PF Shield’s Comments
This case discusses two issues:
Whether an entity can be ‘reverse-pierced’ (where a creditor of a company’s owner can reach company assets) has not been fully resolved in every state (although, currently, most states do allow reverse-piercing, and, in this case, Virginia allows it, also).
A limited partnership can be reverse-pierced, which means a charging-order protected entity (which many would think would be immune to reverse-piercing) may be subject to reverse-piercing. Note, however, that if other members of the partnership (or partnership creditors) may be harmed, then reverse-piercing would probably not be allowed, which is exactly why PF Shield’s “Entanglement Theory” method is so effective and necessary in an asset protection program.
And now the case…
C. F. TRUST, INCORPORATED; ATLANTIC FUNDING CORPORATION, Plaintiffs-Appellees, v. FIRST FLIGHT LIMITED PARTNERSHIP, Defendant-Appellant, and BIRCHWOOD ORGANIZATION, INCORPORATED; BIRCHWOOD HOLDINGS GROUP, INCORPORATED; MARYLAND AIR INDUSTRIES, INCORPORATED; PVD LIMITED PARTNERSHIP; OCCOQUAN LIMITED PARTNERSHIP; CARNETT COMMERCIAL INVESTORS, INCORPORATED; BARRIE M. PETERSON; BARRIE M. PETERSON, Trustee; NANCY A. PETERSON; SCOTT PETERSON; DOE ENTITIES 1-10, Defendants.
No. 01-1753
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
338 F.3d 316; 2003 U.S. App. LEXIS 15013
June 4, 2002, Argued
July 29, 2003, Decided
SUBSEQUENT HISTORY: Costs and fees proceeding at, Petition denied by C.F. Trust, Inc. v. First Flight Ltd. P’ship, 2005 U.S. Dist. LEXIS 4232 (E.D. Va., Mar. 16, 2005)
PRIOR HISTORY: [**1] Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. T. S. Ellis, III, District Judge. (CA-99-1742-A).
C.F. Trust, Inc. v. First Flight Ltd. P’ship, 140 F. Supp. 2d 628, 2001 U.S. Dist. LEXIS 3569 (E.D. Va., 2001)
DISPOSITION: Affirmed.
CASE SUMMARY
PROCEDURAL POSTURE: The federal appellate court had certified the following two questions to the Virginia Supreme Court: (1) Would Virginia recognize a claim for outsider reverse veil-piercing under the facts of the case? (2) If the answer to (1) was yes, what standards had to be met before Virginia would allow reverse veil-piercing of the limited partnership? The Supreme Court of Virginia accepted the certification request and answered both questions.
OVERVIEW: Defendant limited partnership appealed from an order declaring the limited partnership the alter ego of defendant individual and thereby making the limited partnership’s assets subject to judgments entered against the individual. The federal appellate court previously held that the district court had properly exercised jurisdiction over the post-judgment alter ego claims of plaintiffs and that those claims constituted an existing liability sufficient to support a veil piercing claim under Virginia law. However, the federal appellate court found it “uncertain” whether Virginia law would permit outsider reverse veil piercing against a limited partnership and, if so, what standards would have to be met before Virginia would permit such a claim. Regarding the certified questions, the Virginia Supreme Court answered that Virginia did recognize the concept of outsider reverse piercing and that this concept could be applied to a Virginia limited partnership. Further, when determining whether reverse piercing of a limited partnership was appropriate, a court had to consider the same factors that it considered when determining whether traditional veil piercing should be permitted.
OUTCOME: The federal appellate court affirmed the judgment of the district court.
CORE TERMS: piercing, partnership, veil, outsider, innocent, alter ego, injustice, answered, veil-piercing
LexisNexis(R) Headnotes
Business & Corporate Law > Corporations > Shareholders > Disregard of Corporate Entity > General Overview
Business & Corporate Law > Limited Partnerships > Management Duties & Liabilities
Virginia does recognize the concept of outsider reverse piercing and that this concept can be applied to a Virginia limited partnership.
Business & Corporate Law > Limited Partnerships > Formation
Business & Corporate Law > Limited Partnerships > Management Duties & Liabilities
Civil Procedure > Justiciability > Exhaustion of Remedies > General Overview
When determining whether reverse piercing of a limited partnership is appropriate, a court must consider the same factors that it considers when determining whether traditional veil piercing should be permitted. Thus, although no single rule or criterion is dispositive, the litigant who seeks to disregard a limited partnership entity must show that the partnership sought to be pierced has been controlled or used by the debtor to evade a personal obligation, to perpetrate a fraud or a crime, to commit an injustice, or to gain an unfair advantage. The piercing of a veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and/or limited partnership and the individual no longer exist, and adherence to that separateness would create an injustice. When considering reverse veil piercing, a court must weigh the impact of such action upon innocent investors, and innocent secured and unsecured creditors, as well as the availability of other remedies the creditor may pursue.
