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By: Kristin A. Ingulsrud
California’s Fourth Appellate District has determined that “outside reverse veil piercing” may be a means of reaching a Limited Liability Company’s assets. In Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, the court held that a Delaware LLC could be liable for a judgment against the 99% owner of the LLC.
A corporation or LLC is considered a separate legal entity, distinct from its officers, directors, stockholders, or members. A fundamental benefit to forming a corporation or LLC is shielding the personal assets of the individuals from liability for the debts or actions of the company. However, where the corporate form is misused, a court may “pierce the corporate veil” and hold the individual liable for the actions of the company.
Conversely, reverse veil piercing occurs when a business entity is held liable for the debt of an individual. Outside reverse veil piercing refers to a request from an outside third party to satisfy the debt of an individual through the assets of a business entity of which the individual is an insider.
California courts apply two general requirements when deciding whether to disregard a corporate entity: “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.
Up until now, California courts have not been receptive to outside reverse veil piercing. In Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, the court held that a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability.
Postal Instant Press remained the reigning authority on outside reverse veil piercing in California until the issue was revisited in Curci Investments, LLC v. Baldwin. Curci obtained a $7.2 million judgment against Baldwin personally. Curci motioned the court to add one of Baldwin’s investment LLCs, “JPBI”, as a judgment debtor, as he had been unsuccessful in collecting on the judgment against Baldwin. Curci argued that Baldwin held virtually all the interest in JPBI, controlled all of its actions, and used it as a personal bank account. The Fourth District Court of Appeal concluded that reverse veil piercing may be available under these circumstances and remanded the matter for the trial court to engage in the required factual analysis.
Curci is groundbreaking because it limits Postal Instant Press’s holding to corporations and opens the door for application of outside reverse veil piercing to LLCs. The Curci court held that the same factors used in evaluating traditional veil piercing cases should be applied to reverse veil piercing and concluded that “the key is whether the ends of justice require disregarding the separate nature of JPBI under the circumstances.” In so holding, Curci opens the door to further expansion of reverse corporate veil piercing in California.
A properly-formed and maintained business entity can prevent veil piercing.
If you have any questions or would like more information, please contact Kristin Ingulsrud at [email protected].