The Reverse Pierce Doctrine - Article PDF

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EBSCO Publishing Citation Format: APA (American Psychological Assoc.): NOTE: Review the instructions at http://support.ebsco.com/help/?int=ehost&lang=&feature_id=APA and make any necessary corrections before using. Pay special attention to personal names, capitalization, and dates. Always consult your library resources for the exact formatting and punctuation guidelines.
References Crespi, G. S. (1990). The reverse pierce doctrine: Applying appropriate standards. Journal Of Corporation Law, 16(1), 33. 
THE REVERSE PIERCE DOCTRINE: APPLYING APPROPRIATE STANDARDS I. INTRODUCTION Judicial recognition of corporations as separate legal entities is well established and plays an important role in encouraging investment by limiting investor risk exposure. It is equally well established, however, that under appropriate circumstances courts will disregard the existence of a corporate entity (or, in more colorful language, "pierce the corporate veil") and treat the corporation and its dominant shareholder or other controlling insider as a single entity with regard to a particular claim or claims. Extensive literature exists that analyzes and criticizes the veil-piercing cases,[1] but this commentary focuses almost entirely upon the more routine applications of the doctrine of corporate disregard instead of on some interesting and unusual circumstances. This Article will attempt to illuminate a little-examined but important branch of corporate disregard jurisprudence known as the reverse pierce doctrine. [2] Disregard of a corporate entity is an equitable remedy. The decision whether to allow disregard, therefore, necessarily requires the balancing of competing objectives.[3] A court's decision to disregard usually arises in the context of attempts by corporate contract or tort creditors to pierce the corporate entity to reach shareholder assets (hereinafter referred to generically as "standard corporate creditor veil-piercing" attempts). Under those circumstances, courts must attempt to uphold legitimate investor expectations of limited liability exposure while preventing the use of the corporate form to promote fraud, illegality, or other injustice. The common law response to this problem has been to apply a presumption of separate entity status, rebuttable upon a showing of sufficient fraud, illegality, injustice, or an overriding public policy concern. The classic, early statement of the principles governing corporate disregard was set forth by Judge Sanborn in 1905:
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If any general rule can be laid down in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.[4] Such a general formulation of the issue, unfortunately, provides little practical guidance for courts that grapple with concrete and difficult cases. In the great majority of instances in which corporate disregard is sought, a creditor of a corporation is seeking to pierce the corporate entity to reach the assets of a corporate insider, usually a majority shareholder. In this context, the form and substance of the relationship between the corporation and the controlling insider is often an important factor in determining the presence of fraud or other injustice to the creditor. As a result, Judge Sanborn's early formulation has been widely superseded by an articulation of the corporate veil-piercing principles that emphasizes the insider-corporation relationship and no longer focuses exclusively upon the equities of the relationship between the corporate insider and the creditor or the general public. A typical expression of this contemporary articulation is set forth below: [It must be shown:] First, that the corporation is not only influenced and governed by that [insider], but that there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; second, that the factors are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.[8] Both courts and commentators have recognized that neither the above "unity of interest/fraud or injustice" formulation[6] nor any of the many piquant metaphors used to depict the circumstances that have been found sufficient to allow corporate disregard[7] are adequate to reconcile the conflicts within the case law or to predict reliably the outcome of future cases. As Justice Cardozo stated with his usual eloquence: The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mist of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy." All of this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice. . . . The logical consistency of a juridical conception will indeed be sacrificed at times, when the sacrifice is essential to the end that some accepted public policy may be defended or upheld. This is so, for illustration, though agency in any proper sense is lacking, where the attempted separation between parent and subsidiary will work a fraud upon the law.[8] Other commentators have noted that courts tend to eschew careful analysis and instead utilize metaphors in conclusory fashion when they have chosen to disregard the corporate entity, fortifying (and obscuring) their opinions by including every available fact that might
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indicate some control relationship or unity of interest between the corporation and the insider. [9] This is done even when there is no connection between the insider/corporation relationship or the degree of observance of corporate formalities and the injustice alleged. The jurisprudence of corporate disregard is by all accounts an exceptionally muddled area of the law.[10] Not only is this jurisprudence relatively unhelpful in resolving or predicting the outcome of standard corporate creditor veil-piercing controversies, it is almost wholly irrelevant to the interesting and diverse set of situations that are collectively referred to by the cases and commentary as involving a "reverse pierce" of the corporate veil. In a reverse pierce claim, either a corporate insider or a person with a claim against a corporate insider is attempting to have the insider and the corporate entity treated as a single person for some purpose. Conversely, in a standard corporate creditor veil-piercing controversy, it is a creditor of the corporation that is attempting to pierce the separation between the insider and the corporate entity. Because of this difference, reverse pierce claims implicate different policies and require a different analytical framework from the more routine corporate creditor veil-piercing attempts. This Article attempts to take a modest first step towards articulating the different policies regarding reverse piercing attempts and developing the proper analytical framework for deciding these cases. It initially presents a classification scheme distinguishing the two major classes of reverse pierce claims--insider and outsider reverse piercing.[11] For each class of claim, this Article then examines the surprisingly substantial and diverse body of existing case law.[12] Following this examination, this Article attempts to set forth, for each class of claims, a set of factors that should be considered in resolving those controversies.[13] These factors are grounded in the fundamental principles applicable to all corporate disregard decisions; hopefully, they are precise enough to be useful in deciding difficult reverse pierce cases in a consistent fashion. II. APPROPRIATE STANDARDS TO GOVERN REVERSE PIERCING A. Insider and Outsider Reverse Piercing Distinguished The case law and commentary have rather loosely applied the term "reverse pierce" to two distinct situations, which differ from the standard corporate creditor veil-piercing controversies but which also should be distinguished from each other. Most reverse piercing cases involve a dominant shareholder or other controlling insider who attempts to have the corporate entity disregarded to avail the insider of corporate claims against third parties or to bring corporate assets under the shelter of protection from third party claims that are available only for assets owned by the insider. This Article will henceforth refer to such situations as "insider" reverse piercing claims although this terminology is not currently used by the case law or commentary. Other reverse piercing cases, however, involve a third party claimant who files an action against the corporate insider and attempts to pierce the corporation to subject corporate assets to this claim; these cases can also involve a third party claimant who attempts to assert that claim against the corporation in an action between the corporation and the third party. This Article subsequently will refer to these situations as "outsider" reverse piercing claims. The key distinction between insider and outsider reverse piercing claims is the relative position
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of the persons seeking corporate disregard and their opponents. In insider reverse piercing claims, the controlling corporate insider (and, derivatively, the corporation) seek to have the corporation disregarded over the objections of a third party; in outsider claims, the third party seeks to have the corporation disregarded over the objections of the insider and the corporation. The different relative positions are crucial in determining the proper application of the equitable doctrine of reverse pierce. This Article will separately analyze insider and outsider reverse piercing claims. B. Insider Reverse Piercing Claims 1. Review of the Case Law The doctrine of insider reverse piercing has been most fully accepted and articulated by the courts of Minnesota in a line of cases commencing in 1981. The doctrine has also been considered by the courts of a number of other states and by several federal courts.[14] The doctrine has had mixed success outside of Minnesota. At least five state courts have allowed insider reverse piercing claims.[15] A number of other cases decided under state law[16] and all such cases arising under federal law, however, have denied reverse piercing claims.[17] Those opinions that denied insider reverse piercing claims generally emphasized the factspecific nature of the rulings and left open the possibility of applying the doctrine under appropriate circumstances.[18] This section of this Article will consider in some detail the Minnesota case law[19] and then briefly survey those cases from other states that have allowed insider reverse piercing claims. [20] A brief review of those state and federal law cases that have denied insider reverse piercing claims will follow.[21] (a) The Minnesota Cases Three Minnesota cases have allowed insider reverse piercing claims.[22] Several other Minnesota cases, however, have denied such claims under different circumstances.[23] Consequently, these latter cases serve to establish limits upon the scope of that state's application of the doctrine. In the seminal 1981 case of Roepke v. Western National Mutual Insurance,[24] the president and sole shareholder of a corporation had died in an automobile accident. The corporation owned the vehicle driven by the decedent at the time of the accident as well as five other vehicles. The corporation had paid separate premiums on each of the six vehicles under an automobile insurance policy with the defendant insurer. The policy specified the corporation as the sole named insured and provided survivor's benefits up to a maximum of $10,000 on each vehicle.[25] The central issue for determination in Roepke was whether, under the Minnesota no-fault statute, the plaintiff, the wife of the decedent-defendant, should be allowed to stack the survivor's benefit coverage on each vehicle and potentially to recover as much as $60,000 or whether her recovery should be limited to the $10,000 coverage on the single vehicle involved in the accident. The statute clearly would have allowed stacking had the decedent owned and insured the six vehicles in his individual capacity;[26] however, if the corporation were regarded as the sole "insured" under the policy, the statute would prohibit stacking.[27] The Minnesota Supreme Court concluded that it was appropriate for the decedent to be
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regarded as a person insured under the policy and that stacking was proper.[28] The court recognized that this result required that the corporation be disregarded as a legal entity separate from its controlling shareholder in its relationship to the insurer.[29] In reaching this result, the court first noted that corporate disregard is an equitable remedy which may be available if one individual owns "all, or practically all" of the stock of the corporation and the equities so require[30] The court then cited as persuasive authority several non-Minnesota cases that had allowed reverse piercing in probate administration contexts in which corporate disregard did not adversely affect any corporate shareholders or creditors.[31] The court also cited several Minnesota cases that had disregarded corporate entities in a trust administration context.[32] Having established the acceptability of reverse piercing under appropriate circumstances, the Roepke court allowed an insider reverse pierce on the basis of the following factual findings: (1) the decedent was the president and sole shareholder of the corporation; (2) he treated the insured automobiles as his own, he used them for family purposes, and neither the decedent nor members of his family owned any other vehicles; (3) no shareholder or creditor of the corporation would be adversely affected; and (4) the purpose of the Minnesota no-fault insurance act[33] would be best fulfilled by piercing the corporate veil and holding the decedent to be an insured under the policy.[34] The Roepke holding was expressly limited to the "facts peculiar to this case."[35] The opinion did not address the troubling question of why the interests of the insurer as a person owing duties to the corporation (broadly speaking, a debtor of the corporation) were less worthy of protection than the interests of corporate creditors or shareholders in a veil-piercing controversy. At first, the Roepke decision was narrowly construed and was not followed in subsequent Minnesota Supreme Court and Court of Appeals decisions. The Roepke precedent was initially cited two years later in Rademacher v. INA,[36] another automobile insurance coverage dispute in which the Minnesota Supreme Court rather summarily denied an insider reverse piercing claim. The first full application of the principles articulated in Roepke took place almost simultaneously with Rademacher in Kuennen v. Citizens Security Mutual Insurance. [37] This subsequent Minnesota Supreme Court opinion relied heavily upon Roepke, but construed it narrowly in denying a reverse piercing claim? In dictum, the Kuennen court grounded the reverse pierce doctrine more expressly on the "degree of identity" criterion, often applied in standard corporate creditor veil-piercing cases, than had been done in Roepke.[39] Finally, in Leidall v. Grinnell Mutual Reinsurance,[40] a Minnesota Court of Appeals panel denied a reverse piercing claim under circumstances in which the plaintiff, the decedent's wife, had attempted to recover on the decedent's brother's insurance policy. Gradually, however, Roepke and its insider reverse pierce doctrine gained greater acceptance in Minnesota. Cargill v. Hedge,[41] decided in 1985, was the first case in which the Minnesota Supreme Court applied and extended Roepke to allow an insider reverse piercing claim, In Cargill, the defendant and his wife entered into an installment contract purchase of a farm, took possession of the farm, and subsequently assigned their interest to a family farm corporation for which the defendant's wife was the sole shareholder.[42] The defendant subsequently purchased farm supplies and services from the plaintiff, but failed to pay. The plaintiff, unaware of the existence of the family corporation until after it filed suit, amended its initial complaint against the defendant and his wife to include the corporation. The plaintiff subsequently obtained a judgment against the defendant and the family corporation.[43] After an execution sale of the farm to the plaintiff, the defendant's wife intervened during the
