Reverse Veil Piercing

Question 1

May outsider reverse veil-piercing be permissible in certain limited circumstances?

Answer 1

Yes. Outsider reverse veil-piercing may be permissible in certain limited circumstances. Outsider reverse veil-piercing involves a third party asking a court to hold a company liable for a judgment against the company’s owner or member. Courts disagree about whether to allow reverse veil-piercing. Courts that have refused reverse veil-piercing typically do so to protect innocent parties, such as nonculpable corporate shareholders who could be harmed if the corporation’s assets were attached to satisfy a corporate owner’s liabilities. Reverse veil-piercing could also prioritize the claim of a corporate parent’s judgment creditor over the claims of the subsidiary’s creditors, which would upset those creditors’ expectations. However, as other courts have recognized, these risks do not justify denying reverse veil-piercing in all cases, especially if (1) veil piercing is necessary to prevent a corporation from fraudulently shielding its assets and (2) the creditor seeking piercing demonstrates that reverse piercing will not harm innocent shareholders or creditors and that there are no other available legal or equitable remedies. In Delaware, outsider reverse veil-piercing should be permissible in exceptional cases involving egregious facts and a lack of any real and substantial prejudice to third parties from the piercing. In considering whether to allow reverse veil-piercing, courts must first examine traditional veil-piercing factors, including insolvency, undercapitalization, commingling of funds, and the absence of corporate formalities. Courts should then consider whether equity supports reverse veil-piercing by analyzing factors including (1) how significantly reverse piercing would impair nonculpable shareholders’ legitimate expectations or establish a troubling precedent for shareholders generally, (2) the degree of the corporate entity’s dominion and control over the insider subject to the reverse-piercing claim, (3) the degree to which the reverse-piercing plaintiff’s injury is related to the corporate entity’s dominion and control over the insider, (4) the degree to which reverse piercing serves public convenience, (5) whether the corporate entity engaged in wrongful conduct, (6) whether the reverse-piercing plaintiff himself engaged in wrongful conduct that would bar equitable relief, (7) the extent to which reverse piercing would harm the corporate entity’s innocent third-party creditors, and (8) whether the reverse-piercing plaintiff has any other legal or equitable remedies.