Reverse Veil Piercing: Another Reason to Pay Your Bills

By: Tamara B. Pow, Esq .

A recent California Court of Appeals case ( Curci Investments, LLC v. Baldwin ) means California LLC assets could be at risk for a member’s personal liability. Baldwin borrowed $5.5 million from an investment firm, as a predecessor to Curci Investments Inc. (“Curci”). Fast forward three years to the due date and Baldwin does not repay his debt. Curci files a lawsuit to collect the debt, but agrees to stipulate to an extension to allow Baldwin to pay his debt over time. At the end of that extension in 2012, Baldwin still does not pay back the investment firm, so the trial court in California files an Entry of Judgment against Baldwin for $7.2 million, including prejudgment interest and attorney fees and costs. In 2014, Curci files a motion seeking charging orders against some of the business entities that Baldwin may have invested in or been involved in some way. The court grants this motion for 36 entities which then made no distributions. The court then rules against Curci when Curci tries to access Baldwin’s assets through Baldwin’s LLC, in what is known as “reverse veil piercing.” The court was concerned with the possibility of harming innocent shareholders and corporate creditors, allowing judgment creditors to bypass standard judgment collection procedures, and using an equitable remedy when legal remedies are available. Most of all, however, the court ruled against Curci because it believed that reverse veil piercing was not available in California.

Here is the interesting part. Baldwin had previously formed and held interests in hundreds of corporations, partnerships, and LLCs, 36 of which were included in Curci’s motion seeking charging orders. The business in question is JPBI LLC, a Delaware LLC used for the exclusive purpose of holding and investing Baldwin and his wife’s cash balances. From 2006 to 2012, JPBI distributed roughly $178 million to Baldwin and his wife, (during which time Baldwin borrowed money, agreed to the stipulation to extend the date to pay the investment firm and was ordered by the court to repay Curci). To top it all off, Baldwin owned 99% of JPBI LLC, while his wife owned the remaining 1%.

All of that would mean nothing, however, without the applicability of reverse veil piercing, the inverse of traditional veil piercing. The trial court thought it to be unavailable in California, based on the decision of another case, Postal Instant Press, Inc. v. Kaswa Corp. (2008), which ruled that the veil of a corporation could not be pierced under certain conditions. However, in the timely appeal filed by the plaintiff, the California Appeals Court was able to differentiate that case from this one, ultimately remanding the case back to the trial court, with instructions to determine whether JPBI’s veil should be pierced. While the Appellate Court did not rule whether JPBI’s veil should be pierced, it did make clear that reverse veil piercing, which is the act of a collector satisfying the debt of an individual through the assets of an entity of which the individual is an insider, is available in California for several reasons:

First, the facts of this case allay any concerns the trial court had based on the previous case. Since Baldwin and his wife owned the entire company, and were in charge of when JPBI distributed money, there were no innocent shareholders involved. Additionally, Curci explored all avenues, and pursued other legal remedies, before filing the motion seeking charging orders. This satisfied the court’s concern that creditors bypass standard judgment collection procedures or other legal remedies.

Second, the previous case applied only to corporations, whereas JPBI is an LLC. Per the trial court, in reading the decision from the previous case, “A third party may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability.”

Third, Corporations Code § 17705.03, which Baldwin had used to argue his case, was read by the Appellate Court as the exclusive remedy for reaching the judgment debtor’s “transferrable assets,” not referring to his LLC’s assets.

Fourth, the Revised Uniform Limited Liability Company Act, from which the previous statute came from, included comments that the charging provisions “were not intended to prevent a court from effecting reverse veil piercing where appropriate.”

Next the trial court will have to determine whether Curci can in fact pierce JPBI LLC’s veil to use Baldwin’s assets to satisfy his debt. The court will have to determine this by evaluating the same factors that are applied in a traditional veil piercing case, as well as whether Curci has any plain, speedy, and adequate remedy at law.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.