What is Reverse Piercing?

Protecting your personal assets from your company’s liabilities is a crucial aspect of risk management. The same is true in reverse – protecting your company’s assets from personal liability is just as important.

Limited Liability Corporations (LLCs) have long been favored by business owners for this very purpose. They generally shield assets from both directions of liabilities. However, there are situations where this protection can be challenged.

We’ve previously mentioned piercing the corporate veil in which an owner’s assets are exposed when their business is sued, but less common but still possible is when the courts pursue an LLC’s assets during a personal lawsuit against one of its owners.

When Can the Court Reverse Pierce?

Reverse piercing comes into play when a business owner faces a personal lawsuit but must expose certain assets held within their California LLC to satisfy the judgment. This tactic is generally invoked when the owner of the LLC does not have other assets that are sufficient to satisfy a judgment, or those assets are more difficult to reach. Even worse – it does not necessarily matter if you the owner mismanages the business or not (although that weighs in favor of a judge allowing this)! In these cases, someone with a judgment against an owner may pursue the LLC’s assets to satisfy personal obligations.

One of the first and most notable examples of this comes from Curci Investments, LLC v. Baldwin in California’s Court of Appeals. The court concluded that the respondent (James P. Baldwin) held “virtually all the interest” in one of his LLCs and thus the LLC essentially operated as a personal venture for Baldwin that could be exposed to satisfy the multi-million dollar judgment against him.

Can Innocent Third Parties Fall Victim to Reverse Piercing?

It’s important to note that the court will not pursue reverse piercing that unjustly damages the finances, business, and reputation of innocent third parties connected to the LLC. In Curci, the court ruled that Baldwin’s near-exclusive interests in an LLC exposed him and only him to risk for the liability he faced personally.

If the LLC has multiple owners, and these co-owners are not linked to the litigation in question, it becomes less likely that severe penalties will be imposed on the LLC due to the personal liability of one owner. The court’s aim is to provide a fair and just resolution without causing collateral damage.

Why the Location of Your LLC Matters

In the realm of reverse piercing in California, jurisdiction plays an important role. California courts are only authorized to pursue California LLCs. If your LLC was established in another state, reverse piercing does not apply. In such cases, California courts are generally not able to pursue a reverse piercing to satisfy a judgment entered under their jurisdiction.

Courts in states such as California, North Carolina, and Virginia have allowed reverse piercing. Furthermore, states that have strong policies and laws against (or that limit) reverse piercing are Nevada, Wyoming, and Delaware.

Is Your California LLC At Risk?

Now, the question you may be asking is whether your California LLC is at risk of reverse piercing. The answer to that depends on various factors, including the extent to which you, as the owner, are involved in the day-to-day operations and financial matters of the LLC. To mitigate this risk and ensure maximum asset protection, it’s essential to work with legal experts who know the law.At Dahl Law Group, we help businesses and business owners safeguard their assets and navigate complex legal scenarios just like this. Contact Dahl Law Group today to set up or review your business structure. We will work diligently to help you mitigate the risks of piercing or reverse piercing.

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Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.