Keith Paul Bishop reports:
In an opinion filed yesterday, the Fourth District Court of Appeal held that reverse veil piercing may be applied to a Delaware limited liability company. Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017). ...
What I find most curious, however, is the Court of Appeal’s assumption that Section 17705.03 could be applied to the LLC. If one takes into account the defined terms used in the statute (member, transferee, transferable interest, and limited liability company), the statute can be read to apply only to California LLCs. In fact, the statute nowhere mentions foreign LLCs. As noted above, the case involved a creditor’s attempt to reach the assets of a Delaware LLC. Underlying this is the question of when it comes to veil piercing and reverse veil piercing, what law applies – the jurisdiction of formation of the entity whose veil is being pierced or the forum jurisdiction?
This is a question Todd Henderson and I addressed in our book Limited Liability: A Legal and Economic Analysis
... where courts find it necessary to choose a specific state’s law to resolve a veil-piercing claim, they typically rely on the internal affairs doctrine to apply the law of the state of incorporation. Whether to disregard the principle of limited liability is a question of corporate governance, since the question turns on the relative efficiency of various corporate monitors. And questions of corporate governance are typically determined by the state of incorporation. This is because matters of governance cannot be tailored to acts in particular jurisdictions. For instance, if shareholders are in control or would otherwise be effective monitors of a particular corporate activity, this fact will not vary and cannot be changed depending on the jurisdiction. A uniform rule on matters of governance is the only practical one.
As we note, however, there are some exceptions that decline to apply the internal affairs doctrine. New York is the leading example. But even there, the courts usually end up applying the law of the state of incorporation.
In the leading Soviet Pan Am Travel Effort v. Travel Committee, Inc.[1] case, for example, ... the Soviet Pan Am court explained that “[b]ecause a corporation is a creature of state law whose primary purpose is to insulate shareholders from legal liability, the state of incorporation has the greater interest in determining when and if that insulation is to be stripped away.”[2]
[1] 756 F. Supp. 126 (S.D.N.Y. 1991).
[2]Soviet Pan Am, 756 F. Supp. at 131. See also Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995) (“Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance.”).
As we also explained therein, the same general principles apply to reverse veil piercing:
As with standard veil piercing claims, courts generally apply the law of the state of incorporation in reverse veil piercing cases. In Taurus IP, LLC v. DaimlerChrysler Corp.,[1] for example, the court applied Texas law to determine whether to affect a reverse veil piercing of a Texas corporation to obtain personal jurisdiction over a Texas resident.[2] The U.S. Bankruptcy Court for the Southern District of Florida likewise held that:
As to Florida's choice of law rules, “[c]laims involving ‘internal affairs' of corporations, such as the breach of fiduciary duties, are subject to the laws of the state of incorporation.” …
Reverse veil piercing involves the internal affairs of the Debtor, mainly the rights and liability of the Debtor. The parties have not established, and no facts on the record indicate that this is an unusual case where some other state has a more significant relationship to the occurrence and parties.[3]
Because the corporation in question had been incorporated in Connecticut, the court applied Connecticut corporation law rather than that of Florida.
[1] 726 F.3d 1306 (Fed. Cir. 2013).
[2] Id. at 1336.
[3] In re Friedlander Capital Mgmt. Corp., 411 B.R. 434, 442 (Bankr. S.D. Fla. 2009).
If this stuff is of interest, perhaps you should go buy our book. No?
