Creditors And LLCs – Reverse Veil Piercing
Posted Oct 21, 2020
By Washington State Business and Real Estate Lawyer David C. Tingstad
In keeping with last week’s theme, this post discusses reverse veil piercing. Reverse veil piercing is the process by which an entity’s assets may be used to satisfy a judgment against a member/shareholder/partner in their individual capacity. Reverse veil piercing is the opposite of corporate veil piercing, where the assets of the member/shareholder/partner may be used to satisfy a judgment against the entity (I discussed this several weeks ago here).
Washington Case Law?
Washington’s LLC Act (RCW 25.15.061) states that “courts may consider the factors and policies set forth in established case law with regard to piercing the corporate veil…” Based on last week’s discussion of charging orders (view here), there is an argument that Washington prohibits reverse veil piercing because the LLC Act states that charging orders are the “exclusive remedy by which a judgment creditor of a member or transferee may satisfy a judgment out of the judgment debtor’s transferable interest.” There are no reported decisions in Washington with respect to reverse piercing claims.
However, California courts addressed this issue squarely in Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214, 221 Cal.Rptr.3d 847 (2017). This case is noteworthy as it confronts California’s charging order statute, which is substantially similar to RCW 25.15.256. Ultimately, the court found that despite the “exclusive remedy” language in the charging order statute, reverse veil piercing was an available remedy.
The facts in Curci are quite interesting. Defendant Baldwin, a “prominent real estate developer,” formed and held interests in “hundreds of corporations, partnerships, and limited liability companies.” Plaintiff Curci Investments, LLC (“Curci”) obtained a multimillion-dollar judgment against Baldwin (and his wife) personally. However, Curci had a difficult time collecting the judgment.
Baldwin used one of his entities, JPB Investments LLC (the “LLC”), to hold and invest his marital community’s money. Baldwin owned 99% of the membership interest, while his wife owned the other 1%. The LLC distributed approximately $178 million to Baldwin and his wife between 2006 and 2012, but after Curci obtained its judgment, the LLC ceased paying distributions. Only after extensive post-judgment discovery did Curci learn of the LLC, whereby it sought to have the LLC added as a judgment debtor. The trial court denied Curci’s attempt to add the LLC as a judgment debtor and an appeal followed, which is the subject of this case.
On appeal, the Curci court initially wrestled with whether prior precedent barred reverse veil piercing. Specifically, in Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal.App.4th 1510, 77 Cal.Rptr.3d 96 (2008), the court rejected an attempt to reverse veil pierce citing concerns regarding “harming innocent shareholders and corporate creditors.” The Curci court readily distinguished those concerns from the facts at hand as no “innocent” member of the LLC existed. Both Baldwin and his wife were liable to Curci.
For our purposes, the most significant part of the opinion came when the court addressed Baldwin’s assertion that California’s charging order statute (Corporations Code § 17705.03) preempted the court from reverse veil piercing in LLC contexts because it provides the sole remedy creditors have against a debtor who has a membership interest in an LLC. In response, the court stated the following:
Baldwin asserts [the charging order statute] preempts us from making reverse piercing available vis-à-vis an LLC because it provides the sole remedy creditors have against a debtor who has a member interest in an LLC. But, that statute is not as all-encompassing as Baldwin suggests. It more narrowly provides a charging order levying distributions from the LLC to the debtor member is the exclusive remedy by which a judgment creditor may “satisfy the judgment from the judgment debtor’s transferable interest.”
Reverse veil piercing is a means of reaching the LLC’s assets, not the debtor’s transferable interest in the LLC. That [the charging order statute] does not preclude reverse piercing is underscored by the drafters’ comments to the Revised Uniform Limited Liability Company Act from which the statute was adopted without substantive change. Those comments state the charging provisions are “not intended to prevent a court from effecting a ‘reverse pierce’ where appropriate. ”
The case before us presents a situation where reverse veil piercing might well be appropriate. Curci has been attempting to collect on a judgment for nearly half a decade, frustrated by Baldwin’s non-responsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he has an interest. Although the formation of [the LLC] predates the underlying judgment, its purpose has always remained the same—to serve as a vehicle for holding and investing Baldwin’s money.
Curci Investments, LLC, 14 Cal.App.5th at 223-224 (internal citations omitted).
The court concluded that reverse veil piercing may ultimately be available to Curci and remanded back to the trial court for additional considerations consistent with the court’s findings.
The charging order statute in Curci was substantially similar to Washington’s statute. Consequently, Curci may provide guidance to Washington practitioners (and judges) as to how to proceed in reverse veil piercing cases. It certainly cannot be said that attempts to reverse veil pierce in Washington are frivolous or without merit.
It is also important keep in mind the reluctance Washington courts will likely exercise in reverse veil piercing cases, just as they do in classic veil piercing cases. As I have already noted here, Washington courts approach piercing claims with skepticism and almost certainly will not pierce the corporate veil if other remedies exist.
For more Washington business entity law considerations, refer to this blog every Wednesday at 12 PM, noon.
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