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statutory redemption period seeking to exempt from execution the portion of the farm containing their homestead. She argued that the existence of the family corporation should be disregarded and that its assets, consequently, should be treated as the individual defendant's assets subject to the Minnesota statutory homestead exemption. In its analysis, the Cargill court reaffirmed the position it had originally suggested in Roepke, and more fully articulated in Kuennen, that the degree of identity between the individual and his corporation is important for reverse piercing the corporate veil.[44] The court also restated the position taken in Roepke that it is important whether others, such as creditors or other shareholders, would be harmed by a pierce.[45] After conceding that the defendant and his wife had "maintained some of the corporate formalities, such as keeping corporate minutes, filing corporate tax returns, and dealing with the Production Credit Association as a corporation,"[46] the Minnesota Supreme Court nevertheless concluded that, because of the intimate family connections with the corporation's operations, the corporation "was as much an alter ego for the [defendant and his wife] as Mr. Roepke's corporation was for him."[47] The court determined that the purpose of the homestead exemption provided strong policy reasons for allowing a reverse pierce, reasons much stronger than those present in Roepke.[48] Regarding to the plaintiff's claim that a reverse pierce would adversely affect it as a creditor of the corporation, a result which would be contrary to the principles set out in. Roepke, the Minnesota Supreme Court belatedly conceded that Roepke had imposed a burden on the insurer comparable to the burden that a reverse pierce would impose on the plaintiff here.[49] It nevertheless allowed the individual defendant in Cargill to pierce the corporate veil and shelter corporate assets under his individual homestead exemption.[50] The court was clearly influenced by the fact that the plaintiff had been unaware of the existence of the corporation when it extended credit to the defendant individually.[51] The Cargill opinion appears to stand for the proposition that, if disregarding the corporate entity would advance important state policies, an insider reverse piercing claim will be sustained. This is true even if a corporate creditor is thereby prejudiced or many corporate formalities have been observed if the corporate creditor extended credit unaware of the existence of the corporation. The opinion contained, as had Roepke, cautionary dicta expressing a reluctance to extend the doctrine further.[52] The Roepke/Cargill doctrine has been unevenly applied by the Minnesota Court of Appeals. In 1987, an attempt to extend the doctrine further in favor of guarantors met with failure in Miller & Schroeder, Inc. v. Gearman.[53] Two years later, however, that same court significantly extended the scope of the doctrine in State Bank in Eden Valley v. Euerle Farms,[54] another homestead exemption case that allowed an insider reverse piercing claim. The Eden Valley court recognized that there had been a more scrupulous observance of corporate formalities by the officers and directors of Eden Valley than by the comparable officials of Cargill, but did not find this fact determinative.[55] More importantly, the Eden Valley creditors were well aware of the existence of the corporation and lent funds to and took security interests from it. [56] This differed from the lender in Cargill, who was not cognizant of the corporation's existence until after the suit was filed. The court refused to concede that a reverse pierce would impose any unfairness upon the creditors, stating that "any unfairness to creditors [caused] by the homestead exemption is inherent in the exemption itself."[57] The court suggested that the creditors could have protected themselves by taking a mortgage on the
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real estate from the corporation as security,[58] but the opinion also suggests that even this measure may not have been sufficient.[59] Eden Valley thus broadens the reach of the Roepke/Cargill articulation of the reverse pierce doctrine by making it relatively clear that any closely held family farm corporation will satisfy the "alter ego" requirement for reverse piercing regardless of the degree of compliance with corporate formalities. Eden Valley also removes the uncertainty as to whether the Cargill rationale might allow reverse piercing when the creditor has dealt directly with the corporate entity. After Eden Valley, it would not be advisable for any lender to a family farm corporation in Minnesota to assume that it will be able to proceed against the real estate of that corporation in the event of default except to the extent that the property exceeds in size the amount that could possibly be sheltered by one or more of the homestead exemptions available to insiders of the corporation. It is not clear, however, to what extent this more liberal construction of the reverse piercing doctrine will be endorsed by the Minnesota Supreme Court or extended outside of the somewhat unique homestead exemption context. (b) Cases from Other States allowing Insider Reverse Piercing Claims Insider reverse piercing claims have also been upheld in cases decided in Florida, Illinois, Michigan, Montana, and New Jersey.[60] This section briefly reviews these cases on a stateby-state basis. The two subsequent sections will examine opinions from a number of other state and federal courts that have denied reverse piercing claims.[61] In Gilbert v. Doris R. Corporation,[62] a Florida appellate court allowed a reverse pierce claim. The plaintiff there attempted to invoke the protection available to individual debtors under the Florida usury statutes with regard to a loan made to his wholly-owned corporation. The court justified allowing the reverse pierce claim by characterizing the entity as a "sham contrivance" designed to circumvent the policies underlying the usury laws.[63] The Illinois courts have given qualified support to the insider reverse pierce doctrine. In Earp v. Schmitz,[64] an early forcible detainer action, the plaintiff lessor attempted to eject the defendant lessee from the leased premises on the basis that the lessee had breached a contract provision prohibiting the use of the premises by any person other than the lessee. The lessee initially leased the building as a sole proprietor and subsequently incorporated and operated out of the premises as a corporation.[65] The Illinois Court of Appeals upheld a finding for the defendant? The Earp opinion was cited several decades later by the same court in Crum v. Kroll[67] to provide support for the allowance of an insider reverse piercing claim. A number of insider reverse piercing claims have arisen in the Michigan courts. Most of the Michigan decisions that have considered such claims have allowed them. Cases involving conveyance restrictions,[68] lost profits,[69] and worker's compensation statute tort immunities have upheld reverse piercing claims.[70] Only one insider reverse piercing claim has been adjudicated in Montana. That case, United States Gypsum Co. v. Mackey Wall Plaster Co.,[71] arose in a receivership context. The Montana Supreme Court allowed the claim, and the language of its opinion provides some general support for application of the insider reverse piercing doctrine. There are two New Jersey opinions upholding insider reverse piercing claims. In Gelber v.
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Kugel's Tavern,[72] the New Jersey Supreme Court allowed an insider reverse piercing claim in the usury statute context. A similar result was later reached by an appellate court in Lesser v. Stubbe.[78] (c) State Law Cases Denying Insider Reverse Piercing Claims Insider reverse piercing claims have been denied by the courts of a number of states, including Kentucky, Louisiana, New York, Oklahoma, Tennessee, Texas, and Utah.[74] Those opinions, in general, do not flatly reject the doctrine, but instead find it inapplicable to the cases' facts.[75] The tone of many of those opinions suggests, however, that those courts would rarely, if ever, apply the doctrine to allow a reverse pierce.[76] A number of common circumstances often exist when insider reverse piercing claims are denied. One situation that often results in denial of such a claim is when an insider seeks corporate disregard to allow the joinder of insider and corporate claims or counterclaims against an outsider in an action brought only by the insider or by the corporation.[77] Another circumstance that will often result in denial of a reverse piercing claim is when a parent corporation uses worker's compensation statutes to invoke employer immunity from a tort claim filed by an injured employee of a subsidiary corporation.[78] A number of courts will also deny a reverse pierce claim when an insider seeks corporate disregard to obtain of the protection of the usury statutes with regard to corporate debts.[79] The doctrine has been rejected at least once in a criminal context as well.[80] (d) Federal Law Cases Denying Insider Reverse Piercing Claims The insider reverse piercing doctrine has not fared well in the federal courts when federal law provides the rule of decision. The tone was set by the 1946 Supreme Court decision Schenley Corp. v. United States, which rejected an insider reverse piercing claim in a licensing context. [81] Since that time, a number of federal bankruptcy opinions have applied the logic of Schenley to deny a variety of insider reverse piercing claims.[82] 2. Appropriate Standards to Evaluate Insider Reverse Piercing Claims (a) General Principles The general principles articulated by Judge Sanborn in United States v. Milwaukee Refrigerator Transit Co.[83] remain valid in the insider reverse piercing context; the separate entity status of a corporation should be respected unless the entity is used to "defeat public convenience, justify wrong, protect fraud, or defend crime. . . ."[84] The policy basis for the presumption of separate entity status in the insider reverse piercing context differs significantly, however, from the rationale for respecting the entity status of a corporation in a standard corporate creditor veil-piercing attempt. In an insider reverse pierce, it is the shareholder or other insider that is actively seeking corporate disregard; consequently, allowance of such claims will not undermine the security of investor expectations of limited liability exposure. The true danger in allowing insider reverse piercing claims is that such decisions may unsettle the expectations of corporate creditors who expect their loans to be secured by corporate assets without regard to any defenses that may be asserted by individual shareholders (such as usury statute protection or homestead exemption rights). The liberal allowance of insider reverse piercing claims may also cause
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entities that owe duties to corporations (such as corporate insurers) to reevaluate their expectations that those duties will not extend to corporate insiders. If insider reverse pierce claims are liberally allowed, these entities may become more reluctant to enter into these relationships with corporations or may be willing to do so only on more favorable terms that compensate them ex ante for the perceived new risks. Consequently, the usefulness of the corporate form as a means for raising and deploying capital may be impaired. As a general policy, therefore, insider reverse pierce claims should be allowed only when the court can justify by the achievement of some substantial public convenience the disturbance of the legitimate expectations of corporate creditors or debtors or when the court can justify this disturbance by the allowance of those claims as a measure necessary to remedy significant fraud, crime, or injustice. In this latter instance, the wrongful conduct would have to be that of the corporate creditor or debtor who would be prejudiced by allowing the reverse pierce. This situation differs from the standard corporate creditor veil-piercing attempts when the corporate insider is the person generally alleged to have engaged in wrongful conduct. One distinction between standard corporate creditor veil-piercing and insider reverse piercing is immediately apparent. The unity of interest factors given substantial weight (perhaps inappropriately) under the standard corporate creditor veil-piercing jurisprudence are largely irrelevant in evaluating insider reverse piercing claims. It would be clearly aberrant to allow a corporate insider to reverse pierce the corporate entity because the insider caused the entity to fail to observe the requisite corporate formalities and operated it as the insider's alter ego. This would violate perhaps the most fundamental rule of equity by allowing a person to profit from personal wrong doing. The relevance, if any, of the failure to observe corporate formalities is the possible suggestion that the corporate creditor or debtor reasonably believed that it was dealing directly with the insider rather than with a corporate entity. If so, the creditor or debtor would not have relied upon the separate legal status of the entity; however, unless the creditor or debtor knew of the corporation's failure to observe formalities and perceived this failure as vitiating the separate existence of the entity, it should be of no significance in an insider reverse piercing controversy. There are, therefore, two distinct (although occasionally overlapping) kinds of insider reverse piercing claims, each requiring a separate analysis applying different criteria. For those claims grounded in an appeal to the public convenience, the analysis should involve a balancing of the social value of upholding the legitimate expectations of the affected corporate creditors or debtors, applying a rebuttable presumption in favor of assuring such expectations, against the importance of the policies served by allowing a reverse pierce under the particular circumstances involved. For those claims grounded in allegations of wrongful conduct by the affected creditors or debtors, the importance of generally upholding legitimate creditor or debtor expectations must be balanced, with a rebuttable presumption in favor of upholding those expectations, against the gravity of the injustice experienced by the corporation or the insider if the affected creditors or debtors avoid the reverse pierce. For claims involving both public convenience appeals and wrongful conduct allegations, all of the above policies would have to be weighed. The presence or absence of a unity of interest between the corporation and its controlling insider, important in standard corporate creditor veil-piercing controversies, is usually of little or no relevance to this analysis.
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(b) Analytical Deficiencies of the Case Law (i) Cases Allowing Insider Reverse Piercing Claims As a general matter, those cases that use the insider reverse piercing doctrine to disregard the corporate entity fail to demonstrate sufficient appreciation of what factors are relevant in a particular controversy and fail to note the crucial differences between insider reverse piercing claims and standard corporate creditor veil-piercing claims. For example, the Minnesota Roepke/Cargill/Eden Valley line of cases articulating the doctrine gives substantial weight to largely irrelevant factors and neglects to analyze fully the true policy issues implicated. Each of these decisions was a pure public convenience case with no allegation of wrongful conduct. In Roepke v. Western National Mutual Insurance,[85] the court placed great emphasis upon the unity of interest between the insider and the corporation.[86] Unity of interest should, however, be irrelevant in a reverse pierce context because an insider should not be allowed to assert control of the entity or disregard the requisite corporate formalities as a basis for obtaining a disregard of the entity. The Roepke opinion piously declares that no shareholder or creditor will be adversely affected by a reverse pierce[87] while ignoring that the debtor insurer will be injured by having to pay out the plaintiff's claim. Finally, there is no attempt made by the Roepke court to balance the public convenience benefits of the policy of liberal compensation underlying the Minnesota no-fault statute against the harm done to corporate insurers by thwarting their legitimate expectations. In Cargill v. Hedge,[88] the court invoked without analysis the "alter ego" status of the corporation as the primary basis for allowing a reverse pierce,[89] but failed to discuss sufficiently the significance of the creditor's failure to rely upon the existence of the corporate entity. In addition, the court treated the policy underlying the homestead exemption statute as controlling over competing policies without making any serious attempt to justify this position.[90] The State Bank in Eden Valley v. Euerle Farms[91] court made essentially the same mistakes as the Cargill court.[92] These cases leave this author with the uncomfortable feeling that the true role of the insider reverse piercing doctrine in Minnesota may be to provide the courts with a rationale for favoring distressed family farmers or impecunious relatives of decedents at the expense of deep-pocket insurers or grain companies. In fairness, some insider reverse piercing claims have been denied in Minnesota under these circumstances;[93] however, as long as the court's application of the doctrine fails to balance properly the true competing interests involved in these cases, a potential exists for its misuse to accomplish unlegislated wealth redistribution in hard cases. Some of the reverse piercing cases decided outside Minnesota that have allowed corporate disregard demonstrate a somewhat better appreciation of the true questions involved, but still fail to analyze the issues correctly. The Illinois Crum[94] decision, for example, was a wrongful conduct situation in which a reverse pierce was sought to prevent the defendant from invoking a procedural technicality to avoid paying damages for a breach of contract. The court recognized that its decision rested on the injustice of allowing the defendant to use this theory to avoid liability.[95] The Crum court failed, however, to analyze what effect allowing a reverse pierce in that case would have on the general expectations of corporate debtors: that they would not be held directly liable to the corporation's shareholders in an action brought by the corporation. The several decisions allowing reverse pierce claims in a usury statute context are properly based on the recognition of the wrongful conduct of the lender, but they fail to evaluate fully the strength of the public policies at issue and the significance of the borrower's complicity?
