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Outside Reverse Veil Piercing in California – Factors Considered

Outside reverse veil piercing differs from traditional veil piercing, which is permitted due to the “‘The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity. Traditional veil-piercing permits a party to pierce the corporate or limited liability company (LLC) veil so that an individual shareholder [or LLC member] may be held personally liable for claims against the corporation [or LLC However reverse veil piercing, rather than seeking to hold an individual responsible for the acts of an entity, seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider. Outside reverse veil piercing arises when the request for piercing comes from a third party outside the targeted business entity. In a recent decision out of SLO County, where the wrongdoer was the owner of an LLC that owned land in Cambria. The trial court amended a judgment against the wrongdoer to reverse veil pierce and add the LLC. Sacramento-reverse-veil-piercing-attorney

The trial court’s adding the nonparty alter ego to the judgment was an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.

The wrongdoer appealed, arguing that a charging order under Corporations Code section 17705.03 provides the sole remedy available, but the courts state otherwise. [T]he key is whether the ends of justice require disregarding the separate nature of the LLC under the circumstances. In making that determination, the trial court should, at minimum, evaluate the same factors as are employed in a traditional veil piercing case, as well as whether the plaintiff has any plain, speedy, and adequate remedy at law. Outside reverse piercing is permissible in the context of a limited liability company because, unlike a corporation, a limited liability company does not issue shares on which a creditor may levy and creditors do not have sufficient alternative remedies at law.

In California the alter ego doctrine starts with two conditions that must be met.
-First, there must be such a unity of interest and ownership between the corporation [or LLC] and its equitable owner that the separate personalities of the corporation [or LLC] and the shareholder [or member] do not in reality exist.
-Second, there must be an inequitable result if the acts in question are treated as those of the corporation [or LLC] alone

Sacramento-reverse-veil-piercing-lawyerAs to the first condition – unity of interest and ownership – relevant factors, in this case, includes 1] commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; 2] the treatment by an individual of the assets of the corporation as his own; 3] the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities. (A more complete list is set out below).

Here, the wrongdoer owned the LLC and was its manager. The court of appeals found that the trial court properly concluded that he used LLC bank accounts as if they were his own personal accounts because:
–he wrote a $5,000 check drawn on BKS Cambria’s bank account. The check was payable to an attorney retained to respond to the IRS regarding their personal returns.
–In the same month, he wrote four checks transferring $80,000 from the LLC account to his personal bank account to fund a loan to Valentin Alexandrov, a co-judgment debtor. He wired the funds to Alexandrov, who later wired them back. The debtor did not return the $80,000 to the LLC.
— he transferred funds from the LLC to another entity, the “memo” portion of both checks simply states “transfer.”
— he lives rent-free on LLC property and receives “around $1200 per month as a loan from” the LLC. He did not specify the interest rate or repayment schedule for the loan.
— He makes cash withdrawals from the LLC while failing to document when and why funds are distributed from the LLC, used LLC funds to pay the expenses of other entities, and paid attorneys and litigation expenses in the lawsuit against himself personally even though the LLC was not party to the action.

ALTER EGO FACTORS Sacramento-alter-ego-attorney
The alter ego test encompasses a host of factors: “[1] [c]ommingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses …; [2] the treatment by an individual of the assets of the corporation as his own …; [3] the failure to obtain authority to issue *513 stock or to subscribe to or issue the same …; [4] the holding out by an individual that he is personally liable for the **139 debts of the corporation …; the failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entities …; [5] the identical equitable ownership in the two entities; the identification of the equitable owners thereof with the domination and control of the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; sole ownership of all of the stock in a corporation by one individual or the members of a family …; [6] the use of the same office or business location; the employment of the same employees and/or attorney …; [7] the failure to adequately capitalize a corporation; the total absence of corporate assets, and undercapitalization …; [8] the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation …; [9] the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest, or concealment of personal business activities …; [10] the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities …; [11] the use of the corporate entity to procure labor, services or merchandise for another person or entity …; [12] the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another …; [13] the contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions …; [14] and the formation and use of a corporation to transfer to it the existing liability of another person or entity.” … [¶] This long list of factors is not exhaustive. The enumerated factors may be considered “[a]mong” others “under the particular circumstances of each case.” ’ … ‘No single factor is determinative, and instead, a court must examine all the circumstances to determine whether to apply the doctrine.

(Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 512–513)