Business & Corporate Law > Corporations > Shareholders > Disregard of Corporate Entity > General Overview
Business & Corporate Law > Limited Partnerships > Management Duties & Liabilities
Although in Virginia, unlike in some states, the standards for veil piercing are very stringent and piercing is an extraordinary measure, it is permitted in the most egregious circumstances.
COUNSEL: ARGUED: Russell James Gaspar, COHEN MOHR, L.L.P., Washington, D.C., for Appellant.
Harvey Alan Levin, BIRCH, HORTON, BITTNER & CHEROT, Washington, D.C., for Appellees.
ON BRIEF: Barbara A. Miller, BIRCH, HORTON, BITTNER & CHEROT, Washington, D.C.; James R. Schroll, BEAN, KINNEY & KORMAN, P.C., Arlington, Virginia, for Appellees.
JUDGES: Before WIDENER, WILLIAMS, and MOTZ, Circuit Judges. Judge Motz wrote the opinion, in which Judge Widener and Judge Williams joined.
OPINION BY: DIANA GRIBBON MOTZ
OPINION:
[*316] DIANA GRIBBON MOTZ, Circuit Judge:
In this diversity action, First Flight Limited Partnership appealed from the district court’s order declaring First Flight the alter ego of Barrie Peterson and thereby making First Flight’s assets subject to judgments entered against Peterson. We previously held that the district court had properly exercised jurisdiction over the post-judgment alter ego claims of C. F. [*317] Trust, Incorporated and Atlantic Funding Corporation and that those claims constituted an existing liability sufficient [**2] to support a veil piercing claim under Virginia law. See C. F. Trust, Inc. v. First Flight Ltd. Partnership, 306 F.3d 126, 133-34 (4th Cir. 2002).
However, we found it “uncertain” whether Virginia law would permit outsider reverse veil piercing against a limited partnership and, if so, what standards would have to be met before Virginia would permit such a claim. Id. at 141. Accordingly, after outlining the involved facts of this case and the legal issues they presented, we certified to the Supreme Court of Virginia, pursuant to Rule 5:42 of the Rules of the Supreme Court of Virginia, the following two questions:
1) Would Virginia recognize a claim for outsider reverse veil-piercing under the facts of this case?
2) If the answer to (1) is yes, what standards must be met before Virginia would allow reverse veil-piercing of the limited partnership? Id. (citing Va. Sup. Ct. R. 5:42(a)).
The Supreme Court of Virginia accepted our certification request and answered both questions. See C. F. Trust, Inc. v. First Flight Limited Parthershp, 266 Va. 3, 580 S.E.2d 806 (Va. 2003). It answered the first certified [**3] question in the affirmative, holding “that Virginia does recognize the concept of outsider reverse piercing and that this concept can be applied to a Virginia limited partnership.” Id. at 810.
With respect to the second question, the Supreme Court of Virginia explained: when determining whether reverse piercing of a limited partnership is appropriate, a court must consider the same factors” that it “considers when determining whether traditional veil piercing should be permitted.” Id. at 811. Thus, although “no single rule or criterion is dispositve, the litigant who seeks to disregard a limited partnership entity must show that the partnership sought to be pierced has been controlled or used by the debtor to evade a personal obligation, to perpetrate a fraud or a crime, to commit an injustice, or to gain an unfair advantage.” Id. The court further explained that “the piercing of a veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and/or limited partnership and the individual no longer exist, and adherence to that separateness would create an injustice.” Id.
The Supreme Court of Virginia also explained [**4] that when “considering reverse veil piercing” a court “must weigh the impact of such action upon innocent investors,” and “innocent secured and unsecured creditors,” as well as “the availability of other remedies the creditor may pursue.” Id. The court noted that in this case, however, “there are no innocent limited or general partners involved” and that “C.F. Trust and Atlantic Funding have exhausted all remedies available to them.” Id. at 811 nn.2-3.
In sum, the court concluded that although “in Virginia, unlike in some states, the standards for veil piercing are very stringent and piercing is an extraordinary measure” it “is permitted[] . . . in the most egregious circumstances, such as under the facts before this Court.” Id. (emphasis added).
In view of these answers to the certified questions, we affirm the judgment of the district court.