Court Holds Law Firm May Be Alter-Ego of Defunct Company

In October 2018, a jury in a federal district court in North Carolina granted a judgment in excess of $30 million against Covil Corporation, a company that formerly manufactured products containing asbestos but has been defunct since 1993. By the time the North Carolina litigation commenced, Covil had no officers, directors, agents, or employees. As a result, the litigation was directed by Covil’s insurers. After the jury verdict was handed down, a receiver for Covil was appointed in South Carolina.

In an effort to collect the judgment, the plaintiffs from the North Carolina litigation filed suit in South Carolina state court against Covil’s insurers and the law firm that represented Covil in the North Carolina litigation. The defendants removed the case to federal court, and the plaintiffs filed a motion to remand for lack of diversity jurisdiction. The plaintiffs contended that because the law firm was based in South Carolina, there was no complete diversity and the federal court therefore lacked subject matter jurisdiction.

The defendants contended that the law firm was fraudulently joined as a defendant in order to circumvent diversity jurisdiction. In their complaint, the plaintiffs alleged that the law firm—acting together with the insurers—was the alter ego of Covil during the North Carolina litigation in that they totally dominated and controlled Covil. The defendants argued that the insurers, not the law firm, controlled Covil during the litigation; moreover, the law firm had nothing to do with Covil during the time period when the plaintiffs’ injuries occurred.

The court disagreed. The court ruled that defendants were required to show that there was no possibility that the plaintiffs could establish a cause of action against the law firm—not even a glimmer of hope. The court reasoned that alter ego theory allows for the possibility that multiple entities act in concert as a company’s alter ego, so the insurers’ control over Covil did not mean the law firm did not also control Covil. The court admitted that the plaintiffs’ theory was novel, but the defendants had not offered any controlling law showing a requirement that the law firm be an officer, director, employee, or shareholder of Covil for the alter ego theory to apply. Thus, there was at least a “glimmer of hope” that the plaintiffs’ theory could succeed, and therefore the law firm was not fraudulently joined and the court lacked subject matter jurisdiction.

Finch v. United States Fid. & Guar. Co., No. 3:19-cv-01827, 2020 U.S. Dist. LEXIS 98307 (D.S.C. June 4, 2020)