Reverse Piercing of Corporate Veil

Sometimes a creditor with a cause of action against a corporation will try to “pierce the veil” of the corporation to hold liable the owners of the company if the creditor believes the owners have significant assets. There is a different concept called “reverse piercing” when a creditor will try to attack a corporation and its assets to satisfy a claim initially brought against the individual owners.

Piercing the veil of a corporation is not uncommon; reverse piercing cases are relatively rare. In a recent  Florida bankruptcy case a bank that held a million dollar judgment against an individual businessman sought to become a creditor of a company owned by the same individual when the company filed bankruptcy. The creditor sought to satisfy its judgment against the individual by filing a claim against the corporation’s assets- a reverse piercing of a corporation.

The bankruptcy court said that to reverse-pierce a corporation to satisfy the liability of its individual owner the creditor must show the owner must have used or formed the corporationto hide assets from a pre-existing liability. In this regard, reverse piercing is an equitable remedy similar to a fraudulent transfer remedy except in the piercing remedy the creditor is challenging the formation of a company rather than the transfer of an asset to a third party. Additionally, the creditor must demonstrate that the corporation is the alter-ego or mere instrumentality of the individual debtor. The alter-ego threshold is met most often by a creditor showing that the owner used the corporation to pay personal expenses from corporate accounts.

Piercing the corporate veil and reverse piercing is difficult to prove except in the most egregious cases which is why the issue does not often appear in bankruptcy cases.

The post Reverse Piercing of Corporate Veil appeared first on Orlando Bankruptcy Law Blog.