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Finally, Wells v. Firestone Tire & Rubber Co.,[97] a pure public convenience case decided in Michigan, properly invoked the public policy underlying the worker's compensation statutes favoring single recoveries for workplace injuries[98] and correctly noted the plaintiff's failure to rely upon the separate legal status of the corporate entity? The opinion, however, devoted considerable verbiage to depicting the precise control relationship between the parent corporation and the subsidiary corporation,[100] a matter irrelevant when determining whether a reverse pierce is justified. As with other cases, the Wells court also failed to evaluate the strength of the competing public policies--the need to limit excessive recoveries for injuries versus the need to assure the legitimate expectations of corporate creditors. (ii) Cases Denying Insider Reverse Piercing Claims The substantial number of state and federal decisions that have refused to allow an insider reverse pierce[101] almost invariably fail to conduct a meaningful analysis. Although these cases stop short of asserting that the insider reverse piercing doctrine has no validity, they give it very short shrift. The opinions tend to follow a simple formula: first, declare in lofty tones that, if one chooses to enjoy the benefits of incorporation, one has little or no right to complain about the burdens it may impose; next, summarily deny the claim.[102] The opinions that deny these claims in the usury statute context usually do not even articulate their rationale.[103] A court that would conduct a more penetrating analysis would recognize that, if the particular burden imposed by incorporated status thwarts substantial public policy or involves the wrongful or unjust injury of a corporate insider because of an outsider's manipulation of the corporate entity, it is appropriate to inquire initially whether the burden should be alleviated through corporate disregard. The analysis should then consider whether reverse piercing could be accomplished without jeopardizing the ability of the corporate form generally to result in benefits to those availing themselves of it. (c) Appropriate Standards The insider reverse piercing case law typically fails to illuminate adequately the precise issues raised by those claims or to provide appropriate criteria for their resolution. The central question presented in applying the reverse pierce doctrine to insider claims is how to strike the appropriate balance between the need to uphold the legitimate expectations of corporate creditors and debtors and the need to do justice in hard cases involving some over-riding public interest or some abuse of the corporate form by those creditors or debtors to alter the scope of their obligations to the corporation or to the corporation's obligation to them. Given this focus, the proper factors for a court to consider in evaluating the merits of an insider reverse piercing controversy are: (a) the degree to which allowing a reverse pierce would thwart the legitimate expectations of any adversely affected corporate creditors or debtors or establish a precedent troubling to corporate creditors and debtors generally; (b) the degree to which any corporate creditors or debtors that would be adversely affected by a reverse pierce have reasonably relied upon the separate entity status of the corporation in establishing and conducting their relationships with it; (c) the degree to which the public convenience, as articulated by the statutes and common law of the jurisdiction, would be served by allowing a reverse pierce;
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(d) the extent and severity of the wrongful conduct, if any, engaged in by any corporate creditors or debtors that would be adversely affected by a reverse pierce; and (e) the possibility that the person seeking a reverse pierce is personally guilty of wrongful conduct sufficient to bar the individual from obtaining equitable relief. The relative weight given to each of the above factors will, of course, vary with the particular factual circumstances. The nature of an equitable remedy such as corporate disregard dictates that no abstract and definitive calculus exists for conducting the required balancing. The above factors are flexible enough to allow a court to tailor its analysis to a specific factual context. Application of these factors will, however, ensure that courts will decide reverse pierce cases upon the proper criteria, thus promoting consistency in outcomes. A review of the case law suggests that most, but not all, insider reverse piercing claims will be denied if the above standards are reasonably applied regardless of the precise balancing formula that is utilized. The degree of identity factors that have been given substantial or even determinative weight under the standard corporate creditor veil-piercing jurisprudence, and unfortunately in most of the insider reverse piercing cases as well, should be relevant only to the extent that they bear upon the presence or significance of one or more of the factors listed above. The relative financial circumstances of the contending parties should have no bearing upon the decision whether to allow a reverse pierce except insofar as those circumstances are relevant to determine the extent to which the public convenience would be advanced by allowing a reverse pierce.[104] C. Outsider Reverse Piercing Claims 1. Review of the Case Law This Article previously defined "outsider reverse piercing" as encompassing situations in which a person pressing an action against a corporate insider seeks to disregard the corporate entity to subject corporate assets to the claim or situations in which a person with a claim against a corporate insider seeks to assert that claim against the corporation in an action between the claimant and the corporation. Outsider reverse piercing claims differ from insider reverse piercing claims in that in outsider claims the insider resists, rather than promotes, the disregard of the corporate veil. Outsider reverse piercing claims also differ from standard corporate creditor veil-piercing attempts. In standard corporate creditor veil piercing attempts, creditors generally seek to pierce a corporate entity to reach the assets of a controlling insider; conversely, creditors bring outsider reverse piercing claims to attempt to subject corporate assets to a claim against the insider. No single state has articulated the outsider reverse piercing doctrine to the extent that the Minnesota courts have refined the insider reverse piercing doctrine. Fewer than twenty cases decided over the last sixty years have involved outsider reverse piercing claims,[105] and most of these are the only such case in their jurisdiction. Interestingly, slightly over half of these opinions have upheld the reverse piercing claims; the rest have denied them.[106] Because outsider reverse piercing claims usually present cases of first impression to the courts, the opinions draw freely upon similar cases that have arisen in other jurisdictions. Given this fact, these opinions can be best understood if they are examined in chronological
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order, rather than on a state-by-state basis, so as to follow the actual evolution of the doctrine. The earliest opinion that discusses an outsider reverse piercing claim is Kingston Dry Dock Co. v. Lake Champlain Transportation Co.,[107] a 1929 Second Circuit Court of Appeals admiralty case argued before Judges Learned and Augustus Hand. In Kingston Dry Dock, the plaintiff Kingston had repaired a ship which was owned by Champlain's subsidiary, at the request of Champlain, a shipping company. The subsidiary had numerous director and management interlocks with its parent, but had not ordered or otherwise been involved in any way with the repairs. Kingston became dissatisfied with the financial situation of Champlain and sought to recover its expenditures from Champlain's subsidiary firm in an action brought against Champlain. The district court upheld Kingston's claim by disregarding the separate status of the subsidiary to subject the subsidiary's assets to the fulfillment of Kingston's claim against Champlain. The Second Circuit Court of Appeals reversed and expressed strong reservations about allowing outsider reverse piercing in an intra-corporate context. Judge Learned Hand stated in the opinion: Perhaps it would be too much to say that a subsidiary can never be liable for a transaction done in the name of the parent, the situation at bar. Any person may use another as a screen, and one may conceive cases where such an arrangement might exist. But such instances, if possible at all, must be extremely rare. . . . [The subsidiary] never intended in fact to make the [parent] . . . its agent, nor did it interpose in any way in the conduct of its affairs. Rather their relations were reversed, so that the [subsidiary] . . . could not have interposed.[108] Several decades elapsed before the outsider reverse piercing doctrine was again litigated. The doctrine was successfully invoked, however, in W.G. Platts, Inc. v. Platts,[109] a 1957 Washington marital property case. In Platts, the Washington Supreme Court upheld a lien that attached in favor of the wife upon property owned by a corporation controlled by the husband even though the mother and brother of the husband were small minority shareholders. The ruling was based summarily upon a finding that the corporation had acted as the "alter ego" of the husband.[110] An outsider reverse piercing claim was considered several years later in Shamrock Oil & Gas Co. v. Ethridge,[111] a federal court case decided under Colorado law. In Shamrock Oil, the District Court of Colorado upheld an outsider reverse piercing defense asserted against a corporate claim by creditors of the corporation's shareholder. The court found that the shareholder had operated his wholly-owned corporation as his "alter ego"[112] and the court subsequently held that this finding supported not only shareholder liability for corporate obligations, but also corporate liability for the shareholder's obligations.[113] In 1963, the Illinois Court of Appeals decided Divco-Wayne Sales Financial Corp. v. Martin Motor Vehicle Sales, Inc.,[114] a case involving several affiliated corporations that manufactured, distributed, and financed automobile sales. The court denied an outsider reverse piercing claim brought by a creditor of the parent firm. The Divco-Wayne court reasoned that similarity of names among affiliates, without more, fails to justify disregard of their separate entity status.[115] Five years later, in Olympic Capital Corp. v. Newman,[116] the District Court for the Central District of California rejected an outsider reverse piercing claim that attempted to hold a corporation liable for a debt owed by its controlling shareholder.
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Although not citing Kingston Dry Dock Co., the court followed similar reasoning: Plaintiff here would have the court disregard . . . [the corporation] to impose liability upon . . . [the shareholder], i.e., that . . . [the shareholder] was a hollow shell controlled and dominated by . . . [the corporation]. The statement of such a contention makes patent the fallacy of the reasoning. . . . Alter ego [liability] would appear to be limited to the situation where there is reason to disregard a corporate entity to reach individuals, it has no applicability in disregarding the existence of an individual to reach corporate assets.[117] The Olympic Capital Corp. court also noted that agency presented a possible basis for corporate liability for the shareholder's actions, but Olympic failed to plead this basis for liability in the action.[118] In Central National Bank & Trust Co. of Des Moines v. Wagener,[119] decided in 1971, the Iowa Supreme Court allowed a creditor of an individual to reverse pierce a corporation controlled by that individual. The opinion expressly rejected the reasoning of Olympic Capital Corp.[120] It did not, however, offer any rationale for this rejection; the court merely referred to earlier precedents.[121] The Platts, Shamrock Oil, and Central National Bank opinions were subsequently cited by the Idaho Supreme Court as support for the allowance of an outsider reverse piercing claim in Minich v. Gem State Developers, Inc.[122] The Minich court felt the case involved facts similar to those of three precedents.[123] The Minich court rejected the rationale of Olympic Capital Corp. in summary fashion.[124] Valley Finance v. United States,[125] decided in 1980, marks the first assertion of an outsider reverse piercing claim under federal law. The trial court had allowed the Internal Revenue Service to seize the assets of a corporation which was wholly-owned by Korean businessman Tongsun Park, to satisfy tax claims against Park.[126] The Court of Appeals for the District of Columbia upheld the lower court decision. The court of appeals premised its ruling upon a conventional application of the alter ego principles often used in standard corporate creditor veil-piercing controversies.[127] The court did not find it significant that its ruling resulted in corporate liability for individual shareholder obligations rather than the reverse. The unusual approach followed by the Fifth Circuit Court of Appeals in 1980 to resolve an outsider reverse piercing controversy in FMC Finance Corp. v. Murphree[128] merits a detailed discussion. That case involved three corporations with similar names: FMC Corporation; FMC Finance Corporation (FMC Finance), a wholly-owned subsidiary of FMC Corporation; and FMC Leasing Corporation (FMC Leasing), a wholly-owned subsidiary of FMC Finance. Perimeter Express, Inc. leased some buses from FMC Leasing that were manufactured by FMC Corporation; Perimeter Express obtained financing for the lease through FMC Finance. The majority shareholders of Perimeter Express executed a guaranty of the Perimeter Express lease obligations in favor of FMC Finance.[129] After a default on the lease and a bankruptcy filing by Perimeter Express, FMC Finance filed suit against the majority shareholders to enforce the guaranty. The majority shareholders of Perimeter Express defended on the grounds that FMC Corporation failed to honor warranty claims on the buses. This affirmative defense by the shareholders was in substance an outsider reverse piercing claim because the shareholders sought disregard of the separate existence of plaintiff FMC Finance and its parent FMC Corporation to assert a defense against FMC Finance based on the actions of FMC Corporation. FMC Finance argued that it was inappropriate for the defendants to raise
