Inside And Outside Reverse Veil Piercing
UCLA Professor Stephen Bainbridge has published several posts commenting on my post discussing Curci Invs. v. Baldwin, 2017 Cal. App. LEXIS 698. The issue in Curci was whether reverse veil piercing of a limited liability company is possible in light of Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal.App.4th 1510 (2008). The Court distinguished Postal Instant Press and found that reverse veil piercing was possible. For the sake of brevity, I described only the type of veil piercing at issue in Curci. However, Professor Bainbridge correctly notes that their are, in fact, two types of veil piercing:
As Todd Henderson and I [Professor Bainbridge] explained in our book Limited Liability: A Legal and Economic Analysis , there are two types of reverse veil piercing. One type might be called insider reverse veil piercing, in which a shareholder seeks to disregard the corporate entity.
The other is so-called outsider reverse piercing, in which a personal creditor of the shareholder seeks to disregard the corporation’s separate legal existence to reach assets of the corporation to satisfy its claim.
The Court of Appeal in Postal Instant Press described both inside and outside reverse veil piercing and concluded that the theory of outside reverse veil piercing suffers from a fatal hamartia:
While these cases treat such flaws and concerns as limitations on the application of the doctrine of outside reverse piercing, we conclude they reflect inherent and insurmountable flaws in the doctrine itself. These concerns arise precisely because standard alter ego and outside reverse piercing are actually different theories, justified by different reasons, and address different issues. To ameliorate the flaws in outside reverse piercing, courts recognizing the doctrine have imposed qualifications and requirements which, in their totality, essentially eliminate the outside reverse piercing doctrine as a practical matter. Indeed, if all the requirements of outside reverse piercing are met, its application would be unnecessary to protect the judgment creditor. Judgment collection procedures offer judgment creditors adequate protection in situations where outside reverse piercing would not harm innocent shareholders and creditors, legal remedies are inadequate, and the traditional requirements of proving alter ego are met. By levying on the debtor’s shares, the judgment creditor could place itself in the same position as the shareholder.
I’m guessing that Professor Bainbridge agrees.