While debtors often try to hide their assets to avoid paying a judgment, the Court of Appeal recently made it easier to get to an LLC’s assets where the owner is using the business to avoid payment of an individual judgment. In Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, Curci loaned Baldwin $5.5 million secured by a promissory note. After Baldwin failed to repay the note, Curci obtained a judgment and attempted to collect. During the collection process, Curci learned that Baldwin had previously created an LLC to hold and invest Baldwin’s money. Curci got an order that any distributions from the LLC to Baldwin would first be used to satisfy the judgment. However, since Baldwin was the CEO, he refused to make any distribution payments. Curci then sought to amend the judgment to add the LLC as a judgment debtor to levy directly against its assets.
The trial court denied the motion, holding that a prior California case barred so-called “reverse piercing” of the corporate veil. The Court of Appeal reversed. The Court described the typical corporate piercing process where an officer, director, shareholder, or owner can be held personally liable for the debts of a corporation due to fraud or some other wrongful purpose. The Court then noted that reverse veil piercing is similar, but seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider.
The Court held that, where an LLC owner who has control over the company uses the LLC to purposely shield assets to avoid a judgment against the individual owner, the LLC can be made a party to the action. If the requirements of reverse piercing are met, the plaintiff can obtain a judgment against the LLC to satisfy the individual’s judgment. The Court was careful to distinguish this case from a corporation, where reverse piercing is not available.
The Curci case makes it much easier to reach an individual’s assets when they use LLC’s to avoid paying a judgment.
If you have any questions regarding piercing the corporate veil, please contact Greg Woodard at (949) 769-6602.