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defenses against the subsidiary based upon the conduct of its parent FMC Corporation, a separate entity that it did not control. The district court granted FMC Finance's motion for a directed verdict, but the Fifth Circuit Court of Appeals reversed this ruling. Deciding the case under Illinois law, the court of appeals recognized that, to sustain the defendants' claim, it would have to disregard the separate existence of the subsidiary from the parent with regard to the defendants, i.e., reverse pierce the corporate veil of the subsidiary at the behest of a creditor of the parent.[130] The court cited Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[131] for the proposition that, under unusual circumstances, it may be appropriate to allow an outsider reverse pierce. [132] Correctly recognizing that the unity of interest/fraud or injustice veil-piercing criterion applied in standard corporate creditor veil-piercing controversies was inapposite in evaluating an outsider reverse piercing claim,[133] the court set forth a novel two-part test. First, a "control relationship between the parent and the subsidiary" was a "necessary but not sufficient condition" for piercing the corporate veil.[134] Second, "in this type of case . . . implied misrepresentation in the extension of credit" was necessary before allowing a reverse pierce.[135] The court found the requisite control relationship to exist between FMC Finance and FMC Corporation even though FMC Finance was the controlled entity. It then cited DivcoWayne for the proposition that name similarity without more is insufficient to justify a reverse pierce[136] and remanded for a jury determination on the misrepresentation question.[137] The Texas marital property case of Zisblatt v. Zisblatt, decided in 1985,[138] allowed an outsider reverse piercing claim asserted by a spouse who sought to attach the assets of a corporation partially owned by her husband in a controversy over the classification of assets as divisible community property.[139] The Texas Court of Appeals was not swayed by the fact that allowance of this claim would be prejudicial to another corporate shareholder.[140] It may have declined to give weight to this prejudicial effect because the second shareholder was the sister of the defendant who had obtained her shares gratuitously.[141] In Estudios, Proyectos E Inversiones De Centro America, S.A. v. Swiss Bank Corp.,[142] a 1987 Florida Court of Appeals case, an outsider reverse pierce claim was asserted in the context of a prejudgment attachment. The trial court had granted a writ of attachment of corporate property to satisfy a debt owed by the controlling shareholder of the corporation.[143] The court of appeals upheld the claim and stated that, while the usual result of piercing the corporate veil is to hold a shareholder liable for corporate liabilities, "[t]he remedy is equally available, however, to hold the corporation liable for the debts of controlling shareholders where the shareholders have formed or used the corporation to secrete assets and thereby avoid pre-existing personal liability."[144] In 1989, the Eleventh Circuit Court of Appeals issued a reverse pierce opinion in Shades Ridge Holding Co. v. United States,[145] another federal tax case. In Shades, the corporation had appealed a lower court ruling that found it liable for the unpaid tax liabilities of its controlling shareholder.[146] The court of appeals affirmed the allowance of the outsider reverse piercing claim of the Internal Revenue Service, summarily stated that "[p]roperty of the nominee or alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability,"[147] and found the necessary alter ego relationship.[148] Cascade Energy and Metals Corp. v. Banks[149] was a recent Tenth Circuit Court of Appeals
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case that involved a dispute between the principal promoter of a gold mine and a group of investors in the mine. The investors alleged that the promoter had improperly transferred and commingled funds among several corporate entities that the promoter controlled, and the investors requested that the court disregard those entities to allow the assets of the entities to be subjected to their claims against the promoter. The district court had allowed what was, in effect, an outsider reverse pierce claim by ruling in favor of the plaintiffs and holding the entities jointly liable for the promoter's conduct.[150] The Tenth Circuit Court of Appeals reversed in part, denying the outsider reverse piercing claim. The opinion contained substantial analysis of the reverse pierce issue. The court determined that, under Utah law, the unity of interest/fraud or injustice formulation of the appropriate criteria for veil-piercing was controlling[151] and that the unity of interest prong was satisfied by the promoter's complete domination over the affiliates.[152] The court stated, however, that for a number of reasons a reverse pierce was not justified under Utah law. First the court noted that the Utah Supreme Court had never formally considered the reverse pierce doctrine, and moreover, in Messick, the supreme court had pejoratively declared the reverse pierce doctrine to be a "little-recognized theory."[153] Second, the court recognized that it was dealing with a special "variant" of reverse piercing claim which was asserted by an outsider rather than an insider[154] and that certain special problems result from the allowance of such a claim; these problems include the bypassing of normal judgment collection procedures that attach corporate shares rather than assets and the possible prejudicing of other, non-culpable corporate shareholders if the creditors of a controlling insider directly attach the corporation's assets.[155] Third, the court of appeals expressed reservations about the wisdom of allowing veil-piercing when it is exercised in favor of consensual contract creditors rather than nonconsensual tort creditors.[156] Fourth, the court noted that the promoter observed the corporate formalities and that the promoter had held out to the world the entities as separate organizations.[157] Finally, the court emphasized that, under Utah law, the fact that a unity of interest could be shown between the insider and the affiliates was not sufficient to allow a pierce; rather, the claimants must show how their injury was related to the unity of interest or to their reliance on the entities' lack of separateness, a showing that the plaintiffs had not made.[158] In Transamerica Cash Reserve v. Dixie Power and Water,[159] a Utah case decided after Cascade Energy Metal Corp. but without reference to it, the Utah Supreme Court reversed a lower court decision and denied an outsider reverse pierce claim that was based on the allegation that the corporation was the "alter ego" of its controlling shareholder. The court first cited as relevant precedents the Shamrock Oil, Minich, and Olympic Capital Corp. opinions, [160] thus recognizing the division of authority on the issue.[161] The court ultimately denied the claim based upon a special limitation that it imposed upon use of the "alter ego" theory to allow creditors of controlling insiders to attach corporate assets. The court held that, to proceed on such a claim, "it must be shown that the corporation itself played a role in the inequitable conduct at issue."[162] A recent Fifth Circuit Court of Appeals case decided under Texas law vacated the lower court decision allowing an outsider reverse piercing claim and provided, in dicta, a fairly extensive discussion of the doctrine. Zahra Spiritual Trust v. United States[163] involved a suit brought to discharge federal tax liens imposed upon corporate assets to satisfy the tax liability of the corporation's beneficial owners through an intervening trust. The Zahra court clearly recognized that it was dealing with a reverse pierce controversy
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that differed from the standard corporate creditor veil-piercing controversy,[164] but declared that the disregard remedy was "equally available to hold the corporation liable for debts of the controlling shareholders" under appropriate circumstances,[165] citing the Estudios, Proyectos E Inversiones De Centro America opinion as support for this proposition.[166] Noting further the judicial recognition of the outsider reverse pierce doctrine in the tax liability cases of Valley Finance[167] and Shades Ridge Holding Co.[168] and in the Texas cases of American Petroleum Exchange v. Lord[169] and Zisblatt v. Zisblatt,[370] the court concluded that, under Texas law, an outsider reverse pierce could be predicated upon a finding of an alter ego relationship between the corporation and the controlling insider.[171] Turning to the question of the existence of such a relationship, the court concluded that, because the individuals who owed the tax liability were not direct shareholders of the corporation but instead were beneficiaries of a trust which held the shares, the requisite alter ego relationship might not be present.[172] The court then remanded the case for determination as to whether the taxpayers had a present ownership interest in the trust sufficient to justify treating them as shareholders of the corporation.[178] 2. Appropriate Standards to Evaluate Outsider Reverse Piercing Claims (a) General Principles Under the early United States v. Milwaukee Refrigerator Transit Co.[174] formulation of the principles governing corporate disregard decisions, the separate entity status of a corporation should be respected except when a contrary result is justified on the basis of advancing the public convenience or on the basis of wrongful conduct by the person seeking to avoid corporate disregard. This formulation is also applicable in the outsider reverse piercing context. A corporation should be presumed to be a separate legal entity in the face of an outsider reverse piercing claim unless the person asserting the claim can justify the equitable remedy of corporate disregard on either or both of these two bases. The policies underlying the presumption of separate entity status in the outsider reverse piercing context differ, however, from the policies implicated in the insider reverse piercing context. Allowance of an outsider reverse pierce will prevent the shareholders of a corporation from shielding corporate assets from claims against a controlling insider; as a result, the general expectations of investors that their corporations will be free from liability for claims against corporate insiders may be impaired. This impairment of investor expectation ultimately could reduce the usefulness of the corporate form as a vehicle for raising and deploying capital; thus, the policy basis for denying outsider reverse piercing claims more closely parallels the need to assure investor expectations of limited liability exposure (the basis for upholding the status of the corporate entity in a standard corporate creditor veil-piercing controversy) than it parallels the need to assure the expectations of corporate creditors or debtors as to the scope of corporate obligations (the basis for upholding the entity in the insider reverse piercing context). The existing body of corporate disregard jurisprudence in the standard corporate creditor veil-piercing context is consequently somewhat more applicable here than in the insider reverse piercing context. An outsider reverse pierce takes place over the objections of the insider and the corporation; therefore, the relevant wrongful conduct, if any, would be that of the insider or the corporation. A key factor in any outsider reverse piercing controversy is the presence of corporate
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shareholders other than the insider against whom the outsider is asserting the primary claim. If other shareholders do exist, allowance of a reverse pierce would prejudice those shareholders by allowing the outsider to attach assets in which they have an interest. This injustice visited upon non-culpable parties would militate strongly against granting the equitable remedy of corporate disregard. (b) Analytical Deficiencies of the Case Law The outsider reverse piercing case law demonstrates a somewhat greater understanding of the true issues involved in evaluating the claims than do the insider reverse piercing cases. This difference perhaps exists because the outsider reverse pierce cases more closely resemble the standard corporate creditor veil-piercing controversies. The early Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[175] opinion applies the standard unity of interest/fraud or injustice veil-piercing criteria in the outsider reverse piercing context, a result that is arguably justified when such unity of intent is related to the perceived injustice because disregard is being sought over insider objections. In outsider reverse piercing claims, however, the relevant criterion is the degree to which the corporation dominates the insider, rather than the reverse, since the issue is corporation liability for insider actions. A corporation properly may be held liable for the wrongful conduct of a controlling insider if the corporation aided and abetted that conduct or contributed to the insider's conduct as the insider's agent; however, these are conceptually distinct theories of liability that do not require corporate disregard. A number of cases that allowed corporate disregard, including W.G. Platts, Inc. v. Platts,[176] Shamrock Oil & Gas Co. v. Ethridge,[177] Central National Bank & Trust Co. of Des Moines v. Wagener,[178] and Minich v. Gem State Developers,[179] could have instead utilized an agency or aiding and abetting theory of liability to support recovery rather than the outsider reverse pierce doctrine. Judge Learned Hand in Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[180] recognized the limitations inherent in the outsider reverse piercing doctrine. He noted that only in extremely rare instances, if ever, will a corporation exercise sufficient domination over its parent or other insider to justify holding it liable for claims against the insider on the basis of disregard of its separate legal status.[181] Divco-Wayne Sales Financial Corp. v. Marin Motor Vehicle Sales, Inc.[182] merely emphasized the obvious point that normal parent-subsidiary control relationships or similar names among corporate affiliates alone fail to justify disregard of the separate entity status of a subsidiary as against third parties having claims against its parent. W.G. Platts, Inc. v. Platts[183] and Zisblatt v. Zisblatt[184] appear to be special cases that rest upon the implicit premise that the policies underlying the marital property division statutes justify allowing outsider reverse piercing claims prejudicial to other shareholders, at least under egregious circumstances. As a result, these cases would seem to have little force outside of that restricted context.[185] The most puzzling of the outsider reverse piercing opinions is FMC Finance Corp. v. Murphree.[186] The FMC Finance court recognized that the usual unity of interest/fraud or injustice criteria for veil-piercing, which require the person facing liability to have dominated the corporate entity, will rarely if ever be satisfied in an outsider reverse piercing controversy.[187] As noted in Kingston Dry Dock, it is virtually impossible for a subsidiary to interpose itself decisively in the conduct of its parent's affairs.[188] Rather than infer from this fact the seemingly obvious conclusion that outsider reverse piercing should rarely if ever be allowed,
