• Delaware Law Permits Reverse Veil Piercing by Judgment Creditors
  • April 24, 2018 | Author: Lawrence D. Coppel
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • The United States Court of Appeals for the Fourth Circuit, applying Delaware law, recently held that a judgment creditor may collect a judgment by reaching the assets of a Delaware limited liability company that is the alter ego of the judgment debtor. The court noted that this type of “reverse veil piercing” is to be contrasted with traditional veil piercing where a judgment creditor of a business entity is permitted to collect from the assets of someone who is found to be the entity’s alter ego. Even though the creditor obtained its judgment in a Virginia federal court, Delaware law applied because the court concluded that the law of the state in which the entity was formed should govern the veil piercing issue as opposed to the law of the forum. In reaching its decision, the court rejected the debtor’s argument that the sole remedy under Delaware law for the judgment creditor was to obtain a charging order against the debtor’s interest in the LLC. Further, the court affirmed the lower court’s ruling that the LLC was the debtor’s alter ego based on evidence showing that the debtor failed to observe corporate formalities, did not maintain proper accounting records and had commingled his personal assets with those of his business entities. Since many business entities are formed today in Delaware, the Fourth Circuit’s decision strengthens the rights of creditors who obtain judgments against debtors that own interests in Delaware formed business entities.