Are You Ready for the Next Downturn? Reverse Veil Piercing May Be Used to Reach an LLC's Assets
"Piercing the corporate veil" typically occurs when a judgment creditor proves that the individual owner of a corporate judgment debtor is the alter ego of that entity, thereby allowing the creditor to pursue the individual's assets to satisfy the judgment. Some jurisdictions allow "reverse veil piercing," which is exactly the opposite: a creditor with a judgment against an individual proves the individual is the alter ego of a corporate entity he or she owns, thereby allowing the creditor to pursue the entity's assets to satisfy the judgment against the individual. In a 2008 case entitled Postal Instant Press, Inc. v. Kaswa Corporation, in a case of first impression, a California court determined that reverse veil piercing is not an available remedy for creditors in California.
Recently, in Curci Investments, LLC v. Baldwin, California's Fourth District Court of Appeals distinguished Postal Instant Press and found that reverse veil piercing is an available remedy in certain circumstances. The Curci court noted that Postal Instant Press involved a corporation with innocent shareholders, while the Curci case involved an LLC owned by the judgment debtor (Baldwin) and his wife, who was already statutorily liable for her husband's debts. The Curci court also gave weight to the fact that Baldwin had used his control of the LLC to prevent it from making cash distributions that might have been used to satisfy the judgment. Finally, the Curci court noted that a judgment creditor's legal remedies were much more limited with respect to an LLC interest than with respect to the shares of a corporation. Ultimately, while it expressly declined to articulate a specific standard to be applied to determine whether reverse veil piercing was an available remedy to meet "the ends of justice," the opinion suggests that key factors will be the absence of innocent interest holders, the individual's use of the entity to protect assets, the existence of traditional alter ego factors, and the absence of traditional legal remedies (e.g. conversion, fraudulent conveyance) to provide a speedy, adequate remedy.
Lenders should be aware of circumstances where reverse veil piercing may be available to satisfy a judgment against an individual, such as a guarantor who forms, owns and controls LLCs to protect his or her assets from collection.