Choice of Law and Outer Piercing of the Reverse Veil – Corporate Law/Commercial Law

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United States: Choice Of Law And Outside Reverse Veil Piercing

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Last week, I took note of the decision of the Court of Appeals for the Second District which allows the possibility apart from piercing the veil, Blizzard Energy, Inc. vs. Bernd Schaefers,2021 Cal. App LEXIS 968. Readers may recall that the case involved plaintiff’s request that a California court add two limited liability companies partly owned by defendant to a Kansas judgment against defendant. Last week’s post was about the possibility of such an outer piercing of the veil. The Court of Appeals conceded that this could happen, but sent the case back to determine if it would be unfair to the defendant’s wife who was not subject to the Kansas judgment.

The defendant also argued that the trial court should have applied Kansas law rather than California law. The Court of Appeals rejected this argument because the parties did not cite, and the Court could not find, any Kansas case dealing with the issue of whether piercing an LLC’s reverse veil is permitted. under the alter ego doctrine. Because the Court found a “false conflict” between California law and Kansas law, it left the choice of law issue undecided.

Readers may recall this previous article on the US District Court Edward M. Chen ruling that Ohio law applied to an alter ego action against members of an Ohio limited liability company. Greenlight Sys., LLC vs. Breckenfelder, 2021 US Dist. LEXIS 120288. He found support for his decision in section 17708.01 of the California Corporations Code which provides:

(a) The law of the state or other jurisdiction under which a foreign limited liability company is incorporated governs all of the following:

(1) The organization of the limited liability company, its internal affairs and the authority of its partners and managers.

(2)The liability of a member as a member and of a manager as manager for the debts, obligations or other liabilities of the limited liability company.

Section 17708.01, of course, only pertains to piercing the veil forward, not backward. It is also not clear that this law applies to the Blizzard Energy cases because it appears that the LLCs in these cases were organized under California law.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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