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California Court of Appeal Signals Availability of Reverse Veil Piercing Doctrine Against LLCs

On Behalf of | Aug 16, 2017 | Business Litigation

In the context of a creditor which had for five years sought enforcement remedies against an individual who had created an elaborate web of trusts, partnerships, and an LLC to evade payment, the California Court of Appeal distinguished prior case law in holding that, under certain circumstances, an LLC may be held liable to its members’ debts. The prior case was Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008), which held that corporations should not be held liable to its shareholders’ debts because exercising such equitable powers would necessarily harm innocent shareholders and creditors when there are remedies at law available, i.e., creditors assuming direct control over debtors’ shares. Here, the Curci Investments court noted that, unlike in the corporate context, a creditor of an LLC member may only obtain a charging order to divert an LLC’s distributions. However, as was the case here, because the LLC membership retains ultimate control, it may simply halt any further distribution.

Noting a split of persuasive authority on the reverse veil piercing doctrine and analyzing the case before it, the court held that reverse veil piercing may be available to creditors: (1) where an insider of a judgment debtor is an LLC, (2) where there are no innocent members of the LLC, i.e., no one not already liable to the debt, (3) where the creditor can demonstrate the absence of a plain, speedy, and adequate remedy at law, and (4) where the creditor can otherwise demonstrate the applicability of the traditional veil piercing doctrine. The court then remanded the case to the superior court for findings on whether the traditional veil piercing doctrine was met and whether some other adequate remedy at law exists. This opinion leaves open to discussion the precise test for reverse veil piercing in California, but signals the availability of new tools for collecting against challenging debtors. A copy of the published opinion Curci Investments, LLC v. Baldwin is available by hyperlink here.