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Reverse Piercing of your Corporate Veil For Creditors in California

Posted by James Burns | Mar 06, 2023 | 0 Comments

Piercing the corporate veil is a legal concept that allows a court to disregard the limited liability protection afforded to a corporation and hold its shareholders personally liable for the corporation's debts or obligations. This is typically done when the corporation is found to have been used for fraudulent or illegal purposes or when the corporation and its shareholders fail to maintain sufficient separation between their personal and business affairs. Generally, if a corporation is sued, the shareholders cannot be held personally liable for the debts of the corporation. This is the norm and the reason that many individuals form corporations or LLCs across the country. “Limited liability is the rule, not the exception.” (Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 510.).

A reverse piercing of a corporate interest would be the opposite of piercing the corporate veil, where instead of holding shareholders personally liable for the corporation's debts, the corporation seeks to hold a shareholder or group of shareholders liable for the corporation's obligations. However, as mentioned earlier, "reverse piercing" is not a widely used or recognized legal term, so it is unclear whether this concept has a specific legal meaning or application.

In California, remedies already exist to address these actions. A Plaintiff can sue for conversion or fraudulent conveyance, for instance. Thus, because these remedies already exist, “reverse piercing, accomplished by the expedient means of a post-judgment motion, is an unacceptable shortcut to pursue those remedies.” (Postal, 162 Cal.App.4th at 1523.)

There have been some instances of reverse piercing of the corporate veil in the past, but they are not common. One example is the 1997 case of In re Silicone Gel Breast Implants Products Liability Litigation, where the court allowed reverse piercing of the corporate veil to hold a group of shareholders personally liable for a corporation's liabilities arising from defective breast implants. However, it's worth noting that the standards for reverse piercing of the corporate veil can vary depending on the jurisdiction and the specific circumstances of the case. In some cases, the court may require a higher level of proof or a showing of actual control over the corporation's affairs by the shareholder or group of shareholders in order to allow reverse piercing.

The concept of reverse piercing of the corporate veil is generally disfavored by courts and is not recognized in some states, including California. In California, the general rule is that a corporation's shareholders are shielded from personal liability for the corporation's debts and obligations, absent certain exceptional circumstances.California follows the traditional approach to piercing the corporate veil, which requires a plaintiff to show that the corporation was used to perpetrate a fraud or injustice, or that the corporation was so undercapitalized or inadequately capitalized that it was essentially a sham. The plaintiff must also show that piercing the corporate veil is necessary to prevent fraud or to achieve equity. In essence, the courts see it as a hasty and inadequate solution for which other remedies already exist.Nevertheless, in very limited circumstances, a California court may allow reverse piercing of the corporate veil if it is necessary to prevent fraud or to achieve equity. The court will consider several factors, including whether the shareholder exercised complete control over the corporation's finances and operations and whether the shareholder used the corporation to perpetrate a fraud or wrongdoing.

For example, suppose “Joe Ripof” defrauds “John” of thousands of dollars. John sues Joe and wins in court. John receives the right to collect his judgment, but when his legal team approaches Joe, Joe claims that he is impoverished. After some digging, John learns that during the lawsuit, Joe transferred all his assets into one of several corporations that Joe owns as a single shareholder or with other family members only. In states like New York, John could reverse pierce to collect his judgment from the corporate assets of Joe.

It's important to note that reverse piercing of the corporate veil is a complex and an unusual legal concept, and it is generally difficult to obtain in any jurisdiction. If you have questions or concerns about corporate liability or piercing the corporate veil, it is recommended that you consult with a qualified legal professional who is familiar with the laws and regulations in your state. You can go to our calendar and book a Free 15 minute call to begin the conversation.

About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising:


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