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California Court Green Lights Reverse Veil Piercing Of Delaware LLC

Courts historically have applied the alter ego doctrine to “pierce the corporate veil” so that a shareholder may be held liable for the debts or conduct of the corporation.  California has extended the possibility of alter ego liability to members of California limited liability companies:

A member of a limited liability company shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation; except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the limited liability company where the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers.

Cal. Corp. Code § 17703.04(b).

As the name suggests, reverse veil piercing occurs when a third party outsider is able to reach corporate assets to satisfy claims against an individual shareholder.  In an opinion filed yesterday, the Fourth District Court of Appeal held that reverse veil piercing may be applied to a Delaware limited liability company.  Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017).  This may come as a surprise to those familiar with the Fourth District Court of Appeal’s earlier opinion in Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008):

The reasoning of the cases adopting outside reverse piercing of the corporate veil is flawed, and we join other courts declining to accept it.  As we will explain, outside reverse piercing is not a logical extension of the standard alter ego doctrine but instead addresses significantly different concerns.  Outside reverse piercing can harm innocent shareholders and corporate creditors, and allow judgment creditors to bypass normal judgment collection procedures. Legal theories (such as agency or respondeat superior) and legal remedies (such as claims for conversion or fraudulent conveyance) adequately protect judgment creditors without the need to distort theories of corporate liability.

Id. at 1513.  Notwithstanding the above, the Court of Appeal found that Postal Instant Press was no bar to reverse veil piercing in Curci because Postal Instant Press involved a corporation, not a limited liability company.  Standing alone, that isn’t a terribly convincing distinction, however, in light of Corporations Code Section 17703.04(b).  Perhaps more convincing was the Court of Appeal’s finding that a creditor of an LLC does not have the same rights as against a shareholder of a corporation because a creditor of a member of an LLC may only obtain a charging order (Corp. Code § 17705.03).

What I find most curious, however, is the Court of Appeal’s assumption that Section 17705.03 could be applied to the LLC.  If one takes into account the defined terms used in the statute (member, transferee, transferable interest, and limited liability company), the statute can be read to apply only to California LLCs.  In fact, the statute nowhere mentions foreign LLCs.  As noted above, the case involved a creditor’s attempt to reach the assets of a Delaware LLC.  Underlying this is the question of when it comes to veil piercing and reverse veil piercing, what law applies – the jurisdiction of formation of the entity whose veil is being pierced or the forum jurisdiction?

Finally, under the category of “hopelessly confused”, I happened across the following description of Curci:

Reverse veil piercing may be available when the only shareholders of a limited liability corporation are both liable for a debt to a judgment creditor.

However, the case involved members of an LLC, not shareholders, and the entity was an LLC, not a limited liability corporation (whatever that might be).

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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