What Is Reverse Veil Piercing In California
I am writing a book for the entrepreneur on seven (7) legal principles for owning and acquiring a business. The second chapter explores entity structuring when you start a business and/or acquire assets (or stock) for a growth strategy. So, why do we want to own a business in a legal structure such as a corporation or a limited liability company? The reason is that if an owner properly complies with corporate compliance, such as record keeping, not mixing corporate and personal funds, etc., then if the business is sued, and the creditor (or other party) obtains a judgement, then such judgement creditor cannot execute the judgement against the personal assets of an owner, meaning a shareholder or a member of a limited liability company. So, reverse veil piercing (in California) would mean that a judgement is received against an individual owner, and the judgement creditor attempts to execute the judgement against a corporation or limited liability company owned by the judgment debtor.
A recent California case, Curci Investments, LLC (Curci LLC”) v. Baldwin (“B”) (August 10, 2017 GO52764) illustrates the issue of “reverse piercing”. In this case, Curci obtained a multi-million dollar judgement against B, then tried to join B’s LLC as a judgment debtor to satisfy the judgement. The California trial court denied the motion of joinder. The fact are briefly stated as follows. B formed JPBI, A Delaware LLC (“JPBI”) to hold personal investments and cash balances (for him and his spouse.) B owned 99% of the membership interests and his wife held 1% of the membership interests of the Baldwin personal LLC. B was the manager and CEO of JPBI. About 2 years later (on or about 2009), B, individually borrowed $5.5 million from Curci LLC’s predecessor- in- interest. . The loan was memorialized in a promissory note executed by Baldwin and the managing member of Curci’s predecessor (the “Curci note)”. In the Curci note, Baldwin agreed to pay back the principal amount of the loan, with interest, by January 2009. Curci was assigned the lender’s interest in the Curci note shortly after it was executed. One month after executing the Curci note, Baldwin settled eight family trusts to provide for his grandchildren during and after their college years (the family trusts). Not long after the family trusts were settled, JPBI loaned a total of approximately $42.6 million (the family notes) to three general partnerships (the family partnerships) formed by Baldwin for estate planning purposes. Because the partners of the family partnerships are various combinations of the family trusts, certain of Baldwin’s children signed the family notes in their capacity as trustees. Baldwin signed the family notes in his capacity as manager of JPBI. Each family note indicated the principal amount of the loan was to be repaid by July 2015. Although all the family notes are in favor of JPBI, Baldwin and his wife list them as “Notes Receivable” on their personal financial statements.
When the Curci note was due and payable, B did not make the payments required under the terms of the note. Curci LLC, filed suit, against B for $7.2 million including, prejudgment interest and attorney’s fees and costs in 2012. By 2014, B had not paid the judgement, so the court granted charging orders against other B entities including JPBI. So the monetary distributions that were to go to B would go to Curcu LLC.
During the time of the outstanding note, JPBI had paid about $178 million to B and his spouse, so Curci LLC then filed a motion in 2015 to add JPBI as a judgement debtor. Please note that B argued that Postal Instant Press (162 Cal App 4th 1510), was applicable based upon the holding that third part creditors cannot reach corporate assets to satisfy a personal judgement. In the Posta case, the entity at issue was a corporation. However, the court in this case held that the Postal holding was limited to corporations and this entity was a limited liability company. The court also reasoned that B and his spouse were not “innocent” parties. Most importantly the court reasoned that the entity structure was different, with different statutory requirements and that creditor have different options against a limited liability company.
What we learn from this case, is the analysis for “the pierce the corporate veil doctrine” will be similar when looking at these entity structures but could come out with a different result. In this case, it appears the promissory note could have been structured to include the proper parties, or, the creditor could have taken collateral to secure the note. My goal with the entrepreneurial client is to be sure the proper entity structuring is done at the early growth stage, for issues, including but not limited to, liability protection. For example, if my client operates under a license (such as a real estate broker), a limited liability structure may not be available, depending upon the jurisdiction. Therefore, there are also many legal and business to address in the emerging growth states.