Outside Reverse Veil Piercing now available for LLCs in California

This is a case brief regarding Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017), which is a case about “reverse veil piercing” which the Court found can be applied to LLCs. Corporations continue to be protected by reverse veil piercing.

Ordinarily a corporation is considered a separate legal entity, distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations.[1] The same is true of a limited liability company (LLC) and its members and managers.[2]

That legal separation may be disregarded by the courts “when [a corporation or LLC] is used [by one or more individuals] to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose.”[3] In those situations, the corporation’s or LLC’s actions will be deemed “to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.

To pierce a veil, the plaintiff must prove a two prong test:

(1)    There must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.

(2)    There must be an inequitable result if the acts in question are treated as those of the corporation alone.

Reverse veil piercing is different; reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider.

In Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510 (Postal Instant Press), the Court held that reverse veil piercing is not available against corporations citing three concerns: (1) allowing judgment creditors to bypass standard judgment collection procedures, (2) harming innocent shareholders and corporate creditors, (3) and using an equitable remedy in situations where legal theories or legal remedies are available outweigh the wrong to the judgment creditor.

In the present case, the court did not believe the foregoing problems existed primarily on the major difference between LLCs and Corporations:

When the debtor is a shareholder, the creditor may step straight into the shoes of the debtor. It may acquire the shares and, thereafter, “have whatever rights the shareholder had in the corporation,” including the right to dividends, to vote, and to sell the shares.

In stark contrast, if the debtor is a member of an LLC, the creditor may only obtain a charging order against distributions made to the member. (Corp. Code, § 17705.03.) The debtor remains a member of the LLC with all the same rights to manage and control the LLC, including, the right to decide when distributions to members are made, if ever. (Corp. Code, §§ 17704.07, 17705.02, 17705.03.)

 


[1] Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 (Sonora Diamond).

[2] Corp. Code, §§ 17701.04, 17701.05, 17703.04, subd. (b).

[3] Sonora Diamond, supra, 83 Cal.App.4th at p. 538; see Corp. Code, § 17703.04, subd. (b) [alter ego doctrine applicable to LLC‟s].

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