C.F. Trust, Inc. v. First Flight Ltd. Partnership
2000 U.S. Dist. LEXIS 13123, 2000 WL 1262448, 111 F. Supp. 2d 734 (2000)
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Rule of Law:
Virginia law recognizes the doctrine of 'reverse piercing of the corporate veil,' allowing a creditor to reach corporate assets to satisfy a personal judgment against an insider when that insider has used the corporate form to evade a personal obligation, perpetrate a fraud, or commit an injustice.
Facts:
- Plaintiffs C.F. Trust, Inc. ('CF Trust') and Atlantic Funding Corporation ('AFC') held promissory notes on which defendant Barrie Peterson was liable as an endorser and guarantor.
- CF Trust and AFC obtained judgments against Barrie Peterson for approximately $6.1 million and $1.2 million, respectively.
- Barrie Peterson wholly owned and controlled several corporate entities, including Birchwood Holding Group ('BHG'), and was a 49% limited partner in First Flight Limited Partnership ('First Flight').
- After the judgments were entered, Peterson allegedly used these entities to shield his assets from collection by his creditors.
- First Flight transferred over $4 million to Peterson’s son, Scott, allegedly in violation of the partnership agreement, instead of distributing a pro-rata share to Barrie Peterson.
- Peterson's controlled corporations, particularly BHG, allegedly paid for his and his family's personal expenses, including mortgage payments, credit card bills, and country club fees, using funds funneled from his other entities.
Procedural Posture:
- CF Trust and AFC obtained money judgments against Barrie Peterson in Virginia state court and federal district court, respectively.
- CF Trust and AFC then filed this new action in the U.S. District Court for the Eastern District of Virginia against Barrie Peterson, several corporate entities he controlled, and his wife and son.
- The complaint alleged numerous claims, including a request for a declaratory judgment that the defendants were the alter egos of Barrie Peterson.
- Several claims and parties were dismissed either by court order or voluntarily by the plaintiffs.
- The remaining parties filed cross-motions for summary judgment on the surviving claim for a declaratory judgment based on the alter ego theory.
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Issue:
Does Virginia law permit a creditor to 'reverse pierce' the corporate veil to reach the assets of a corporate entity to satisfy a judgment against a corporate insider who has allegedly used the entity as an alter ego to evade a personal obligation?
Opinions:
Majority - Ellis, District Judge.
Yes. Virginia law permits a creditor to reverse pierce the corporate veil to hold a corporate entity liable for the debts of an insider. The rationale for traditional piercing, which is to prevent the abuse of the corporate form, applies with equal force to reverse piercing. While the Supreme Court of Virginia has not directly ruled on the issue, the Virginia Court of Appeals has recognized the doctrine, and it is supported by legal principle. The standard for piercing requires a plaintiff to show both (1) a unity of interest and ownership such that the separate personalities of the corporation and individual no longer exist, and (2) that the insider used the corporation to evade a personal obligation, perpetrate a fraud, or commit an injustice. The court rejected the defendants' argument that 'evading a personal obligation' is not a sufficient 'legal wrong,' confirming that it is a valid basis for piercing under Virginia precedent. However, the court also held that the alter ego doctrine cannot be applied to treat one individual as the alter ego of another individual, as the doctrine is limited to disregarding corporate and partnership forms.
Analysis:
This decision is significant for establishing, through a federal court's interpretation of state law, that Virginia recognizes the 'outsider reverse piercing' doctrine, providing creditors with a crucial tool to combat judgment-proof debtors who hide assets in corporate shells. The opinion clarifies that the standard for piercing does not require proof of a separate crime or fraud; using the corporate form simply to 'evade a personal obligation' is sufficient. By explicitly limiting the alter ego doctrine to business entities, the court also reinforces the distinction between piercing the corporate veil and other causes of action like conspiracy or fraudulent conveyance that might apply to individuals aiding a debtor.