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however, the FMC Finance court significantly reformulated (indeed, stood on its head) the unity of interest prong of the criteria. The court required only a control relationship between the parent and the subsidiary as the threshold criterion for holding the subsidiary liable for the parent's obligations.[189] This holds true even if that relationship is a normal one in which the parent controls the subsidiary.[190] The FMC Finance reformulation is in utter conflict with Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[181] Kingston stands for the proposition that the highly unusual circumstance of a subsidiary dominating its parent is a virtual prerequisite for finding the kind of unity of interest that would allow an outsider reverse pierce in an inter-corporate relationship context. The FMC Finance court applied its novel criterion and remanded the case for a jury determination on the misrepresentation issue, a result that appears to be wrong.[192] Cascade Energy & Metals Corp. v. Banks[193] provides the most insightful and comprehensive judicial analysis available of the outsider reverse piercing doctrine. The Cascade court clearly recognized that the plaintiff's claim differed significantly from a standard corporate creditor veil-piercing attempt or even from an insider reverse piercing claim. The major flaw of Cascade is that it fails to show a clear understanding of the key insight of Kingston Dry Dock v. Lake Champlain Transportation Co.[194] Kingston. Dry Dock requires that the usual unity of interest/fraud or injustice veil-piercing criteria, when applied in an outsider reverse piercing context, be interpreted to require a domination of the insider by the corporation. This requirement contrasts with the element of insider domination of the corporation that standard corporate creditor veil-piercing cases require. The Cascade opinion does explicitly recognize, however, that factors suggesting a unity of interest are irrelevant unless the injury alleged relates to the unity of interest or to the outsider's reliance upon the lack of separateness of the corporation and the insider. Most significantly, the Cascade opinion precisely states the central problem potentially posed by outsider reverse piercing claims: that if other, non-culpable shareholders of the corporate entity exist, they will be unfairly prejudiced if the creditors of a corporate insider can directly attach the corporate assets.[195] (c) Appropriate Standards The body of outsider reverse piercing case law is more limited than the corpus of insider reverse piercing cases. As this Article has discussed, the outsider reverse piercing cases also exhibit analytical deficiencies comparable to the shortcomings of the insider reverse piercing cases.[196] The application of the reverse pierce doctrine to outsider claims presents this central question: how to strike the appropriate balance between upholding the legitimate expectations of corporate shareholders that corporate assets will not be subjected to claims against other corporate insiders as against the need to do justice in hard cases involving some over-riding public interest or some abuse of the corporate form by the insiders. Given this focus, the proper factors for a court to consider in evaluating the merits of an outsider reverse piercing controversy are the following: (a) the degree to which allowing a reverse pierce would impair the legitimate expectations of any adversely affected shareholders who are not responsible for the conduct of the insider that gave rise to the reverse pierce claim, and the degree to which allowing a reverse pierce would establish a precedent troubling to shareholders generally;
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(b) the degree to which the corporate entity whose disregard is sought has exercised dominion and control over the insider who is subject to the claim by the party seeking a reverse pierce; (c) the degree to which the injury alleged by the person seeking a reverse pierce is related to the corporate entity's dominion and control of the insider, or to that person's reasonable reliance upon a lack of separate entity status between the insider and the corporate entity; (d) the degree to which the public convenience, as articulated by the statutes and common law of the jurisdiction, would be served by allowing a reverse pierce; (e) the extent and severity of the wrongful conduct, if any, engaged in by the corporate entity whose disregard is sought by the insider; and (f) the possibility that the person seeking reverse pierce is himself guilty of wrongful conduct sufficient to bar him from obtaining equitable relief. Because allowance of an outsider reverse pierce subjects the assets of a corporate entity to claims against an insider, it must be shown that the corporation had sufficient control over the insider to be held properly liable for the conduct giving rise to the claim. Insider domination of the entity that the plaintiff seeks to disregard should not suffice to satisfy the dominion and control criterion in the outsider reverse piercing context.[197] The relative financial positions of the contending parties should have no bearing upon the issue except to the extent that those circumstances are relevant for determining where the public convenience lies. A review of the case law suggests that most, if not all, outsider reverse piercing claims will be denied if the above standards are reasonably applied regardless of the precise balance struck among those factors. The circumstances needed to justify allowance of an outsider reverse piercing claim would be highly unusual. First, if shareholders other than the culpable insiders exist, the allowance of a reverse pierce would seem to prejudice their interests unfairly and also would generally undermine investor expectations that corporate assets will be insulated from claims against corporate insiders. The proper scope of this equitable doctrine, therefore, would appear to be limited to closely held firms in which a single insider, or a small group of insiders acting in concert, holds all or virtually all economic claims.[198] It is unclear what purpose the doctrine would serve if limited to that restricted context because it appears that a claimant could, under those circumstances, achieve the claimant's ends more directly by attaching the insiders' shares in the entity or by seeking corporate liability as an agent or alder and abettor of the insiders.[199] Second, it is difficult to conceive of instances in which a closely held entity could exercise dominion over the controlling insiders. Further analysis confirms Judge Learned Hand's original insight in Kingston Dry Dock that situations calling for outsider reverse pierces are "extremely rare."[200] III. CONCLUSION Attempts to reverse pierce a corporate entity should be evaluated by different criteria than those applied in evaluating standard corporate creditor veil-piercing attempts. Thus far, the courts hearing reverse pierce controversies have applied the standards developed in the corporate creditor suit context in a haphazard fashion that overlooks significant distinctions between corporate creditor veil-piercing claims and reverse piercing claims. The courts have
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also generally overlooked the important distinction between the two different classes of reverse piercing claims, insider and outsider, and have failed to develop appropriate criteria for resolving either class of controversies. This Article attempts to clarify this distinction and set forth workable criteria for deciding these cases. These criteria focus upon the need to assure the legitimate expectations of any adversely affected parties, the public interests that would be served by allowing each type of reverse pierce claim, the presence or absence of wrongful conduct by the parties against whom the claim is asserted, and the conduct of the claimants. When these criteria are applied to the body of insider reverse piercing cases, the conclusion reached is that while most insider reverse piercing claims should be denied, there exists a variety of circumstances under which a court would be justified in disregarding the separate legal status of a corporate entity at the behest of a corporation and its controlling insider.[201] It appears, however, that only under highly unusual circumstances should a court uphold an outsider reverse piercing claim and allow a person with a claim against a corporate insider to attach corporate assets directly to satisfy a claim. 1. For recent discussions of the doctrine of corporate disregard, see Barber, Piercing the Corporate Veil, 17 WILLAMETTE L. REV. 371 (1981); Dobbyn, A Practical Approach to Consistency in Veil-Piercing Cases, 19 U. KAN. L. REV. 185 (1971); Gelb, Piercing the Corporate Veil--The Undercapitalization Factor, 59 CHI.[-]KENT L REV. 1 (1982); Krendl & Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 DEN. L.J. 1 (1978); Note, Piercing the Corporate Veil: J.L. Brock Builders, Inc. v. Dahlbeck, 21 CREIGHTON L. REV. 621 (1988) [hereinafter Note, Piercing]; Note, Piercing the Corporate Law Veil: The Alter Ego Doctrine Under Federal Common Law, 95 HARV. L. REV. 853 (1982) [hereinafter Note, Alter Ego]; Note, Piercing the Corporate Veil in Federal Courts: Is Circumvention of a Statute Enough?, 13 PAC. L.J. 1245 (1982) [hereinafter Note, Circumvention]; Note, Disregard of the Corporate Entity, 4 WM. MITCHELL L. REV. 333 (1978) [hereinafter Note, Corporate Entity]; see also Easterbrook & Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985). 2. The commentary that deals specifically with the reverse pierce doctrine is limited to two recent student notes. See Note, Piercing the Corporate Veil: It Can Work in Reverse, 33 MERCER L. REV. 633 (1982) [hereinafter Note, Reverse]; Note, Reverse Piercing of the Corporate Veil: Should Corporation Owners Have It Both Ways? 30 WM. & MARY L. REV. 667 (1989) [hereinafter Note, Reverse Piercing]; see also Comment, The Alter Ego Doctrine: Alternative Challenges to the Corporate Form, 30 UCLA L. REV. 129, 143 (1982) [hereinafter Comment, Alter Ego] (briefly discussing some reverse pierce cases). 3. Creditors Protective Assn. v. Balcom, 248 Or. 38, 41, 432 P.2d 319, 320 (1967); Bennett v. Minott, 28 Or. 339, 348, 44 P. 288, 290 (1896). 4. United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (E.D. Wis. 1905); see also Mull v. Colt Co., 31 F.R.D. 154 (S.D.N.Y. 1962). In Colt Co., the court stated: The corporate fiction is but a matter of commercial convenience; the concept is not to be extended beyond reason and policy . . . . When the statutory privilege of doing business in the corporate form is employed as a cloak for the evasion of obligation as a mask, behind which to do injustice, or invoked to subvert equity, the separate personality of the corporation will be disregarded.
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Id. at 166. 5. Minifie v. Rowley, 187 Cal. 481, 487, 202 P. 673, 676 (1921). Another essentially equivalent formulation of this test was developed by Professor Frederick Powell. See F. POWELL, PARENT AND SUBSIDIARY CORPORATIONS 44 (1931). Some courts follow this test. See Krendl & Krendl, supra note 1, at 11-22. 6. This test has also been labeled the "formalities/fairness" criterion. See Barber, supra note 1, at 376. 7. Among the many colorful terms used by courts are: "mere adjunct, agent, alias, alter ego, alter, idere, arm, blind, branch, buffer, cloak, coat, corporate double, cover, creature, curious reminiscence, delusion, department, dry shell, dummy, fiction, form, formality, fraud on the law, instrumentality, mouth piece, name, nominal identity, phrase, puppet, screen, sham, simulacrum, snare, stooge, subterfuge, and tool." Krendl & Krendl, supra note 1, at 8. 8. Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 94-95, 155 N.E. 58, 61 (1926) (citations omitted). 9. Dobbyn, supra note 1, at 188; see also Barber, supra note 1, at 374-75 (listing 19 factors cited by courts as relevant in veil-piercing decisions). 10. For discussion of the shortcomings of the corporate disregard jurisprudence, see generally Dobbyn, supra note 1, at 185; Gelb, supra note 1, at 2; Krendl & Krendl, supra note 1, at 58-59; Note, Piercing, supra note 1, at 627; Note, Alter Ego, supra note 1, at 853-56; Note, Circumvention, supra note 1, at 1245-48; Note, Reverse Piercing, supra note 2, at 67781; Note, Corporate Entity, supra note l, at 336-38. 11. See infra Part II-A of this Article. 12. See infra text accompanying notes 14-82, 105-73. 13. See infra text accompanying notes 83-104, 174-200. 14. See infra text accompanying notes 60-82. 15. See infra text accompanying notes 60-73. 16. See infra text accompanying notes 74-80. 17. See infra text accompanying notes 81-82. 18. See infra text accompanying notes 74-80. 19. See infra text accompanying notes 22-59. 20. See infra text accompanying notes 60-73. 21. See infra text accompanying notes 74-82. 22. See infra text accompanying notes 22-59. 23. See infra text accompanying notes 36-40. 24. 302 N.W.2d 350 (Minn. 1981). 25. Id, at 351. 26. Id. (construing MINN. STAT. section 65B.47, subd. (4)(a) (1978)). 27. Id. at 352 (construing MINN. STAT. section 65B.47, subd. 2 (1978)). 28. Id. 29. Id. 30. Id. (citing Erickson-Hellekson-Vye Co. v. A. Wells. Co., 217 Minn. 361, 381-82, 15 N.W.2d 162, 173 (1944)). 31. Id. at 352 (citing State v. North, 159 Fla. 351, 32 So. 2d 14 (1947); In Re Burrs Estate, 175 Misc. 725, 24 N.Y.S.2d 940 (1941); In Re Greenfeld Estate, 457 Pa. 114, 321 A.2d 922 (1974)). 32. Id. at 352-53 (citing Manufacturers Bldg., Inc. v. Heller, 306 Minn. 180, 235 N.W.2d 825
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(1975); Central Motors & Supply Co. v. Brown, 219 Minn. 467, 18 N.W.2d 236 (1945); In re Koffend's Will, 218 Minn. 206, 15 N.W.2d 590 (1944)). 33. Id. at 353 (stating that the act "prorid[es] insurance for persons and not vehicles"). 34. Id. 35. Id. 36. 330 N.W.2d 858 (Minn. 1983). The plaintiff in Rademacher, a member of a religious order, was injured in an automobile accident. Id. at 859. The religious order was a non-profit corporation that was the named insured in a policy issued by the defendant which covered 53 motor vehicles used by members of the religious order, including the plaintiff. Id. The plaintiff's injury, however, occurred while she was a pedestrian. Id. Rademacher dicta suggests that the Minnesota Supreme Court viewed Roepke as providing no support for disregarding the nonprofit religious corporation. Id. at 862 (stating that there was "a substantial difference between the position of the president and sole shareholder of a business corporation whose automobiles are regarded as the shareholder's personal property and that of the members of a religious order"). The court later mooted the veil-piercing issue when it emphasized that members of the order had taken a vow precluding any interest in the property of the religious order, and thus, "piercing the corporate veil would be of no avail." Id. 37. 330 N.W.2d 886 (Minn. 1983). In Kuennen, the plaintiff again sought to stack the survivors' benefit coverage, available under a policy covering several vehicles, after the controlling shareholder of a corporation was killed in an automobile accident. 38. The Kuennen court refused to disregard the corporate entity, distinguishing Roepke on the grounds that: (1) the decedent was only a 51% shareholder rather than the sole shareholder; and (2) only some, not all, of the covered vehicles were used as family vehicles by the decedent. Id. at 886-87. 39. The Kuennen court determined the "degree of identity" between the shareholder and the corporation was not high and ruled that "where that degree [of identity] is not high the alter ego theory which underlies that doctrine of piercing the corporate veil cannot operate." Id. at 887. Unfortunately, the opinion did not discuss why a criterion developed to determine when to allow corporate disregard over insider objections was relevant to evaluate a claim for disregard pressed by an insider against a corporate debtor. 40. 374 N.W.2d 532 (Minn. Ct. App. 1985). In Leidall, the plaintiff's husband had been killed in an automobile accident. Id. at 533. She then attempted to recover under an insurance policy that was owned by a brother of the decedent who was also his business partner in a family farming partnership. Id. at 534. The policy named the decedent's brother as the sole insured party. Id. The plaintiff's rather fantastic theory was that a double piercing of the partnership entity should occur: first, with regard to the decedent's brother, so as to make the partnership entity an "insured" under his policy; and second, with regard to the decedent, so as to confer upon him any rights held by the partnership. The plaintiff argued that this double disregard of the partnership entity would make the decedent an "insured" under the policy. The court flatly rejected this theory, holding that "[n]ot only are the facts in the present case distinguishable from those in Roepke, but the context is different as well." Id. at 536. The Leidall court noted that sole shareholder/family vehicles circumstances of Roepke were not present in this case. Id. By the term "context," the court was apparently noting that this plaintiff was attempting, as a first step, to look beyond an individual to find an entity as the insured, whereas in Roepke the attempt was to disregard an entity to confer insured status on an individual.
