C.F. Trust, Inc. v. First Flight Ltd. Partnership
2 A.L.R. 6th 719, 266 Va. 3, 580 S.E.2d 806 (2003)
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Rule of Law:
Virginia law recognizes the doctrine of outsider reverse veil-piercing, allowing a creditor to reach the assets of a limited partnership to satisfy the personal debt of a partner when the partner has controlled the entity to evade a personal obligation and there is such a unity of interest that the entity and the individual are indistinguishable.
Facts:
- Barrie M. Peterson personally endorsed and guaranteed several commercial promissory notes held by C.F. Trust, Inc. and Atlantic Funding Corporation.
- After Peterson defaulted on the notes, he began using his wholly-owned corporation, Birchwood Holdings Group, Inc. (BHG), to pay over $2 million of his personal expenses, including mortgages, country club fees, and car payments.
- The primary source of funds for BHG was First Flight Limited Partnership, an entity in which Peterson held a 98% interest.
- Shortly after judgments were entered against him, Peterson transferred half of his partnership interest in First Flight to his son, Scott Peterson, in an attempt to surrender legal control.
- Despite the transfer, Barrie Peterson continued to manage First Flight's daily operations.
- Barrie Peterson directed his son, Scott, to take over $4.3 million in distributions from First Flight and use those funds to continue paying Barrie Peterson's personal expenses.
- Peterson claimed these payments were repayments of prior loans he had made to his companies, but he could not produce underlying documentation and only generated promissory notes years later to justify the disbursements.
Procedural Posture:
- C.F. Trust and Atlantic Funding obtained money judgments against Barrie M. Peterson in Virginia state circuit courts.
- The creditors filed a diversity action in the United States District Court for the Eastern District of Virginia, seeking a declaration that First Flight Limited Partnership was the alter ego of Peterson.
- After a four-day bench trial, the federal district court ruled in favor of the creditors, holding that Virginia would recognize reverse veil-piercing and that First Flight's assets could be used to satisfy Peterson's judgments.
- First Flight and Peterson appealed the district court's decision to the United States Court of Appeals for the Fourth Circuit.
- The Fourth Circuit certified two questions of state law to the Supreme Court of Virginia to determine whether and under what standards Virginia law recognizes outsider reverse veil-piercing.
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Issue:
Does Virginia law permit a creditor to 'reverse pierce' the veil of a limited partnership to satisfy a personal judgment against a partner who dominates the entity and uses it to evade the judgment?
Opinions:
Majority - Chief Justice Hassell
Yes, Virginia law permits outsider reverse veil-piercing. The court finds no logical basis to distinguish between traditional and outsider reverse veil-piercing, as both doctrines seek to disregard a business entity's structure to prevent abuse. The same stringent, fact-specific standards for traditional piercing apply: a creditor must show (1) a unity of interest and ownership so complete that the separate personalities of the entity and the individual no longer exist, and (2) that the individual used the entity to evade a personal obligation, perpetrate a fraud, or commit an injustice. For reverse piercing, courts must also weigh the potential impact on innocent partners and creditors and consider whether other remedies have been exhausted. The standard of proof is clear and convincing evidence.
Analysis:
This opinion officially incorporates the doctrine of outsider reverse veil-piercing into Virginia common law, providing a significant, though extraordinary, remedy for creditors. By extending the traditional alter ego theory, the decision allows creditors to pursue debtors who hide personal assets within controlled business entities. The ruling balances this creditor-friendly tool by establishing important safeguards, requiring courts to consider the impact on innocent third parties like other partners or creditors. This sets a high bar for reverse piercing, ensuring it is reserved for the most egregious cases of abuse of the entity form.
