LLC | Not applicable (claim is against individual, not entity) | ✓ Yes — Reverse pierce to reach LLC assets (Curci) | Reverse piercing + charging order |
| Multi-member LLC with innocent third parties | Possible if LLC itself has liability | ✗ No — Blizzard protects innocent members | Charging order; foreclosure on debtor's interest |
| Delaware corp with CA spouse; extensive commingling | Maybe — Must satisfy Delaware's higher standard | Rarely (DE is reluctant) | CA Family Code § 1101 + books-and-records demand |
The goal of a demand letter raising commingling and alter ego is not to win a veil-piercing trial in the letter itself, but to create settlement pressure by demonstrating that continued obstruction will result in expensive, fact-intensive litigation with serious downside risk for the managing spouse/entity. Here's how to do it credibly.
"You are using the corporation as your alter ego and commingling funds. This is fraud and I will pierce the corporate veil."
Why this fails:
"Between January 2022 and December 2023, you used [Company] business account ending in -7845 to pay the following personal expenses without documentation as compensation or loans: (1) family mortgage payments totaling $76,800; (2) lease payments on your personal Range Rover totaling $18,000; (3) a $15,000 family vacation to Maui charged June 2023; (4) monthly transfers to your personal checking account averaging $8,000. These patterns satisfy multiple Associated Vendors factors..."
Why this works:
"Your management of [Company] satisfies multiple factors identified in Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825 as indicative of unity of interest sufficient to support alter ego liability, including:
1. Commingling of funds (Factor 1): [Specific examples with dates and amounts]
2. Treatment of corporate assets as personal property (Factor 4): [Examples of personal use of company vehicles, real estate, credit cards]
3. Failure to maintain corporate records and minutes (Factor 7): [Note absence of board meetings, resolutions for major transactions]
4. Undercapitalization (Factor 10): [Describe minimal capital, systematic distributions leaving entity unable to meet obligations]
5. Disregard of corporate formalities (Factor 13): [Cite specific instances of acting without board approval, signing documents as individual rather than officer]
Under Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, this evidence establishes unity of interest. Combined with your use of [Company] to shield community assets from disclosure (satisfying the inequitable-result prong), this creates substantial risk of alter ego liability in any litigation."
The most effective demand letters in this space combine Family Code breach claims with alter ego arguments:
"Your conduct gives rise to overlapping liability theories:
1. Marital fiduciary breach (Fam. Code §§ 721, 1101): Your commingling of community business funds with personal accounts, payment of family expenses through the corporation without disclosure, and failure to provide financial records constitute breaches of your fiduciary duties as my spouse. Under § 1101, these breaches—if they resulted in impairment of my community interest—entitle me to at least 50% of any concealed assets plus mandatory attorney fees, and up to 100% if the breaches involved fraud, oppression, or malice.
2. Alter ego liability: The same conduct establishes that [Company] is your alter ego under Mesler and Associated Vendors. In any dissolution or enforcement proceeding, I will seek to pierce the corporate veil and treat [Company]'s assets as your personal assets for purposes of property division, support calculation, and execution on judgments.
Result: You face exposure under either theory, and the factual record for both theories overlaps. The prudent course is to provide full disclosure now, clean up corporate formalities going forward, and negotiate reasonable governance protections—rather than forcing expensive litigation where you face liability under multiple legal frameworks."
"Refusal to comply with these demands will result in: (1) enforcement proceedings under Family Code §§ 721, 1101 seeking 50%-100% remedies plus mandatory fee awards; (2) petition for books-and-records inspection under Corp. Code § 1601 [or DGCL § 220] with fee-shifting; (3) claims for alter ego liability seeking to disregard [Company]'s separate existence and treat its assets as yours for all purposes; and (4) discovery into all personal and business financial records, which will be far more intrusive and expensive than voluntary disclosure now."
"Litigation concerning these matters is reasonably foreseeable. You and [Company] are under a legal duty to preserve all documents, records, and electronically stored information related to:
Demand letters involving commingling and alter ego require both family law and corporate law expertise, careful factual development, and strategic judgment about which theories to emphasize. These services provide comprehensive drafting tailored to your specific situation.
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