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41. 375 N.W.2d 477 (Minn. 1985). 42. Id. at 478. 43. Id. The Minnesota Court of Appeals and Supreme Court opinions in Cargill fail to make clear the basis upon which the corporation was found liable to the plaintiff for the individual defendant's obligations. Liability may have been imposed on the basis of an agency theory. 44. Id. at 479. 45. Id. 46. Id. 47. Id. 48. Id. 49. Id. 50. Id. at 480. 51. Id. at 478-80. 52. Id. at 480. "We are aware of the danger of a debtor being able to raise or lower his corporate shield, depending on which position best protects his property. Consequently, a reverse pierce should be permitted only in the most carefully limited circumstances." Id. 53. 413 N.W.2d 194 (Minn. Ct. App. 1987). In Gearman, the defendant was the sole shareholder, director, and officer for a corporation. Id. at 195. The plaintiff had loaned a sum of money to the corporation secured by a mortgage on corporate real estate; the defendant had given his personal guarantee on the note. Id. The corporation subsequently defaulted; the plaintiff obtained a judgment against the corporation and obtained partial satisfaction through a foreclosure action on the real estate that stood as security. Id. The plaintiff then commenced a second action against the defendant for the remaining deficiency. Id. Under Minnesota law, the plaintiff was barred from obtaining a deficiency judgment against a mortgagor. Id. at 196. The issue was whether the defendant was entitled to a reverse pierce of his corporation to confer upon him the status of a protected mortgagor. The court of appeals noted that, while some of the factors which would suggest that the corporation was a mere "alter ego" of the defendant guarantor were present, the "more important" issue was whether a failure to pierce the veil would result in "an element of injustice or fundamental unfairness." Id. Citing the cautionary diets contained in the earlier Cargill opinion, the court refused to disregard the corporation. Id. at 196. The court stated that no unfairness or injustice would result from requiring the defendant to discharge his guarantee because the defendant had operated the corporation for over 20 years and executed two beneficial mortgages through it, and because this was a commercial transaction involving two established, experienced businessman. Id. at 197. The opinion included a lengthy dissent which argued that, under Roepke and Cargill, a reverse pierce was required. The dissent claimed that there was no "clearer identity" possible than between the guarantor and the corporation. Id. at 198-99. The dissent argued that the guarantor was "in substance and in fact" the mortgagor since the plaintiff was looking primarily to the guarantor for payment of the debt. Id. at 198. Finally, the dissent argued that, because the "focus" of Roepke and Cargill was upon the unfairness to the shareholders that would result if the entity was not disregarded, disregard was appropriate. Id. at 199. 54. 441 N.W.2d 121 (Minn. Ct. App. 1989). In Eden Valley, a husband and wife were the 51% and 49 % shareholders, respectively, of the family corporation that owned their family farm. Id. at 122. The corporation borrowed money from a bank and a production credit association,
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granted the lenders security interests in various chattels, but did not grant a mortgage on its real estate. Id. The husband and wife each had guaranteed the corporation's debts. Id. When the corporation defaulted on the notes, the creditors attempted to obtain a lien on its real estate. Id. at 122-23. The court of appeals thwarted this attempt by disregarding the corporate entity so that the real estate would be exempt from execution under the homestead exemptions available to the husband and wife for their individually owned property. Id. at 123. 55. Id. at 125. 56. Id. 57. Id. 58. Id. 59. Id. 60. See infra text accompanying notes 62-73. 61. See infra text accompanying notes 74-82. 62. 111 So. 2d 682 (Fla. Dist. Ct. App. 1959). The defendants in Gilbert had required that the individual plaintiffs create a shell corporation as a prerequisite to receiving a loan. Id. at 684. The defendants then made the loan to the corporate entity to avoid the usury statute interest rate ceilings applicable to loans made to individual borrowers. Id. The plaintiffs subsequently brought suit for a decree establishing their rights to recover the statutory penalties available under the usury laws. Id. at 683. For this claim to be allowed, the court would have to disregard the separate existence of the entity and regard the individual plaintiffs as the actual borrowers. The court upheld the trial court's finding that the entity was a "sham contrivance." Id. at 685. The court stated that use of a "corporate shell to cloak a loan actually made to an individual borrower" to thwart the policies underlying the usury statutes would not be permitted. Id. The court did not accord significance to the fact that the parties seeking an equitable decree had voluntarily participated in the sham arrangement. Id. 63. Id. at 684. 64. 334 Ill. App. 382, 79 N.E.2d 637 (1948). 65. Id. at 384, 79 N.E.2d at 637. 66. Id. at 389, 79 N.E.2d at 640; see also Fountainebleau Hotel Corp. v. Crossman, 286 F.2d 926, 930 (5th Cir. 1961) (applying Florida law to find a corporate lessee and its sole shareholder "inseparable and interchangeable" with respect to a lease renewal option). The Earp opinion is subject to two possible interpretations. One possibility is that the court implicitly accepted an insider reverse piercing theory and disregarded the existence of the corporate entity. A second possible reading, however, is that the court did view the corporation as a separate legal entity, but one that acted only as the agent of the shareholder lessee, and consequently did not constitute a person separate from the lessee. The court in Crum v. Kroll, 99 Ill. App. 3d 651, 425 N.E.2d 1081 (1981), discussed infra note 67, implicitly endorsed the former interpretation. 67. 99 Ill. App. 3d 651, 425 N.E.2d 1081 (1981). In Crum, the plaintiff had entered into a contract to purchase real estate from the defendant. Id. at 653, 425 N.E.2d at 1083. The plaintiff was allowed to take possession of the property prior to settlement and subsequently incurred expenses in connection with establishing a business. Id. at 654, 425 N.E.2d at 1083. Some of these expenses were paid by a corporation for which the plaintiff was the sole shareholder. Id. at 654, 425 N.E2d at 1083. The defendant never took the steps necessary to complete the conveyance, and the plaintiff sued for damages in a personal capacity. Id. at 654, 425 N.E.2d at 1084. The plaintiff sought to recover as elements of damages the sums paid out
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by his corporation. Id. at 654, 425 N.E.2d at 1084. The defendant sought to resist recovery of the corporate expenditures. The Illinois court of appeals, citing as persuasive authority both its earlier decision in Earp and the Minnesota Roepke decision, allowed the plaintiff to reverse pierce the corporate entity and characterize himself and his corporation as a single entity with regard to the damages claim. Id. at 661, 425 N.E.2d at 1088-89. The court reasoned in relatively conclusory fashion that it would be unjust to allow the defendant to escape liability for the corporation's expenditures because those expenditures were not those of the party plaintiff. Id. at 662, 425 N.E.2d at 1089. Having applied the reverse pierce theory, the court did not need to address whether the trial court's joinder of the corporation as a party plaintiff, a possible alternative basis for recovery, was appropriate. Id. at 662, 425 N.E.2d at 1089. 68. In Montgomery v. Central Nat'l Bank & Trust Co., 267 Mich. 142, 255 N.W. 274 (1934), the plaintiff had conveyed a parcel of real estate to the defendant subject to certain restrictions intended to benefit a corporation in which the plaintiff owned all but three of 45,740 shares. Id. at 143, 255 N.W. at 274. The defendant violated those restrictions, and the plaintiff filed suit to enforce them. Id 4 at 144, 255 N.W. at 274. In its opinion, the Michigan Supreme Court first declared that the conveyance restrictions were imposed for the benefit of the corporation and, consequently, were not valid under Michigan law unless the corporation was a party to the conveyance instrument. Id. at 146, 255 N.W. at 275. The court subsequently allowed the plaintiff's claim using the insider reverse pierce doctrine, which collapsed the corporation onto the plaintiff; this result avoided the harshness of the early Michigan conveyance rule. Id. at 147, 255 N.W. at 276. The opinion noted that, "in furtherance of the ends of justice, a corporation and the individual or individuals owning all its stock and assets will be treated as identical." Id. at 148, 255 N.W. at 276. 69. In Brown Bros. Equip. Co. v. State Highway Comm'n., 51 Mich. App. 448, 215 N.W.2d 591 (1974), the plaintiff corporation sought to recover as relocation costs arising out of a condemnation action the profits lost by an affiliated corporation to which the plaintiff had leased the facilities that were relocated. The Michigan Court of Appeals found for the plaintiffs, in substance allowing an insider reverse pierce-type disregard of the separation between the two affiliates. The ruling hinged on the fact that the defendant had not relied upon the separate status of the two entities, that the separate entity knew of the condemnation action, and that it would have been unjust to allow the defendant to avoid liability for harm to one of the entities simply because that entity was not a party to the action. Id. at 452, 215 N.W.2d at 594. The Brown Bros. opinion did not state the relationship between Brown Brothers Equipment Company and Brown Brothers, Inc. Presumably, the two companies were affiliated, very possibly in a parent-subsidiary relationship. In Williams v. American Title Ins. Co., 83 Mich. App. 686, 269 N.W.2d 481 (1978), the Michigan Court of Appeals heard another lost profits claim. In Williams, the plaintiff lost a piece of property because of the negligence of the defendant title abstracting company. Id. at 693-94, 269 N.W.2d at 48485. The owners of the property had leased it to their wholly-owned corporation, but had not executed a written lease. Id. at 690, 269 N.W.2d at 481-83. The trial court had concluded that the corporation was at most a month-to-month tenant under the oral lease and, consequently, had limited the corporation's recoveries for lost profits to one month's profits. Id. at 696, 269 N.W.2d at 485. On appeal, the plaintiffs sought to have the corporation disregarded to allow them to recover its lost profits for a period not limited by the length of the oral lease. While citing Montgomery v. Central Nat'l Bank & Trust Co., 267 Mich. 142, 255 N.W. 274 (1934), discussed supra note 68, for the general proposition that corporate
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veils may be pierced under appropriate circumstances, the court of appeals declined to allow a reverse pierce. Williams, 83 Mich. App. at 697, 269 N.W.2d at 486. The opinion distinguished Brown Bros. on somewhat dubious grounds: the earlier opinion related only to lost profit claims asserted in a relocation cost context. Id. at 699 & n.3, 269 N.W.2d at 487 & n.3. 70. The Montgomery opinion, discussed supra note 68, was cited approvingly in support of the allowance of an insider reverse piercing claim by the Michigan Supreme Court a half-century later in Wells v. Firestone Tire & Rubber Co, 421 Mich. 641, 364 N.W.2d 670 (1984). In that latter case, the plaintiff, an injured employee of a corporation, sought to recover damages from the corporate parent of his employer. The plaintiff had previously recovered for his injuries under a worker's compensation insurance policy covering his employer that was carried by the employer's corporate parent. Id. at 645, 364 N.W.2d at 672. The parent sought to bar the action on the grounds that the Michigan worker's compensation statutes limited the plaintiff's remedies against an employer to those insurance payments. Id. at 646, 369 N.W.2d at 672. In effect, the corporate parent sought to have the court disregard the separate entity status of its subsidiary corporation and treat the parent as also being the plaintiff's "employer" for worker's compensation remedy limitation purposes. Citing Montgomery as persuasive authority, the Michigan Supreme Court found for the parent on an insider reverse piercing theory. Id. at 651, 364 N.W.2d at 674. The court applied an "economic reality" test that focused on the degree of control exercised by the parent over the plaintiff. Id. at 647, 364 N.W.2d at 673. The holding was also based on the recognition of the significant public purposes served for both employers and employees by the provisions of worker's compensation statutes. Id. at 651, 364 N.W.2d at 674. The court reasoned that, because these statutes were construed liberally when employees sought to recover benefits, it would be unjust not to apply the same broad construction of the key definitional terms when an employer asserted an immunity defense against an employee who had previously claimed and accepted benefits under the statutes. Id. at 651, 364 N.W.2d at 675. Since under the Wells facts the corporate parent would not have been allowed by the court to shield itself behind an insolvent subsidiary to avoid making worker's compensation payments to the plaintiff, the court decided that it would not be inequitable to allow the parent corporation to invoke "employer" status to avoid conferring a second recovery upon the plaintiff. Id. at 651, 364 N.W.2d at 675. The court also noted that the plaintiff had not relied on the corporate distinction between the parent and the subsidiary. Id. at 651, 364 N.W.2d at 675. 71. 60 Mont. 132, 199 P. 249 (1921). In United States Gypsum, the plaintiff corporation owed a sum of money to the defendant corporation. Id. at 141, 199 P. at 250. The owners of the defendant corporation had earlier given a personal note to the plaintiff corporation. Id. They sought to have the plaintiff offset the amount owed on the personal note against the larger amount the plaintiff owed to the defendant corporation. The plaintiff sought instead to satisfy the note obligation through the sale of some pledged securities. The court ruled in favor of the defendant and its owners; it was proper for the owners to use corporate assets to discharge their individual indebtedness because, "whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual shall be deemed to be the same." Id. at 143. 72. 10 N.J. 191, 89 A.2d 654 (1952). In Gelber, the defendant had lent a sum of money to a corporation that the plaintiff had formed subsequent to applying for the loan. Id. at 194, 89 A.2d
