Effort to Reverse Pierce P.S.C. Rejected

Effort to Reverse Pierce P.S.C. Rejected

      In a typical case seeking to pierce the veil, a judgment-creditor seeks to hold the shareholders the corporation or the members in an LLC, the corporation or LLC being the judgment-debtor, liable for the obligations of the business entity. More rarely, we see efforts to hold a business entity liable for the debts of its owners. In certain instances, a judgment-creditor of a member or shareholder will seek to access the assets of the corporation or LLC in order to satisfy the judgment. This is referred to as outsider reverse piercing. Occasionally, we will see efforts by shareholder or a member to have a corporation or LLC ignored so as, intentionally, to make the assets of the business organization directly accessible by the owner. This is referred to as “insider reverse piercing.” In a case decided just last week by the Kentucky Court of Appeals, it rejected an effort by a shareholder in a professional service corporation (“P.S.C.”) to effect an insider reverse pierce and thereby claim coverage under an insurance policy. Isaacs v Sentinel Insurance Company, Limited, No. 2017-CA-000204-MR, 2018 WL 663001 (Ky. App. Feb. 2, 2018).

      Darrell Isaacs, a well-known personal injury plaintiff’s attorney in Louisville (a/k/a “Hammer”), was on January 19, 2015 injured while riding his bicycle on River Road, having been struck by Michael Baumann. Isaacs sued not only Baumann but also Sentinel Insurance, the firm that had written a policy to Isaacs’ firm, Isaacs & Isaacs P.S.C., of which he was the sole shareholder. Essentially (at least as I understand it), on the basis that Baumann did not have sufficient insurance, Isaacs was making a claim against Sentinel under the policies issued to the PSC. It bears noting that there is no suggestion that Isaac’s bicycle (which I understand to have been a Pinarello Dogma) was an insured vehicle under the Sentinel policy.

      Initially, the Court of Appeals dismissed the suggestion that the Sentinel policy covered Isaacs at the time of the accident.

So, an individual is entitled to UIM coverage if occupying a covered motor vehicle at the time of the accident. In short, the terms of UIM coverage set forth in the insurance policy are clear and unambiguous.

In this case, Isaacs was riding a bicycle at the time of the accident and was not occupying a covered auto. Under the clear and unambiguous terms of the insurance policy, Isaacs is not an insured entitled to recover UIM benefits. 2018 WL 663001, *3.

       The Court of Appeals as well rejected an effort by Isaacs to treat him and his PSC as “synonymous,” rejecting as well the argument “that the P.S.C. is nothing more than a ‘legal fiction’ for tax purposes only.” Rather, the court found:

In Kentucky, a professional service corporation (P.S.C.) is a corporate entity as set out in Kentucky Revised Statutes (KRS) 274.015. The corporation must provide professional service to the public of the type which requires as a condition precedent thereto, the obtaining of a license or other required legal authorization to perform the service.  This, licensed attorneys like Isaacs, are “qualified” persons under the statute who may form a P.S.C. to conduct their legal practice.  More importantly, a P.S.C. formed under KRS Chapter 274 has the “same powers, authority, duties and liabilities as a corporation formed under KRS Chapter 271B.”

Thus, a professional service corporation is a distinct legal entity under Kentucky law.  The formation of a P.S.C. under Kentucky law does not involve tax issues.  Rather, those issues look to an election under various federal tax laws by management as to whether the newly formed corporation will elect to be a C-Corporation or S-Corporation for tax purposes.  Isaacs’ argument that he is one and the same as his P.S.C. for insurance purposes because of a tax election is totally without legal merit under Kentucky law, as the record reflects he is a shareholder of the corporation.  Similarly, Isaacs’ argument that he is the named insured of the corporation’s automobile insurance policy by virtue of his stock in the P.S.C. is also without merit (citations omitted).

      And so ended the effort to reverse pierce the P.S.C.