Present: All the Justices
C.F. TRUST, INC., ET AL.
OPINION BY CHIEF JUSTICE LEROY R. HASSELL, SR.
June 6, 2003
v. Record No. 022212
FIRST FLIGHT LIMITED PARTNERSHIP
UPON QUESTIONS OF LAW CERTIFIED BY THE
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
I.
Pursuant to Rule 5:42, the United States Court of Appeals
for the Fourth Circuit certified to this Court the following
questions of law, which we agreed to consider:
"(1) Would Virginia recognize a claim for
outsider reverse veil-piercing under the facts of
this case?
"(2) If the answer to (1) is yes, what
standards must be met before Virginia would allow
reverse veil-piercing of the limited partnership
here?"
II.
A.
C.F. Trust, Inc., a Florida corporation, and Atlantic
Funding Corporation, a Nevada corporation, filed an action in
the United States District Court for the Eastern District of
Virginia and sought a declaration that First Flight Limited
Partnership, a Virginia limited partnership, is the alter ego
of Barrie M. Peterson, who had endorsed and guaranteed certain
promissory notes. C.F. Trust and Atlantic Funding obtained
judgments against Peterson for the principal and interest on
the notes and sought to satisfy their judgments against
Peterson with assets held by First Flight. The federal
district court concluded that this Court would permit reverse
veil piercing and that court entered a judgment requiring
First Flight to use its assets to satisfy the judgments of
C.F. Trust and Atlantic Funding.
B.
The United States Court of Appeals' certification order
contained the following facts which are relevant to our
disposition of this proceeding.
"C.F. Trust and Atlantic Funding each hold commercial
promissory notes endorsed and guaranteed by Peterson. As the
district court noted, this case constitutes just one chapter
in a prolonged tale involving C.F. Trust's and Atlantic
Funding's efforts to collect a combined total of more than $8
million on their notes, and Peterson's equally determined
efforts to avoid paying anything to them.
"C.F. Trust . . . holds two notes, dated November 1,
1993, in the total principal amount of $6,064,903.57. Not
only Barrie Peterson, individually and as trustee, but also
his wife, Nancy Peterson, endorsed and guaranteed both notes.
C.F. Trust formally notified the Petersons of their default on
the notes on August 31, 1995. . . . On February 1, 1996, a
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[circuit court in Virginia] entered judgment in favor of C.F.
Trust and against the Petersons, jointly and severally, for
the amount of the notes, plus interest. . . . In September
1998, when the Petersons still had not paid on the judgment,
C.F. Trust sought and obtained a charging order from the
[circuit] court that charged the Peterson[s'] interests in
various partnerships, including First Flight, with paying the
judgment on the notes. Then, on March 18, 1999, the [federal]
district court issued garnishment orders against various
Peterson corporations, including Birchwood Holdings Group,
Inc., to C.F. Trust.
"Atlantic Funding . . . holds a single note, endorsed and
guaranteed by Peterson, individually and as trustee, in the
principal amount of $1,000,000. Atlantic Funding purchased
its note along with the right to enforce a corresponding and
preexisting judgment, entered on November 15, 1991, against
Peterson for the principal amount of that note, plus interest.
On March 1, 1996, a Virginia [circuit] court granted Atlantic
Funding a charging order charging Peterson's interest in First
Flight with paying the judgment on the Atlantic Funding note,
and, on March 15, 1996, issued a second charging order
charging another Peterson entity with paying the same
judgment.
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"On November 18, 1999, having still received no payment
on the judgments, C.F. Trust and Atlantic Funding initiated
this diversity action against Peterson, Mrs. Peterson, and
Peterson's son, Scott Peterson, as well as against various
Peterson entities, including First Flight. . . . C.F. Trust
and Atlantic Funding alleged that Peterson still owed on the
judgments and sought a declaration that each of the other
defendants was Peterson's alter ego and, therefore, liable on
the judgments.
. . . .
"A four-day bench trial began on August 28, 2000. The
evidence presented at trial showed that Peterson had engaged
in two different practices in order to avoid paying C.F.
