Bankruptcy & Insolvency Articles

New Tool For Creditors - Reverse Veil Piercing Now Available In California

November 30, 2017

A California court recently held in Curci Investments, LLC v. James P. Baldwin, 14 Cal.App.5th 214 (2017) that a creditor was not per se precluded from reverse piercing a corporate veil of an entity associated with the debtor.*   To reach that decision, the appellate court distinguished Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal.App.4th 1510 (2008), that for years had prevented that route for recovery.

Baldwin was a prominent real estate developer who over his lifetime was involved in hundreds of corporations, partnerships and limited liability companies.  This case involved one of these entities named JPB Investments, LLC (JPB), a Delaware limited liability company.  Curci Investments, LLC (Curci) secured a multi-million dollar judgment against Baldwin personally.  Baldwin was the 99 percent owner of JPB, with his wife holding the remaining one percent.  Baldwin was also the manager and CEO of JPB and controlled all of its decisions and actions.  Apparently, Baldwin had personally borrowed $5.5 million from a bank, that subsequently assigned the underlying promissory note to Curci.  When Baldwin defaulted on the note, Curci sued and entered into a stipulated payment schedule that when Baldwin defaulted on, resulting in a stipulated judgment for $7.2 million.

Curci was a determined creditor.  After securing multiple orders to compel and sanction Baldwin for failure to respond to various post-judgment discovery, Curci served 26 separate charging orders on various entities owned by Baldwin, resulting in no recovery on its judgment.  Baldwin was able to successfully limit any direct distributions to himself, even though JPB had distributed over $178 million to Baldwin in the 6 years prior to the entry of the Curci judgment.  Curci then filed a motion under Section 187 of the California Code of Civil Procedure in order to expand the judgment to include JPB as an alter ego of Baldwin.  The trial court denied the motion, based on the prohibition in the Postal Instant Press case.

The appellate court summed up the question on appeal:

The question presented is whether reverse piercing of the corporate veil may be applied under the circumstances of this case, giving Curci the ability to reach JPB's assets by adding it as a judgment debtor… Curci Investments, supra. 14 Cal.App.5th at p. 220.

After analyzing various California and non-California decisions related to alter ego, the court determined that the main barriers to permitting reverse veil piercing was:

…Among those concerns were allowing judgment creditors to bypass standard judgment collection procedures, harming innocent shareholders and corporate creditors, and using an equitable remedy in situations where legal theories or legal remedies are available. Ibid. at p. 222.

The court then proceeded to distinguish the case at bar as follows:

• Curci was seeking to disregard the separate status of a limited liability company and not a corporation.  Ibid.

• There was no "innocent" member of JPB since Baldwin held 99 percent and his wife the remaining one percent interest in JPB.  Ibid.

• A creditor does not have the same options against a member of a limited liability company as it has against a shareholder of a corporation.  When a debtor is a shareholder, an execution will often allow creditor to step straight into the shoes of the debtor as a replacement shareholder.  However, if the debtor is a member of a limited liability company, the creditor may only obtain a limited charging order against distributions made to the member.  In the case at bar, this allowed Baldwin to maintain complete management and control of JPB and manipulate distributions so no monies went to Baldwin.  Ibid. at p. 223.

• Even though there was a statutory mechanism for reaching the debtor's transferrable interest in the limited liability company, the statute did not eliminate the reverse veil piercing remedy since the statue was designed to  reach the limited liability company's assets.  Ibid.

• Curci had spent nearly a half a decade frustrated by Baldwin's non-responsiveness to process, manipulating JPB's distributions and otherwise finding ways to frustrate the enforcement of a legitimate judgment.  Ibid. at p. 224.

Based on the foregoing, the appellate court concluded that in this particular case that reverse veil piercing might be available and remanded the matter to the trial court to engage additional fact finding in order to determine whether the ends of justice required disregarding the separate nature of JPB under the circumstances.

Comment

One way to view this case was an asset protection plan gone bad.  The debtor misused the limited liability company, acted capriciously and got what he deserved in the end.  The  lesson to the debtor is – have annual check-ups of your entities and be prudent in how you use your asset planning.  On the other hand, this case gives creditors hope and a roadmap of factors that can be used in California to reach assets of a debtor who is a member of a limited liability company and who is obvious attempting to avoid paying his legitimate obligations.  This is a significant debtor-creditor rights case that should be studied and can be used as a future shield and/or a sword.

*Reverse veil piercing seeks to satisfy a debt of an individual through the assets of an entity that the individual owns.

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