“No Where To Run And No Where To Hide” – Catching and Collecting From Debtors With Reverse Veil Piercing

You did the easy part, you obtained a judgment against an individual. Now comes the hard part – collecting. You then do all of the usual things after you get a judgment – issue restraining notices, information subpoenas and maybe even a live examination of the judgment debtor. Unfortunately, you find the debtor has little in his own name, but he is the owner of a company. Your judgment is not against the company, however, and unless you get the stock or other equity ownership interest of the debtor in the company (a difficult task) are you going to be able to get to the assets of the company? In New York you have a shot provided your case against the debtor’s company meets the requirements of what is known as reverse veil piercing.

Traditional veil piercing in New York involves a situation where you have obtained a judgment against a corporation and you are trying to get behind the company on the belief that the debtor is using the assets of the company interchangeably with his own assets and otherwise dominates and controls the company. Standard veil piercing is an equitable concept that allows a creditor to disregard a corporation and hold the debtor as a controlling shareholder personally liable for the corporate debt. Sweeney, Cohn, Stahl & Vaccaro v. Kane, 6 A.D.3d 72, 75 (2d Dept. 2004). Generally, in order to state a claim for traditional veil piercing, two elements are required: first, that the owner exercised complete control concerning the transaction attacked; and second, that such control was used to commit a fraud or wrong against the creditor which resulted in injury to the creditor. Morris v. New York State Department of Taxation and Finance, 82 N.Y.2d 135, 141, 623 N.E.2d 1157, 603 N.Y.S.2d 807 (1993). Similarly, a claim for piercing the corporate veil exists where a corporation is shown to be a mere shell dominated and controlled by a debtor for his or her own purpose.

Reverse veil piercing presents the opposite situation: a creditor seeks to make the corporation liable for the debt of its officers or shareholders. Reverse piercing claims require a creditor to show that (1) the owner or shareholder exercised domination over the corporation and (2) that the domination was used to commit a fraud or wrong. In essence, the same two prong test that applies in traditional veil piercing claims applies in claims based on reverse piercing except that, in certain circumstances, the domination requirement in reverse piercing is relaxed in favor of finding a control relationship. Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 293 (Bankr. S.D.N.Y. 1999); see also American Fuel, 122 F.3d at 134-35 (requiring control to the extent that corporate funds were used for personal matters and funds intermingled in the corporation/shareholder scenario.)

In determining whether a corporation was dominated by another entity or individual the Courts consider the following facts:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlap in ownership, officers, directors and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the amount of business discretion displayed by the allegedly dominated corporation; (7) whether the related corporations deal with the dominated corporation at arms length; (8) whether the corporations are treated as independent profit centers; (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group; and (10) whether the corporation in question had property that was used by others.

Reverse veil piercing can be powerful tool in your arsenal of post-judgment remedies. Sometimes simply the threat of a reverse piercing action is enough to bring a recalcitrant debtor to the negotiating table.