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at 655. The trial court had found that the corporation had been formed solely to avoid the application of the New Jersey usury statutes. Id. at 195, 89 A.2d at 656. The plaintiff subsequently sued the defendant to recover the statutory usury penalties by seeking disregard of the corporate entity. The New Jersey Supreme Court remanded for a new trial to consider the reverse pierce claim, stating that corporate disregard would be appropriate if the corporation was created to "hide the fact that the lender has exacted an illegal rate of interest from the borrower." Id. at 196, 89 A.2d at 656. In response to the defendant's argument that the plaintiff, who voluntarily participated in the arrangement, should be estopped from asserting a usury defense, the court stated that no evidence existed that the plaintiff had been advised or was otherwise aware that the defendants required the formation of a corporation to avoid the usury limitations. Id. at 197, 89 A.2d at 657. 73. 56 N.J. Super. 274, 152 A.2d 409 (1959). The defendant in Lesser had obtained a loan for his corporation in a sham arrangement designed to circumvent the usury statutes. Id. at 286, 152 A.2d at 416. The Superior Court of New Jersey followed the approach of the Gelber decision and allowed the defendant to raise the usury defense in a foreclosure action. Id. at 286, 152 A.2d at 416. The opinion did not address the issue of estopping the defendants from assertion of a usury claim. 74. See infra text accompanying notes 77-80. 75. See, e.g., Love v. Flour Mills of Am., 647 F.2d 1058, 1062 (10th Cir. 1981) (stating that " [w]e have found no cases to persuade us, based on the record before us, that the separate corporate personalities assumed by Chickasha and Flour Mills may be disregarded") (emphasis added); Smith v. Cotton Fleet Serv., Inc., 500 So. 2d 759, 762 (La. 1987) (stating that, "in each individual case, the just and reasonable limitation, if any, upon the exercise of the privilege of separate capacity is determined by balancing the policies fostered by corporate existence against the policies justifying its limitation under the particular circumstances"). 76. See, e.g., Terry v. Yancey, 344 F.2d 789, 790 (4th Cir. 1965) (stating that, "where an individual creates a corporation as a means of carrying out [the individual's] business purposes, [the individual] may not ignore the existence of the corporation to avoid its disadvantages"); Messick v. PHD Trucking Serv., Inc., 678 P.2d 791, 793 (Utah 1984) (characterizing the reverse pierce doctrine as "a little-recognized theory"). 77. Messick, 678 P.2d 791, presented a classic insider reverse piercing joinder controversy. The plaintiff had sued to collect a debt owed to him by a corporation. Id. at 792. The trial court had allowed the corporation to set off against the amount it owed the sums that the plaintiff owed to two officers of the corporation stemming from an agreement between the plaintiff and those officers in their individual capacities. Id. at 793. The trial court had based its ruling on the conclusion that the corporation was the "alter ego" of the officers; thus, they could reverse pierce the corporation to offset their receivables against the corporation's obligations to the plaintiff. The Utah Supreme Court reversed on appeal. Pejoratively characterizing the reverse pierce doctrine as "a little-recognized theory," id. at 793, it applied the conventional twopronged unity of interest/fraud or injustice formulation developed in the standard corporate creditor veil-piercing context. The court concluded that there was no basis to support the requisite finding of failure to comply with corporate formalities nor the finding of injustice. Id. at 794-95. In Terry v. Yancey, 344 F.2d 789 (4th Cir. 1965), the Fourth Circuit Court of Appeals applied Virginia law to reject an insider reverse piercing claim. In that case, the plaintiff owned all of the stock of a corporation and also was responsible for about 75% of its sales. Id. at 790. After
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being injured by the defendant in an automobile accident, the plaintiff's sales abilities were impaired, and his corporation was forced to hire an additional salesman. Id. The plaintiff sought to recover for the corporation's additional expenses, a result that would require a disregard of the separate legal status of the corporation with regard to the defendant. The court rejected this claim and stated that, "where an individual creates a corporation as a means of carrying out the individual's business purposes, the individual may not ignore the existence of the corporation to avoid its disadvantages." Id. This sort of language, quite common in the cases denying insider reverse piercing attempts, would, if taken literally, rule out all insider reverse piercing claims. 78. Although the Michigan Supreme Court in Wells, discussed in supra note 70, allowed the corporate parent to reverse pierce its subsidiary to avail itself of the protection against a suit by an employee of the subsidiary provided by the worker's compensation statute, other jurisdictions have rejected insider reverse piercing attempts under very similar circumstances. See, e.g., Love v. Flour Mills of Am., 647 F.2d 1058 (10th Cir. 1981) (applying Oklahoma law); Boggs v. Blue Diamond Coal Co., 590 F.2d 655 (6th Cir. 1979) (applying Kentucky law); Latham v. Technar, Inc., 390 F. Supp. 1031 (E.D. Tenn. 1974) (applying Tennessee law); Smith v. Cotton Fleet Serv., Inc., 500 So. 2d 759 (La. 1987). These cases generally invoke the rationale that, if the corporate parent of a subsidy corporation chooses to take advantage of the benefits of operating the subsidiary in corporate form, principles of reciprocity require that separate identities be maintained in suits filed against the parent by injured employees of the subsidiary. See, e.g., Love, 647 F.2d at 1062; Boggs, 590 F.2d at 662. Smith engages in some sustained examination of the policies involved that parallels the analysis conducted in Wells, but comes to a different conclusion. Smith, 500 So. 2d at 761-63 (finding that a piercing of the corporate veil would not be allowed when no traditional grounds for piercing the veil existed). 79. In Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930), the New York Court of Appeals refused to allow a plaintiff shareholder to reverse pierce his corporation to avail himself of the usury statutes. The court reasoned that, even if the corporation had been established solely for the purpose of circumventing the usury statute interest rate ceilings on loans to individuals, the arrangement constituted a legitimate avoidance of those statutes rather than an illegitimate evasion. Id. at 324, 172 N.E. at 522. This reasoning has been followed by a line of later decisions by lower New York courts that have denied reverse pierce claims in the usury statute context. See, e.g., Werger v. Haines Corp., 277 A.D. 1108, 101 N.Y.S. 361 (1950); Metz v. Taglieri, 29 Misc. 2d 841, 215 N.Y.S.2d 263 (1961); Rosen v. Columbia Say. & Loan, 29 Misc. 2d 329, 213 N.Y.S.2d 765 (1961); Mittman v. Kuo, 5 Misc. 2d 595, 160 N.Y.S.2d 743 (1957); Kings Mercantile Co. v. Cooper, 199 Misc. 381,100 N.Y.S.2d 754 (1950). Not all courts, however, deny a reverse pierce claim when an insider seeks corporate disregard to gain the protection of usury statutes. See supra notes 62-63 and accompanying text. 80. In Weaver v. State, 652 S.W.2d 420 (Tex. App. 1982), the defendant was charged with improperly using the proceeds from the sale of the debentures of one corporation to pay the creditors of another corporation in which the defendant was an investor. The defendant alleged that the two corporations were "alter-ego" corporations and that they should be regarded as a single entity. The Texas Court of Appeals rejected this defense. Id. at 422. This prosecution was not a normal insider reverse piercing case, because the defendant attempted to collapse two corporations into each other rather than a corporation onto the defendant. The language of the opinion, however, suggests that the Texas Court of Appeals would be reluctant to allow
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any sort of insider reverse piercing claim. Id. (stating that "[t]he alter ego doctrine is merely a means of piercing the corporate veil to hold individuals personally liable in certain actions"). 81. 326 U.S. 432 (1946). In Schenley, a corporation had applied to the Interstate Commerce Commission for a permit to act as a "contract carrier by motor vehicle" of commodities in interstate commerce. Id. at 433. The applicant's corporate parent later sought to dismiss the license proceedings because the subsidiary performed carriage services only for the parent or for other affiliates. Id. at 43334. Consequently, the parent argued that the subsidiary should be regarded as a "private" carrier that did not require a permit. The parent sought, in effect, to disregard its subsidiary entity for contract carriage licensing requirements. The Supreme Court rejected this insider reverse piercing attempt, expressing a general hostility towards the doctrine, when invoked to evade statutory obligations: While corporate entities may be disregarded when they are made the implement for avoiding a clear legislative purpose, they will not be disregarded when those in control have deliberately adopted the corporate form in order to secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal entity. One who has created a corporate arrangement, chosen as a means of carrying out his business purposes, does not have the choice of disregarding the corporate entity to avoid the obligations which the statute lays upon it for the protection of the public. Id. at 437; cf. Sumimoto Shoji Am., Inc. v. Avagliano, 457 U.S. 176 (1982) (specifically leaving open whether a domestic subsidiary's actions may be defended under commercial treaty rights available only to its foreign parent). 82. In In re Beck Indus., 479 F.2d 410 (2d Cir. 1973), the trustees of a bankrupt corporation sought to enjoin a suit brought against a subsidiary of that corporation. They argued that the assets of the subsidiary constituted property of the debtor, which under the bankruptcy laws could be protected through injunctions barring suits. Since the debtor's interest in the subsidiary was its ownership of the subsidiary's outstanding stock rather than its assets, the injunction could be issued only if the court was willing to reverse pierce the subsidiary and disregard its separate entity status to allow creditor claims. Citing Schenley as support, the Second Circuit Court of Appeals denied the injunction: Where a parent corporation desires the legal benefits to be derived from organization of a subsidiary that will function separately and autonomously in the conduct of its own distract business, the parent must accept the legal consequences, including its inability later to treat the subsidiary as its alter ego because of certain advantages that might thereby be gained. In short, the parent cannot "have it both ways." Id. at 418. In Carey v. National Oil Co., 592 F.2d 673 (2d Cir. 1979), the plaintiff corporation sought to establish personal jurisdiction over a company owned by the Libyan government by invoking a statute that conferred jurisdiction over foreign states if their actions had a "direct effect" in the United States. The corporation sought to establish such direct effects on the basis of effects upon its wholly owned subsidiary, a Bahamian corporation that had little or no contact with the United States. Id. at 675. In effect, the parent corporation sought to have the subsidiary disregarded with regard to the actions of a foreign corporation. The Second Circuit Court of Appeals summarily dismissed the claim, stating that "we will not here 'pierce the corporate veil' in favor of those who created that veil."
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Id. at 676 (citing Schenley in favor of that result). In In re Howell-Kessler, 447 F. Supp. 976 (S.D.N.Y. 1978), a debtor again sought to have its subsidiary disregarded to assert "equitable ownership" of the subsidiary's property. The Southern District of New York rejected the claim, stating that "it would be particularly inappropriate to permit [the debtor] to deny the independent existence of the corporation which it formed not due to any legal impediment to its own ownership of the property but in order to secure a tax advantage." Id. at 977. In Eckles v. Petco Inc., 33 Bankr. 847 (D. Minn. 1985), a creditor sought to set off a debt owed to the debtor against a debt owed by the debtor to the creditor's wholly owned subsidiary. In effect, the creditor sought to pierce the veil of its subsidiary with regard to its relationships with the debtor. The court ruled against the creditor, stating that it was aware of no cases in which such reverse piercing had been allowed absent an allegation of fraud or other wrong. Id. at 853. Eckles was later cited as persuasive authority in In re Bellanca, 56 Bankr. 339 (D. Minn. 1985), in which the court denied an attempt by a corporation to collapse its own subsidiary so as to reach new value advances by that subsidiary. The Bellanca court noted that the corporate disregard doctrine was a creation of state law that had never been allowed in a bankruptcy context. Id. at 399. The bankruptcy proceeding in In re Wilson, 90 Bankr. 208 (E.D. Va. 1988) again rejected an attempt to obtain an insider reverse pierce. A bankruptcy trustee sought to disregard a corporate entity so that the bankruptcy debtor, the sole shareholder of the corporation, could press as personal claims some corporate claims derived from a set of contracts between the corporation and other entities. Id. at 211-12. The court cited Terry v. Yancey, 344 F.2d 789 (4th Cir. 1965), discussed supra note 77, as persuasive authority for rejecting the reverse pierce doctrine. In re Wilson, 90 Bankr. at 213. The court also distinguished Crum v. Krol, 99 Ill. App. 3d 651, 425 N.E.2d 1081 (1981) (allowing an insider reverse pierce claim), discussed supra note 67, as not having squarely presented the issue. Wilson, 90 Bankr. at 213. The In re Wilson court also stated that veil-piercing claims could be upheld only if there was fraud or inequity in the actions of the party against whom the doctrine was invoked, a factor not present in this case. Id. 83. 142 F. 247 (E.D. Wis. 1905); see also supra text accompanying note 4 (setting forth Judge Sanborn's test for standard corporate creditor veil-piercing attempts). 84. Milwaukee Refrigerator Transit Co., 142 F. at 255. 85. 302 N.W.2d 350 (Minn. 1981); see also supra text accompanying notes 24-35 (discussing Roepke). 86. Roepke, 302 N.W.2d at 353. 87. Id. 88. 375 N.W.2d 477 (Minn. 1985); see also supra text accompanying notes 41-59 (discussing Cargill). 89. Cargill, 375 N.W.2d at 479. 90. Id. 91. 441 N.W.2d 121 (Minn. Ct. App. 1989); see also supra text accompanying notes 54-59 (discussing Eden Valley). 92. The Eden galley opinion also rested upon the alter ego status of the corporation and upon the pre-eminence of the policy embodied by the Minnesota homestead exemption statute. Eden Valley, 441 N.W.2d at 124-25. 93. See, e.g., Kuennen v. Citizens Sec. Mut. Ins., 330 N.W.2d 886 (Minn. 1983) (denying a
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reverse piercing claim in a suit to recover benefits under an insured majority shareholder's automobile policy when the insured was not the sole shareholder of the corporation and only two of the four corporate vehicles were used as family vehicles). 94. Crum v. Krol, 99 Ill. App. 3d 651, 425 N.E.2d 1081 (1981); see also supra note 67 (discussing Crum). 95. Crum, 99 Ill. App. 3d at 662, 425 N.E.2d at 1089 (stating that "to refuse to pierce the corporate veil would be to permit . . . an unjust result"). 96. See supra note 79. 97. 421 Mich. 641, 364 N.W.2d 670 (1984); see also supra note 70 (discussing Wells). 98. Wells, 421 Mich. at 652-53, 364 N.W.2d at 675. 99. Id. at 652, 364 N.W.2d at 675. 100. Id. at 648-50, 364 N.W.2d at 672-73. 101. See supra text accompanying notes 74-82. 102. See generally Note, Reverse Piercing, supra note 2, at 682-85 (discussing the "separate personality" approach, which considers a corporation and its owners to be separate legal entities for all purposes). 103. See, e.g., the cases cited supra note 79. 104. See generally Note, Reverse Piercing, supra note 2, at 696-703 for a discussion of an alternative "unitary interest" test for resolving insider reverse piercing claims. That test, while recognizing the public convenience and equitable factors emphasized by this Article, places emphasis upon the degree of economic integration between the corporate entity and its owners rather than, as suggested in this Article, the degree of reliance upon separate entity status by affected creditors or debtors and the effect of allowing a reverse pierce on debtor or creditor expectations. While certainly an improvement over the level of analysis contained in the opinions, the "unitary interest" test seems deficient in this regard. See also Comment, Alter Ego, supra note 2, at 148-55 (discussing a multi-step balancing approach applicable to, among other issues, insider reverse piercing claims). 105. Cases allowing outsider reverse piercing claims, or ordering remands to make the factual determinations necessary to resolve such claims, include Shades Ridge Holding Co. v. United States, 888 F.2d 725 (11th Cir. 1989); FMC Finance Corp. v. Murphree, 632 F.2d 413 (5th Cir. 1980); Valley Fin. v. United States, 629 F.2d 162 (D.C. Cir. 1980); Shamrock Oil & Gas Co. v. Ethridge, 159 F. Supp. 693 (D. Colo. 1958); Estudios, Proyectos E Inversiones De Centro America, S.A.v. Swiss Bank Corp., 507 So. 2d 1119 (Fla. Dist. Ct. App. 1987); Minich v. Gem State Developers, Inc. 99 Idaho 911, 591 P.2d 1078 (1979); Central Nat'l Bank & Trust Co. of Des Moines v. Wagener, 183 N.W.2d 678 (Iowa 1971); W.G. Platts Inc. v. Platts, 49 Wash. 203, 298 P.2d 1107 (1956); Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985). Cases denying outsider reverse piercing claims include Zahra Spiritual Trust v. United States, 910 F.2d 240 (5th Cir. 1990); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557 (10th Cir. 1990); Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265 (2d Cir. 1929); Olympic Capital Corp. v. Newman, 276 F. Supp 646 (C.D. Cal. 1967); Divco-Wayne Sales Financial Corp. v. Martin Motor Vehicle Sales, Inc., 45 Ill. App. 2d 192, 195 N.E.2d 287 (1963); Transamerica Cash Reserve v. Dixie Power & Water, 789 P.2d 24 (Utah 1990). All of these cases are discussed in the subsequent text and notes. 106. See supra note 105. 107. 31 F.2d 265 (2d Cir. 1929). 108. Id. at 267.
