Reverse Piercing Corporate Veil - Case Law
The alter ego doctrine traditionally is applied to pierce the corporate veil so that a shareholder may be held liable for the debts or conduct of the corporation.
Some courts recognize the corporate veil may be pierced in reverse so that a corporation may be held liable for the debts or conduct of a shareholder. (See Annot., Acceptance and Application of Reverse Veil-Piercing--Third-Party Claimant (2005) 2 A.L.R.6th 195, 2.)
"The typical 'reverse pierce' case involves a corporate insider, or someone claiming through such individual, attempting to pierce the corporate veil from within so that the corporate entity and the individual will be considered one and the same." (1 Fletcher Cyclopedia of the Law of Corporations (2006 rev. vol.) 41.70, p. 258.) This is sometimes called "inside reverse piercing." (In re Phillips (Colo. 2006) 139 P.3d 639, 644-645.)
In Kingston Dry Dock Co. v. Lake Champlain Transp. Co. (2d Cir. 1929) 31 F.2d 265, the court recognized as a matter of federal law the possibility a parent corporation may be liable for the acts of its subsidiary corporation when the parent corporation directly intervened in the transaction, "ignoring the subsidiary's paraphernalia of incorporation, directors and officers." (Id. at p. 267.) The court cautioned, however, that "such instances, if possible at all, must be extremely rare ... ." (Ibid.)
The California Supreme Court has not spoken on the issue of outside reverse piercing of the corporate veil. Whether to accept or reject the doctrine is an issue of first impression in California
In Taylor v. Newton (1953) 117 Cal. App. 2d 752, the Court of Appeal concluded a corporation was liable on a judgment against the corporation's sole stockholder because the evidence supported a finding of alter ego. The court did not discuss the doctrine of reverse piercing or any of the problems it raises. Rather, the court relied on traditional alter ego law to conclude that adherence to the fiction of a separate corporate existence "would promote an injustice" to the stockholder's creditors. (Id. at p. 761.)
NEC Electronics Inc. v. Hurt (1989) 208 Cal. App. 3d 772 256 Cal. Rptr. 441 was a traditional alter ego case: The plaintiff secured a judgment against the corporate defendant, then moved to amend the judgment to add the corporation's sole shareholder as a judgment debtor. (Id. at pp. 775-776.)
The trial court granted the motion, but the appellate court reversed on the ground there was insufficient evidence to show the shareholder had an opportunity to litigate the underlying action between the plaintiff and the corporation. (Id. at pp. 776, 781.)
In Olympic Capital Corporation v. Newman (C.D.Cal. 1967) 276 F.Supp. 646, 658 the Court described outside reverse piercing as "a complete distortion of the alter ego doctrine."
The court continued:
"That doctrine has been invoked when fairness and justice require that the property of individual stockholders be made subject to the debts of the corporation. To apply such a doctrine here would be asking the court to apply the doctrine in one manner, i.e., make the property of the corporation the property of a stockholder, for the purposes of obtaining jurisdiction of the person of the stockholder and then to reverse the procedure, i.e., make the action of the individual stockholder the action of the corporation for purposes of creating liability in the name of the corporation. Neither reason nor law compels such a gymnastic." (Ibid.)
In Floyd v. I.R.S. of U.S. (10th Cir. 1998) 151 F.3d 1295 (Floyd), the court rejected outside reverse piercing as a matter of Kansas law.
The Floyd court expanded on the criticism of the doctrine:
"There are reasons beyond those identified in Cascade to deny an alter ego claim of this kind. For one thing, the prospect of losing out to an individual shareholder's creditors will unsettle the expectations of corporate creditors who understand their loans to be secured--expressly or otherwise--by corporate assets. Corporate creditors are likely to insist on being compensated for the increased risk of default posed by outside reverse-piercing claims, which will reduce the effectiveness of the corporate form as a means of raising credit. Furthermore, as Judge Learned Hand suggested in what may be the earliest case to consider such a claim, outside reverse piercing is only appropriate in the rare case of a subsidiary dominating its parent." (Floyd, supra, 151 F.3d at pp. 1299-1300.)
The Floyd court explained that disregard of the corporate form, as an equitable remedy, should be granted only when legal remedies are inadequate. When the corporation has been dominated by a controlling shareholder, the Floyd court concluded, "an agency or aiding and abetting theory may suffice to hold the corporation liable for the actions of that stockholder." (Floyd, supra, 151 F.3d at p. 1300.)
In addition, "standard judgment collection procedures may also suffice to cover shareholder liability without expanding equitable theories of corporate liability." (Ibid.)
The Floyd court concluded, "in the absence of a clear statement of Kansas law by the Kansas courts, we will not assume that such a potentially problematic doctrine already has application in that state." (Ibid.)