The Reverse Pierce Doctrine - article.pdf

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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 fact-

specific 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 state-

by-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 Divco-

Wayne 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 non-

consensual 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 677-

81; 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.










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 non-

profit 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.



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.


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 two-

pronged 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 Corporation-

related 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 109-

10 (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.







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.

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