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109. 49 Wash. 2d 203, 298 P.2d 1107 (1956). 110. Id. at 206-07, 298 P.2d at 1110. 111. 159 F. Supp. 693 (D. Colo. 1958). In Shamrock Oil, the defendants obtained a judgment against the plaintiff and subsequently obtained execution of their judgment upon the major asset of a corporation that was wholly owned and operated by the plaintiff. Id. at 695. The plaintiff replevied the asset, and the defendants appealed the replevin order. Id. Their claim rested upon the validity of the execution; it was a de facto outsider reverse pierce that allowed the seizure of corporate assets to satisfy a claim against the controlling shareholder. The District Court for the District of Colorado upheld their claim, first finding that the plaintiff had operated the corporation as his "alter ego." Id. at 698. The court then held that this finding supported not only "shareholder liability for corporate obligations, but also corporate liability for the obligations of the shareholder." Id. 112. Id. 113. Id. 114. 45 Ill. App. 2d 192, 195 N.E.2d 287 (1963). In Divco-Wayne, a corporation manufactured and sold vehicles to a dealer for resale to retail customers, and those wholesale transactions were financed by a subsidiary of the manufacturer that had a name similar to that of its parent. Id. at 196, 195 N.E.2d at 289. When the dealer-purchaser defaulted on its payment obligations, the financing subsidiary filed suit against it. Id. at 194, 195 N.E.2d at 288. The defendant then asserted as a counterclaim its right to collect commissions owed it by the parent firm. Id. at 194, 195 N.E.2d at 288. For the counterclaim to be allowed, it would be necessary to disregard the separate entity status of the financing subsidiary and treat the counterclaim against the parent as a claim against the subsidiary. The Illinois Court of Appeals refused to pierce the veil of the subsidiary to allow the counterclaim, stating that a parent-subsidiary relationship and similar names among affiliates were not alone sufficient to constitute the fraudulent or unjust conduct necessary to support an outsider reverse piercing claim; there must be some holding out of identity among affiliates that misleads or lulls one into a mistake of fact. Id. at 199, 195 N.E.2d at 290. 115. Id. at 199, 195 N.E.2d at 289-90. 116. 276 F. Supp. 646 (C.D. Cal. 1967). 117. Id. at 655 (emphasis in original). 118. Id. 119. 183 N.W.2d 678 (Iowa. 1971). 120. Id. at 682. 121. Id.; see also Central Fibre Prods. Co. v. Lorenz, 246 Iowa 384, 66 N.W.2d 30, 33 (1954) (holding that assets held under corporate names were the property of the individual judgment debtor and, therefore, subject to the judgment of the plaintiff). 122. 99 Idaho 911, 917, 591 P.2d 1078, 1084 (1979). 123. Id. at 917, 591 P.2d at 1084. The plaintiffs in Minich brought their action for specific performance of a contract to sell a suburban lot and custom-built house against individual defendants and the corporation of which the individuals were the officers, directors, and majority shareholders. Id. at 912, 591 P.2d at 1079. The contract had named the individuals as parties to the contract, and the individuals contracted in their individual capacities even though the corporation held title to the property. Id. at 912-13, 591 P.2d at 1079-80. 124. The Minich court rejected the Olympic Capital Corp. decision by stating: "The Olympic Capital Corporation's case presented a federal district court venue problem arising out of a
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very complicated financial fact situation. The court observation in that case cannot be accepted in this jurisdiction. This court and other courts have disregarded the claimed corporate ownership of assets to satisfy individual debts where the facts dictated a necessity to do so." Id. at 917, 591 P.2d at 1084. 125. 629 F.2d 162 (D.C. Cir. 1980). 126. Id. at 166. 127. Id. at 171-73. 128. 632 F.2d 413 (5th Cir. 1980). 129. Id. at 417. 130. Id. at 420-21. 131. 31 F.2d 265 (2d Cir. 1929); see also supra text accompanying notes 107-08 (discussing Kingston Dry Dock Co.). 132. FMC Finance Corp., 632 F.2d at 421. 133. Id. at 422. 134. Id. 135. Id. at 423. 136. Id. 137. Id. at 424. FMC Corporation became a debtor of the guarantors when it provided their corporation with a warranty on leased buses. Id. The defendants may have reasonably understood this warranty obligation credit to have been extended by all FMC Corporationrelated entities, including FMC Finance, rather than by FMC Corporation alone. Such an understanding was regarded by the court of appeals as a potential basis for piercing the corporate veil of those other entities so that defenses based on the FMC Corporation warranty obligation could be asserted by the defendants as a defense to a claim by FMC Finance. In the words of the court: A creditor has the duty first to ascertain the creditworthiness of the corporation he voluntarily deals with, and assumes the risk of possible default by that corporation when he extends credit . . . . When the shareholder or affiliate [of the corporation], however, engages in conduct likely to create in the creditor the reasonable expectation that he is extending credit to an economic entity larger than the corporation he actually contracted with, and the creditor reasonably relies to his detriment on his reasonable belief concerning who or what he was dealing with, then the corporate veil can be pierced. Id. at 423. This quotation suggests that the court of appeals was of the view that the "implied misrepresentation" must be by the entity sought to be disregarded to justify a reverse pierce. 138. 693 S.W.2d 944 (Tex. Ct. App. 1985). 139. The Texas Court of Appeals in Zisblatt allowed a spouse to subject the assets of a corporation partially owned by her husband to her marital claims against him even though 40% of the corporation's stock was owned by the husband's sister. Under Texas law, a spouse in a divorce action is entitled to a share of the community property of the couple, but is generally not entitled to a share of the "separate" property the other spouse owned at the time of marriage, unless the court chooses to exercise its broad equitable powers to make an award of separate property. See, e.g. Dillingham v. Dillingham, 434 S.W.2d 459 (Tex. Ct. App. 1968). The husband in Zisblatt owned all of the stock of a corporation prior to his marriage and subsequently arranged his affairs so that a portion of his income, which would normally become community property, was diverted to the corporation to increase its value. Zisblatt,
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693 S.W.2d at 953. The husband, after the marriage but prior to the divorce, gave 40% of the stock of the corporation to his sister. Id. The husband asserted in the divorce action that the increase in value of the corporation during the marriage was his separate property rather than community property. Id. The Texas Court of Appeals, however, ruled that, when a person controls a corporation as an "alter ego" and uses it as an instrument to circumvent the marital property division statutes, it is appropriate to "characterize corporate assets as part of community estate." Id. at 952. The court held that such a recharacterization was justified by the facts before it. Id. at 955-56. 140. See Zisblatt, 693 S.W.2d at 955 (stating: "[w]e further hold that the character of [the corporation's assets] as community property could and would not be either changed, altered or affected by the ownership or transfer of stock to third parties"). This view creates the potential for far-reaching application of the outsider reverse pierce doctrine, at least in marital property disputes; however, the authority of this proposition is lessened because the transfer of stock in Zisblatt was a gratuitous gift to a near relative. The prior court of appeals opinion cited in support of this proposition, Spruill v. Spruill, 624 S.W.2d 694 (Tex. Ct. App. 1981), expressly limited the impact of a recharacterization of corporate assets as community property to the interest in those assets held by the husband or wife. See id. at 697. 141. Zisblatt, 693 S.W.2d at 955. 142. 507 So. 2d 1119 (Fla. Dist. Ct. App. 1987). 143. Id. at 1120. 144. Id. 145. 888 F.2d 725 (11th Cir. 1989). 146. Id. at 727. 147. Id. at 728. 148. Id. at 729. 149. 896 F.2d 1557 (10th Cir. 1990). 150. Id. at 1575. 151. Id. (citing Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979)). 152. Id at 1575-76. 153. Id. at 1577. 154. Id. at 1575 n.17. 155. Id. at 1577. 156. id. 157. Id. at 1578. 158. Id. 159. 789 P.2d 24 (Utah 1990). 160. Id. at 26; see also Olympic Capital Corp. v. Newman, 276 F. Supp. 646 (C.D. Cal. 1967) (discussed in supra text accompanying notes 116-18); Shamrock Oil & Gas Co. v. Ethridge, 159 F. Supp. 693 (D. Colo. 1958) (discussed in supra text accompanying notes 111-13); Minich v. Gem State Developers, 99 Idaho 911, 591 P.2d 1078 (1978) (discussed in supra text accompanying notes 122-24). 161. Transamerica Cash Reserve, 789 P.2d at 26. 162. Id. at 26-27. 163. 910 F.2d 240 (5th Cir. 1990). 164. Id. at 243-44. 165. Id. at 244.
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166. Id.; see also Estudios, Proyectos E Inversiones De Centro Am. v. Swiss Bank Corp., 507 So. 2d 1119 (Fla. Dist. Ct. App. 1987) (discussed in supra text accompanying notes 142-44). 167. Zahra Spiritual Trust, 910 F.2d at 244; see also Valley Finance Inc. v. United States, 629 F.2d 162 (D.C. Cir. 1980), cert. denied 451 U.S. 1018 (1981) (discussed in supra text accompanying notes 125-27). 168. Zahra Spiritual Trust 910 F.2d at 244; see also Shades Ridge Holding Co. v. United States, 888 F.2d 725 (11th Cir. 1989) (discussed in supra text accompanying notes 145-48). 169. Zahra Spiritual Trust, 910 F.2d at 244; see also American Petroleum Exchange v. Lord, 399 S.W.2d 213 (Tex. Ct. App. 1966) (holding the corporation liable for the majority stockholder's debts in a proceeding to enforce a property judgement against the stockholder; the stockholder held the great majority of the corporation's stock individually, held nearly all of the remainder of the stock as trustee for his minor daughter, and treated the corporation as his alter ego). 170. Zahra Spiritual Trust, 910 F.2d at 244; see also Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985) (discussed in supra text accompanying notes 138-41). 171. Zahra Spiritual Trust, 910 F.2d at 244. 172. Id. at 246. 173. Id. 174. 145 F.2d 247 (E.D. Wis. 1906); see also supra text accompanying note 4. 175. 31 F.2d 265 (2d Cir. 1929); see also supra text accompanying notes 107-08, 131. 176. 49 Wash. 2d 203, 298 P.2d 1107 (1956); see also supra text accompanying notes 10910 (discussing Platts). 177. 159 F. Supp 693 (D. Colo. 1958); see also supra text accompanying notes 111-13 (discussing Shamrock Oil). 178. 183 N.W.2d 678 (Iowa 1971); see also supra text accompanying notes 119-21 (discussing Central Nat'l Bank). 179. 591 P.2d 1078 (Idaho 1979); see also supra text accompanying notes 122-24 (discussing Minich). 180. 31 F.2d 265 (2d Cir. 1929); see also supra text accompanying notes 107-08, 131 (discussing Kingston Dry Dock). 181. Kingston Dry Dock, 31 F.2d at 267; see also supra text accompanying note 108. 182. 45 Ill. App. 2d 192, 196, 195 N.E.2d 287, 289 (1963); see also supra text accompanying notes 114-15 (discussing Divco-Wayne). 183. 49 Wash. 2d 203, 298 P.2d 1107 (Wash. 1956); see also supra text accompanying notes 10910 (discussing Platts). 184. 693 S.W.2d 944 (Tex. Ct. App. 1985); see also supra text accompanying notes 138-41 (discussing Zisblatt). 185. But see Zahra Spiritual Trust v. United States, 910 F.2d 240, 244 (5th Cir. 1990) (citing Zisblatt as persuasive authority in a tax controversy despite its being a marital property division case). 186. 632 F.2d 413 (5th Cir. 1980); see also supra text accompanying notes 128-37 (discussing FMC Finance). 187. FMC Finance, 632 F.2d at 422. 188. Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265, 267 (2d Cir. 1929); see also supra text accompanying note 108. 189. FMC Finance, 632 F.2d at 422.
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190. Id. The FMC Finance opinion also restated the "fraud or injustice" prong of the standard veil-piercing criteria in an imprecise fashion and failed to make clear that the requisite wrongful conduct may be that of the insider who opposes the reverse pierce as well as that of the corporate entity whose disregard is sought. See id. at 423-24 (stating that any wrongful acts of the insider are presumed to be under the control of the corporation if the injustice prong of the analysis has been reached). 191. 31 F.2d 265 (2d Cir. 1929); see also supra text accompanying notes 107-08, 131. 192. But see Note, Reverse, supra note 2, at 646 (stating "[i]n the final analysis, the result in FMC Finance is a good one"). 193. 896 F.2d 1557 (10th Cir. 1990); see also supra text accompanying notes 149-58 (discussing Cascade Energy). 194. 31 F.2d 265 (2d Cir. 1929); see supra text accompanying notes 107-08, 131 (discussing Kingston Dry Dock). 195. But see supra text accompanying notes 109-10 (discussing W.G. Platts, Inc. v. Platts, 49 Wash. 2d 203, 298 P.2d 1107 (1956)); supra text accompanying notes 138-41 (discussing Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985)). 196. See supra text accompanying notes 175-95. 197. Insider domination of the corporation may, however, provide a sufficient basis for a finding of corporate liability for insider actions on either an agency or aiding and abetting theory. 198. But see supra text accompanying notes 109-10 (discussing W.G. Platts, Inc. v. Platts, 49 Wash. 2d 203, 298 P.2d 1107 (1956)); supra text accompanying notes 138-41 (discussing Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985)). 199. But see supra text accompanying notes 109-10 (discussing W.G. Platts, Inc. v. Platts, 49 Wash. 2d 203, 298 P.2d 1107 (1956)); supra text accompanying notes 138-41 (discussing Zisblatt v. Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985)). 200. Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265, 267 (2d Cir. 1929). 201. In accord with this view, but for somewhat different reasons, is Note, Reverse Piercing, supra note 2, at 704. ~~~~~~~~ By Gregory S. Crespi Assistant Professor, Southern Methodist University School of Law. B.S. 1969, Michigan State University; M.S. 1974, George Washington University; Ph.D. 1978, University of Iowa; J.D. 1985, Yale University. I would like to thank Marc Steinberg and Robert Johnson for their comments on earlier drafts of this Article. Copyright of Journal of Corporation Law is the property of University of Iowa, College of Law (Journal of Corporation Law) and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.
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