Is Reverse Corporate Veil Piercing Allowed in California?
In August of 2017, in the case of Curci Investments, LLC v. Baldwin, 14 Cal. App. 5th 214, the California Court of Appeal for the 4th Appellate District approved a reverse piercing of the corporate veil. This is new law, since about a decade ago, reverse veil piercing was rejected in the case of Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008).
What is Reverse Corporate Veil Piercing in California?
Ordinarily a corporation is considered a separate legal entity, distinct from its owners, shareholders, officers, and directors. The corporate entity has separate and distinct liabilities and obligations. As long as the owners, shareholders, officers, and directors treat the corporate entity as separate and distinct, the corporate entity provides an effective shield protecting personal assets. That is, a creditor of the corporation cannot got after assets of the individuals.
As we discussed here, there is a well-established legal doctrine called “piercing the corporate veil” where, under certain circumstances, the courts will “reach through” the corporate entity and allow creditors/plaintiffs to reach the personal assets of the owners, shareholder, officers, and directors to pay for corporate obligations and debts.
As the name implies, reverse corporate veil piercing is the opposite: The doctrine allows creditors of the individual owners, shareholders, officers, and directors to reach through to assets of the corporate entity to pay the individual obligations and debts.
The Facts of Curci
In Curci, the creditor, Curci Investments, obtained a multimillion dollar judgment personally against James P. Baldwin (“Baldwin”), a prominent California real estate developer. As the court described, during his business career, Baldwin formed and held interests in hundreds of corporations, partnerships and limited liability companies. Curci Investments argued that one of those limited liability companies, JPB Investments LLC (“JPBI”) was a sham corporate entity. Curci Investments asserted Baldwin held virtually all the interest in JPBI and controlled its actions, and Baldwin used JPBI as a personal bank account.
Curci Investments argued that reverse veil piercing should be allowed so that Curci Investments could reach JPBI’s assets to satisfy the personal judgment against Baldwin. The trial court rejected the idea.
However, the Court of Appeals reversed and sent the case back to the trial court for a factual determination on whether reverse veil piercing was warranted.
When do Courts Allow Corporate Veil Piercing in California?
There are similar legal principles used in traditional veil piercing and reverse veil piercing. Piercing the corporate veil — either way — is a legal doctrine that is intended to prevent individuals from misusing the corporate laws for the purpose of committing fraud or other misdeeds. The corporate veil will be pierced if a court finds that:
- Such a unity of interest and ownership between the corporation and its owner(s) that the separate personalities of the corporation and the shareholder do not in reality exist; and
- Inequity and/or injustice will result if the acts in question are treated as those of the corporation alone.
The courts look to this list of factors to determine unity of interest and ownership including, without limitation:
- Commingling of funds and other assets of the person and the corporate entity;
- Holding out by one entity that it is liable for the debts of the other;
- Identical ownership in the two entities;
- Use of the same offices and employees;
- Use of one as a mere shell or conduit for the affairs of the other;
- Inadequate capitalization;
- Disregard of corporate formalities — no separate letterhead, not signing contracts as corporate officers, no directors/shareholder meeting, etc.,;
- Lack of segregation of corporate records; and
- Identical directors and officers.
What This Means for Structuring Your California Businesses?
Experienced business attorneys advise that how you structure your corporate entities is important and that corporate formalities must be maintained. Curci is an interesting case which likely creates more questions than it answers. For example, is this simply a new item on the list of “disadvantages” for creating an LLC vs. creating a corporation? The Curci court specifically distinguished Postal Instant Press by saying the latter concerned corporations while Curci involved LLCs. Further, how will Curci apply to multi-member LLCs and manager-managed LLCs? Is Curci an indication that reverse veil piercing might be more generally acceptable to California courts? Since Postal Instant Press, many more states around the country have come to accept the doctrine.
Contact San Diego Corporate Law
For further information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business and for mergers and acquisitions. Mr. Leonard can be reached at (858) 483-9200 or via email. We look forward to helping your business succeed.