Reverse Veil-Piercing is Now Recognized
The alter-ego scenario in which an individual is held liable for a corporation’s debts has been litigated time and time again. The opposite scenario in which a corporation is held liable for an individual’s debts is much rarer but equally viable. Holding a corporation liable for an individual shareholder’s debts is a reverse piercing of the corporate veil.
Over the last several years, the idea of reverse veil-piercing has garnered more and more acceptance throughout the country. It instinctively makes sense. Veil-piercing has long been allowed in situations in which there are “such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist.” Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979); see also, Messick v. PHD Trucking Serv., Inc., 678 P.2d 791, 794 (Utah 1984). As a matter of simple equivalence, if a corporation can be the same personality as an individual, then the individual can be the same personality as a corporation.
Standards to Reverse Pierce the Corporate Veil
To reverse pierce the corporate veil, courts use the “Norman test,” to determine whether a corporation is an alter-ego for one or more shareholders. See Norman at 1030. To pierce the corporate veil, a plaintiff must meet the “formalities requirement” and the “fairness requirement” to pierce the corporate veil. This is the same standard applied reverse veil- piercing.
The fairness requirement is most easily met “in cases involving a limited number of shareholders or trustees, or at least an unusual unity of interest and purpose.” M.J. v. Wisan, 2016 UT 13, ¶83 (Utah 2016). It is difficult to meet the fairness requirement if innocent shareholders would be harmed by reverse corporate piercing.
Other Options to Consider
In situations in which reverse veil-piercing may be available, simpler options to hold the corporation liable, such as respondeat superior or a fraudulent transfer cause of action, may also be available. A reverse piercing of the corporate veil is “a tool of last resort[.]” Id. at ¶79. If a plaintiff is considering using this tool, a plaintiff should also consider what other options may be available.
For more specific information about this particular subject, please call my office at 801-691-7770 for a free consultation or see the following web pages:
- Whiting & Jardine, LLC Home Page: www.WhitingJardine.com
- Corporate Governance: http://whitingjardine.com/practice_areas.php?part=corporate
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- Breach of Contract Litigation: http://whitingjardine.com/practice_areas.php?part=breach
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