Piercing The Corporate Veil; Reverse-Piercing The Veil: Are You Confused?

When a corporation or limited liability company becomes insolvent the business owner often is worried that the creditors will try to “pierce the veil” of the corporation and sue the individual owner for all the business’s debts. Florida courts have made it difficult for creditors to pierce the veil of a corporation or LLC to hold owners responsible for corporate obligations. Creditors who contract with a business entity can pierce the veil and sue the owners only if they show that the corporation or LLC was established for an illegal purpose or if the owners were using the corporation to evade what is really a personal obligation (e.g., using a corporation to incur debt to personal consumption).

Most successful efforts to pierce a corporate veil occur when a “mom and pop” business owner intermingles personal and business finances, such as when he pays personal bills from a corporate account. The corporate veil is pierced in that case because the corporation is the legal alter-ego of the controlling owner. There is a famous Florida Supreme Court case on piercing the corporate veil called the Dania Jai-Alai case.

So what is “reverse piercing” of the corporate veil? Reverse piercing is a lesser known, and lesser used, concept whereby a creditor of an individual can execute on corporate assets to satisfy a civil judgment against the individual owners. A creditor can use the reverse-pierce remedy to hold a corporation liable for the debts of the controlling shareholder where the shareholder/debtor formed or used the corporation to secret assets and avoid preexisting personal liability. For instance, if an individual facing a possible individual judgment creates a corporation or LLC and transfers assets in to a controlled entity so the assets would be protected from a civil judgment then individual’s creditors could levy upon the corporate assets under the reverse-piercing theory.

Reverse-piercing is similar to fraudulent conveyance; both legal concepts are equitable remedies to execute a civil judgment. A creditor can sue a corporation that received the owner’s personal assets to help the owner evade personal liability under either theory. If you want to know more about reverse-piercing of a corporation, look at Braswell v. Ryan Investments, 389 So. 2d 38.

Last updated on May 22, 2020

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