Rector, Executor of Est. of James Calvert vs. Calvert, Executrix of Est of James Calvert
COA Not Published (6/1/2018)

Reverse piercing of the corporate veil was raised in this appeal.  To reach that issue, traditional piercing was examined.  Here are some extracted portions of that decision.

James’s Estate advocates for a “reverse piercing” of Lindan’s corporate veil. It is widely accepted that a corporation should be viewed as a separate legal entity, and the courts will not disturb the legal fiction of corporate separateness except in limited circumstances. Morgan v. O’Neil, 652 S.W.2d 83, 85 (Ky. 1983). However, courts do have the equitable authority to “pierce the corporate veil,” imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation’s wrongful acts or obligations. Schultz v. Gen. Elec. Healthcare Fin. Servs. Inc., 360 S.W.3d 171, 174-75 (Ky. 2012). In this case, James’s Estate seeks to accomplish the opposite− to hold Lindan liable for the obligations of its’ principal, Danny.

Kentucky has never recognized the concept of reverse piercing by outsiders to the corporate entity, but it has been recognized in other jurisdictions. See 2 A.L.R. 6th 195, Acceptance and Application of Reverse Veil-Piercing – Third-Party Claimant, (2005 & cumulative supplement). A majority of jurisdictions addressing the issue recognize that the same considerations which justify traditional piercing of the corporate veil may justify reverse piercing. Consequently, reverse piercing has been allowed in cases where the corporation is dominated by the principal and has been used as a means to defraud creditors. Winey v. Cutler, 165 Vt. 566, 567, 678 A.2d 1261, 1263 (1996); Roepke v. W. Nat’l Mut. Ins. Co., 302 N.W.2d 350 (Minn. 1981); Minich v. Gem State Developers, Inc., 99 Idaho 911, 591 P.2d 1078 (1979) (overruled on other grounds by Rueth v. State, 103 Idaho 74, 81, 644 P.2d 1333, 1340 (1982)); Central Nat’l Bank & Trust Co. of Des Moines v. Wagener, 183 N.W.2d 678, 681–82 (Iowa 1971); Fischer Inv. Capital, Inc. v. Catawba Dev. Corp., 200 N.C. App. 644, 657, 689 S.E.2d 143, 151 (2009); Litchfield Asset Mgmt. Corp. v. Howell, 70 Conn. App. 133, 799 A.2d 298, 309, 312 (2002) (overruled on other grounds in Robertson v. Coughlin, 266 Conn. 1, 830 A.2d 1114 (2003)); Olen v. Phelps, 200 Wis. 2d 155, 546 N.W.2d 176 (Wis. Ct. App. 1996); Lambert v. Farmers Bank, Frankfort, Ind., 519 N.E.2d 745 (Ind. App. 1988); Estudios, Proyectos e Inversiones de Centro America, S.A. v. Swiss Bank Corp., 507 So.2d 1119 (Fla. App. 1987); and Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. App. 1985).  However, a minority of jurisdictions reject the concept, concluding that outside reverse piercing bypasses normal debt-collection procedures and unfairly prejudices the rights of innocent shareholders.  See Floyd v. I.R.S. U.S., 151 F.3d 1295 (10th Cir. 1998) (applying Kansas law); Cascade Energy and Metals Corp. v. Banks, 896 F.2d 1557 (10th Cir. 1990) (applying Utah law); Acree v. McMahan, 276 Ga. 880, 585 S.E.2d 873 (2003); Sturtevant v. Town of Winthrop, 1999 Me. 84, 732 A.2d 264 (1999); and Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510, 77 Cal. Rptr. 3d 96 (2008).

The trial court in this case assumed, without deciding, that Kentucky would recognize a claim under a reverse-piercing theory. In Inter-Tel Techs., Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), the Kentucky Supreme Court advised, “[c]ourts should not pierce corporate veils lightly but neither should they hesitate in those cases where the circumstances are extreme enough to justify disregard of an allegedly separate corporate entity.” Id. at 168. While traditional and outside reverse piercing affect different corporate interest, the purposes sought to be achieved are similar. In re Phillips, 139 P.3d at 645. On the other hand, outsider reverse piercing is a significant extension of the concept of piercing the corporate veil, and it is likely to affect the interests of innocent third parties and other corporate creditors. Acree v. McMahan, 585 S.E.2d at 874-75.

Under the circumstances, we conclude that the current case is not the appropriate means to recognize such a claim. We agree with the trial court that James’s Estate failed to present sufficient proof to warrant piercing Lindan’s corporate veil. Kentucky permits traditional piercing under an instrumentality or an alter-ego theory when two dispositive elements are met: (1) domination of the corporation resulting in a loss of corporate separateness and (2) circumstances under which continued recognition of the corporation would sanction fraud or promote injustice. Inter-Tel Techs. at 165. Proof of actual fraud is not required, but the injustice must be something beyond the mere inability to collect a debt from the corporation. Id.

In addressing the first element, the court must look to a number of factors, including but not limited to: (1) undercapitalization, (2) failure to observe corporate formalities, (3) the corporation not paying or overpaying dividends, (4) siphoning of corporate funds by a shareholder; and (5) personal guarantees of corporate debt by majority shareholders. Id. at 162 (Citing White v. Winchester Land Development Corp., 584 S.W.2d 56, 63 (Ky. App. 1979)). Other factors which may be considered include: (1) failure to issue stock; (2) insolvency of the debtor corporation; (3) nonfunctioning of the other officers or directors; (4) absence of corporate records; (5) comingling of funds; (6) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (7) failure to maintain arm’s-length relationships among related entities; and (8) whether, in fact, the corporation is a mere façade for the operation of the dominant stockholders. Id. at 163 (Citing Judson Atkinson Candies, Inc. v. Latini– Hohberger Dhimantec, 529 F.3d 371, 379 (7th Cir. 2008)). The trial court agreed with the Estate that a number of these elements were met.