Monday, August 24, 2020

Piercing Is a Remedy, And Always Has Been

Piercing Is a Remedy, And Always Has Been

In recent years there have been a number of decisions in Kentucky and around the country confirming that piercing the veil is a remedy and not of itself a cause of action. Recent decisions on the point include:
  • In re CC Operations, LLC, No. 17-33389-THF, 2020 WL 1970509, *6 (Bankr. W.D. Ky. Apr. 23, 2020) (“veil-piercing is a remedy for enforcement of a judgment and not an independent cause of action in and of itself, a distinction Trustee does not dispute. Kentucky does not permit veil-piercing as a means of consolidating entities to try and create assets for the debtor company.”);
  • In re Bullitt Utilities, Inc., 614 B.R. 676, 684 (Bankr. W.D. Ky. 2020) (“[Piercing] is an equitable remedy, not a separate cause of action.”); and
  • Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 212 (Ky. App. 2009) (“Given the above legal reasoning, we find that the action before us involves an equitable remedy and is not one at law or one for damages.”).
        While recently going through some older decisions I stumbled upon Louisville & N.R. Co. v. Nield, 186 Ky. 17, 216 S.W. 62 (1919).  While the context is somewhat different in that the law governing a corporation’s voluntary dissolution has changed, the point made by the Court as to the ability to require a shareholder to pay the corporation’s unresolved debt through piercing is valid today as it was then.  The Kentucky Court of Appeals, then the highest Kentucky court, wrote:

The question upon this appeal is whether, in any event, a suit may be maintained in equity against a stockholder for a debt of the corporation before a judgment has been obtained at law against the corporation and a return of “no property,” and without the corporation being made a party defendant. That ordinarily and as a general rule the secondary and equitable liability of a stockholder for the corporation debt cannot be enforced until the primary and the legal liability of the corporation has been determined and legal remedies exhausted by obtaining a judgment and a return of “no property” thereon …. Id. at 63.

Ergo, as long ago as 1919, piercing presupposed a judgment against the corporation and a determination that it had insufficient assets from which to satisfy the judgment. 

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