Court of Appeals Refuses to Adopt Outsider Reverse Piercing

Court of Appeals Refuses to Adopt Outsider Reverse Piercing

      In a recent decision, the Court of Appeals rejected an effort by a judgment creditor to effect an outsider reverse pierce of a corporation in order to secure assets that would be applied to satisfy a debt of the sole shareholder. Williams Estate v. William C. Oates Estate, No. 2012-CA-000327-MR, 2014 WL 2937773 (Ky. App. June 27, 2014).

      Cecil Williams, in August, 1990, loaned $62,500 to William Oates. While the loan was unsecured, apparently Oates told Williams that he owned a piece of residential real estate. No mortgage was filed, however against that real estate. In actuality, Oates did not own the house; rather, it was owned by William C. Oates Realty Co., Inc., of which Oates was the sole shareholder. Oates never repaid Williams the borrowed $62,500. Ultimately, when Williams brought suit, he was awarded a default judgment. However, he was never able to collect thereon. That judgment was subsequently renewed so that it would not become subject to the 15 year statute of limitations of KRS § 413.090. Ultimately the corporation was administratively dissolved after Oates' death, and its assets were distributed to Oates’ heirs. In turn, Williams sought to recover those assets from the heirs in order to satisfy the debt.  In addition, Williams sought to have the corporate existence set aside ab initio, thereby treating the corporation's assets as those of Oates individually.

      Both of these arguments were rejected.

      With respect to the suggestion that the corporation had never really existed, the court relied upon KRS § 271B.2-030(1), which provides that the existence of the corporation begins when the articles of incorporation are filed with the Secretary of State. The court noted as well that the corporation had filed, for several years, the necessary annual reports with the Secretary of State, and tax returns had been filed.  From this the court determined that the corporation had “established its corporate existence.”

      Turning to the effort to pierce the veil, the court noted that the plaintiff was attempting to do a “reverse pierce.” Citing Turner v. Andrew, 413 S.W.3d 272, 277 (Ky. 2013), “reverse piercing” was described as “a theory in which the creditor of an individual who was the sole member of the corporation seeks to pierce the veil to obtain corporate assets to satisfy the member’s personal debt.” It was notes as well that the Turner court had stated that it is unclear whether Kentucky recognizes reverse piercing.  In this decision, the Court observed that the plaintiff had failed “to provide any thoughtful insights were compelling arguments as to why this concept should be adopted in the Commonwealth.”

       Last, and perhaps alluding to the rule of White v. Winchester Land Development that contractual creditors are in the position to protect themselves by contract, it was observed that “a loan for the sum of money at issue should have been secured when it was originally made.”