Reverse Piercing of Debtor’s Own Corporation Disallowed To Claim Exe...

Many people have suggested buying a car through a small business corporation they own in order to protect the car from personal creditors. One debtor found that this planning back-fired when he filed Chapter 7 bankruptcy because it disqualified him from claiming an exemption for the vehicle which he otherwise would be entitled if the vehicle were owned in his personal name.

In one Florida Chapter 7 bankruptcy case the debtors filed in Florida using the default federal exemptions inasmuch as the debtors had not been Florida residents long enough to use Florida exemptions. Federal exemptions permit debtors to exempt vehicles which are “tools of the trade.” The federal vehicle exemption in better than Florida’s $1,000 vehicle exemption amount.

The debtors had titled a work truck in the name of their Illinois business corporation. The stock in the business was not exempt. The bankruptcy trustee could sell the truck if he took possession of the non-exempt corporation stock. The debtor listed his truck as a personal asset ( “his truck”) and claimed the tools of trade exemption to protect the truck from the Chapter 7 trustee. The debtor essentially was trying to “reverse pierce” his own corporation and treat assets titled in the company name as his own property.

The bankruptcy court did not allow the debtor to exempt his truck under the tools of trade federal exemption. The court explained that veil piercing is an equitable remedy used to prevent the fraudulent or improper uses of a corporation from injuring the party seeking to pierce the corporate veil. Veil piercing arguments are usually used by a creditor seeking to pursue a shareholder where the shareholder/debtor used the corporation as his personal alter-ego or where the debtor used the corporation for a fraudulent purpose.

In this case, the court said that there as no evidence the debtor had used his corporation for any fraudulent or improper purpose. The debtor may not use or disregard a corporation as it suited his purposes. The debtor elected to title the truck in a company name for no improper purpose, and the debtor had to accept the consequences of his planning when he filed bankruptcy. The court ordered the debtor and his corporation to turn over the truck to the trustee.

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