PIP, Inc. v. Kaswa Corporation, 77 Cal Rptr. 3d 96 (Dist. 4, 2008) highlights the problem with the theory of reverse piercing. As you know, piercing the corporate veil is an equitable theory applied to pierce the liability protections of a corporation to get at the assets of the shareholder to satisfy a corporate debt. It is an appropriate remedy when a shareholder uses the corporate form to evade personal liability or to commit a wrong.
Legal theories should follow a certain logic. A leads to B which leads to C. Imagine a spear piercing through the corporation to hit the shareholder. When piercing the corporate veil is applied it is a straight shot.
In a reverse pierce the spear is not straight and that is the problem. Reverse piercing is used to apply corporate assets to satisfy the debt of a shareholder. No abuse of a statutory privilege (e.g. limited liability created by the corporate form) or wrongdoing is alleged. Rather a second defendant is brought in merely because of its connection with the individual. A does not lead to B, they sit side by side.
Courts recognizing reverse piercing miss two key points. First, innocents are put at risk. Because no showing of abuse of the distinction between a shareholder and the corporation is necessary (e.g. alter ego, commingling of assets, etc.) there may be other innocent shareholders whose investments are now at risk. And corporate creditors, particularly unsecured trade creditors, may have the assets they were counting on to satisfy their legitimate debts swept up by the shareholder’s creditor. It is arguable that even a secured creditor may see its security vanish because the assets are deemed personal to the shareholder.
Second, there are adequate legal remedies available to the creditor such as conversion and fraudulent conveyance. This is true even in the most obvious case for applying reverse piercing; when a sole shareholder tries to hide personal assets in a corporation to avoid a personal obligation. Even in this case there is no need to create another remedy that is not based on sound legal reason.
-Marc Ward
Comments