Reverse Veil Piercing Is Alive and Well in California

• Publication year: 2018
• Author: Philip J. Bonoli, Esq.

Reverse Veil Piercing Is Alive and Well in California

Philip J. Bonoli, Esq.

Philip Bonoli, Partner at Brutzkus Gubner, counsels his employer clients on all types of employment matters, including severance and employment agreements, government investigations and workplace policies. Additionally, Philip has significant experience with complex litigation and commercial disputes, and has represented businesses in corporate ownership disputes and litigation.

Of all the decisions rendered by courts throughout California and of all the major legislation passed in the state of California over the past year, one case that received little attention but packed a punch in terms of precedential value was Curci Investments, LLC v. Baldwin, 14 Cal. App. 5th 214 (2017). This decision, which resurrected the reverse veil piercing doctrine in California, is a game-changer in the corporate world by allowing third-party creditors to pierce the corporate veil to reach a limited liability company's assets to satisfy the debts, obligations, and liabilities of the limited liability company's members/managers. Reverse veil piercing, which may not be as sexy or mainstream as several other headline-grabbing cases and issues, was left for dead in 2008, but has gained new life following the Curci decision.

Reverse veil piercing was, for all intents and purposes, on life support in California following a California Court of Appeal's decision in Postal Instant Press, Inc. v. Kaswa Corporation, 162 Cal. App. 4th 1510 (2008) which found that, in California, a third-party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder's personal liability. Traditionally, a corporation or limited liability company has been organized to shield and protect the personal assets of its owners, shareholders, or members/ managers from the company's debts and liabilities. A primary purpose of a corporation or a limited liability company is to protect the personal assets of its owners.

The alter ego doctrine was created to allow creditors and other claimants to "pierce the corporate veil" of sham business entities that were improperly maintained. The alter ego doctrine allows creditors and claimants, under certain circumstances, to go after the personal assets of the business entity's owners to satisfy the entity's debts and liabilities. If the creditors and other claimants establish that there is such a "unity of interest and ownership" between the corporate entity and its shareholders that the identity of the corporate entity and its shareholders is no longer separate and that preserving the corporate entity would cause an inequitable result, California courts generally allow the creditors and claimants to pierce the corporate veil and seek the personal assets of the corporate entity's owners to satisfy the corporate entity's debts and obligations. However, if the corporate entity's owners have followed corporate procedures and protocol to maintain its separateness (i.e., observing corporate formalities, maintaining and preserving minute books, maintaining adequate financial reserves, maintaining separate financial accounts), then creditors and claimants would have a difficult time establishing and relying upon the alter ego doctrine to satisfy the corporate entity's debts and obligations.

Because the alter ego doctrine deals with equitable principles, courts have analyzed whether the alter ego doctrine could be applied in a non-traditional way— whether creditors and other claimants may seek the assets of a corporate entity to satisfy the debts of the corporate entity's owners. This has become known as reverse veil piercing, and is very similar to the traditional veil piercing doctrine. Just like traditional veil piercing, reverse veil piercing, is an equitable remedy and allows a court to disregard the separation between a business entity and an individual. However, unlike traditional veil piercing, reverse veil piercing differs in that creditors and other claimants are seeking to satisfy the debts of an individual through the assets of a corporate entity of which the individual is an owner.

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Reverse veil piercing is not a novel doctrine. Shortly after the turn of the century, the Honorable Learned Hand, sitting on the Second Circuit Court of Appeals, wrote an opinion in Kingston Dry Dock Co. v Lake Champlain Transp. Co., 31 F.2d 265 (2d. Cir. 1929), that cultivated the idea of reverse veil piercing. In that case, plaintiff Kingston Dry Dock Company had constructed two canal boats for defendant Lake Champlain Transportation Company, which was a conditional buyer. Plaintiff showed that it made repairs to one of the boats at the request of an individual who was the manager of another company, the Inland Marine Corporation, but this charge was never paid. This individual was also a director of defendant. The contract at issue, however, reserved title to the seller until the seller received final payment. Defendant took possession of the boats but did not make final payment. Plaintiff levied on the two boats. The defendant did not make payment at the time of the attachment, but sought to vacate the writ of attachment. The district court held that the attachment was valid and declined to vacate the attachment. Judge Hand, writing for the Second Circuit, recognized the possibility that a parent corporation may be liable for the acts of its subsidiary corporation: "Liability normally must depend upon the parent's direct intervention in the transaction, ignoring the subsidiary's paraphernalia of incorporation, directors and officers."¹The Second Circuit, however, acknowledged that "such instances, if possible at all, must be extremely rare."²Thus, the idea of...