Reverse Piercing

• Publication year: 2002
• Pages: 109
• Citation: Vol. 31 No. 7 Pg. 109

31 Colo.Law. 109 Colorado Lawyer 2002.

2002, July, Pg. 109. Reverse Piercing

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109

Vol. 31, No. 7, Pg. 109

The Colorado Lawyer
July 2002
Vol. 31, No. 7 [Page 109]

Specialty Law Columns
The Civil Litigator
Reverse Piercing
by Jeffrey Klaus

The Civil Litigator column addresses issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year

Column Editor

Richard L. Gabriel of Holme Roberts & Owen llp, Denver - (303) 861-7000

About The Author

This month's article was written by Jeffrey B. Klaus, Denver, a shareholder of Deisch, Marion & Klaus, P.C. - (303) 837-1122, jbk@deisch-marion.com.

This article discusses the split of Colorado authority regarding the doctrine of reverse piercing, which involves holding a corporation liable for the acts of its shareholders or officers.

Recently, it has become commonplace to observe hip Gen-Xers adorned with all manner of body piercings; it appears to be the height of fashion to pierce one's eyebrow, navel, or even tongue. However, for most attorneys, piercing the corporate veil of an entity found to be the alter ego of one of its principals is usually the only kind of piercing in which they are interested.

This article introduces and considers the prospect of "reverse piercing" - that is, piercing the corporate veil and holding a corporation responsible for the liabilities of a shareholder or officer. This novel approach of considering the "alter ego" theory may help spice up any lawyer's repertoire without endangering delicate body parts.

Overview of Alter Ego Doctrine and Piercing
The Corporate Veil

The alter ego theory is an equitable doctrine intended to prevent injustice and fraud.1 Because the application of an equitable doctrine depends on individual factual circumstances, the factual background of each case is important to any analysis of the underlying equitable principle. Individuals ordinarily form corporations to shield their personal assets from the risks and liabilities of the business ventures engaged in by such corporations. The equitable doctrine of alter ego, often referred to as "piercing the corporate veil," is intended to prevent fraud and injustice resulting from the improper use of the corporate shield. The alter ego doctrine is triggered, and the corporate veil pierced, in cases where a corporate entity is "used to defeat public convenience, or to justify or protect wrong, fraud, or crime...."2

To invoke the alter ego doctrine, the proponent must prove that the shareholders' "disregard of the corporate entity made it a mere instrumentality for the transaction of their own personal affairs."3 Further, there must be "such a unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist; and to adhere to the doctrine of corporate entity would promote injustice or protect fraud."4

When it is established that the alter ego doctrine applies, a court will disregard the corporate form by piercing the corporate veil and considering the actions taken by the corporation to have been taken by its principals. Thus, the alter ego doctrine is a means by which creditors may hold stockholders personally liable for corporate obligations. This broad equitable purpose permits courts to apply the alter ego doctrine with flexibility in circumstances where justice requires that the substance of a relationship take precedence over the form of a corporate entity.

Overview of Reverse Piercing

Reverse piercing occurs when, through a legal action, assets of the corporate entity are reached to satisfy the obligations of a controlling alter ego.5 The alter ego may be a corporate shareholder or officer. Although several jurisdictions have expressly recognized the theory of reverse piercing, only a handful of Colorado cases address the issue These cases appear to be divided into two categories: (1) cases that permitted the application of corporate piercing in reverse, either expressly or by implication; and (2) cases...