Trust's and Atlantic Funding's judgments.
"First, Peterson directed transfers from various Peterson
entities to Birchwood Holdings Group, Inc. (BHG), a
corporation wholly owned by Peterson. BHG provided managerial
and administrative support to other Peterson entities for a
fee, which was calculated according to a cost allocation
method. During the relevant period, however, Peterson
directed transfers of approximately $1.9 million in
overpayments to BHG – excess payments beyond those to which
BHG was entitled based on the applicable cost allocation – and
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then directed BHG to pay more than $2 million of Peterson's
personal expenses.
"Through this method, Peterson maintained a lifestyle
that, he estimated, cost 'between 10 and 15 thousand dollars a
month.' The expenses paid by BHG included: mortgage and
repair payments on a Peterson residence in Fairfax, Virginia;
mortgage payments on a Peterson residence in Nantucket,
Massachusetts; Peterson's country club membership fees; car
payments for Peterson's Mercedes [Benz]; the Petersons' credit
card bills; Peterson's ATM fees; college tuition for
Peterson's younger son, Christopher Peterson; and payments to
Mrs. Peterson. BHG even paid the substantial legal fees
incurred by Peterson and Mrs. Peterson, as well as by various
Peterson entities, to defend the suits brought by C.F. Trust
and Atlantic Funding to collect on their notes.
"Yet, Peterson contended that he derived no salary and
had no income subject to the judgments entered in favor of
C.F. Trust and Atlantic Funding. Peterson instead testified
that the BHG payments toward his personal expenses constituted
repayments of prior loans that he had made to his corporations
before the dates of the judgments. However, BHG's accountant
testified – and the ledgers reflected – that many of BHG's
payments toward Peterson's personal expenses were
'distributions,' not loan repayments. Moreover, no underlying
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documentation supported Peterson's explanation for the
disbursements or the companies' asserted obligations to
Peterson, other than the checks and distributions themselves.
Only in 1999 did Peterson generate 'promissory notes,'
purportedly representing monies owed to him by his companies
as repayment for the asserted loans.
"First Flight provided the bulk of the transfers to BHG
during this time period. First Flight, the primary source of
outside revenue for the Peterson entities, owned and operated
a large commercial and industrial rental property called Top
Flight Airpark. Beginning in 1992 and continuing through
March 15, 1996, Barrie Peterson held a 98% limited partnership
interest in First Flight, including a 2% interest held by Top
Flight Airpark, Incorporated, a corporation wholly owned by
him. Upland Group, an entity wholly owned by Peterson's elder
son, Scott Peterson, held the remaining 2% general partnership
interest.
"However, on March 15, 1996 – six weeks after C.F. Trust
obtained a judgment against Peterson and two weeks after
Atlantic Funding obtained its first charging order – Top
Flight withdrew as 2% partner of First Flight, and Peterson
transferred half of his resulting 98% partnership interest in
First Flight to Scott Peterson. Upland Group, however,
retained its 2% general partnership interest. Through this
6
transfer, Peterson purportedly surrendered legal control of
First Flight to Scott Peterson, although Peterson himself
continued to manage First Flight's day-to-day affairs.
"This transfer provided Peterson a second means of
siphoning money from First Flight, other than through
intercompany transfers to BHG, to pay his personal expenses.
Peterson directed Scott Peterson to distribute First Flight's
funds to himself, and then pay those distributions to Mrs.
Peterson or to BHG, or use the distributions to pay the
personal expenses of Peterson and Mrs. Peterson. Thus,
between March 15, 1996, and December 31, 1999, although First
Flight did not directly distribute funds to Barrie Peterson,
[First Flight] distributed more than $4.3 million to Scott
Peterson.
"To justify these distributions, Peterson and Scott
Peterson amended First Flight's partnership agreement to allow
Scott Peterson, as the general partner, 'to approve any
distributions to the limited partners' and 'to determine
whether any part of the profits of the Partnership should be
distributed to the limited partners.' At trial, Peterson and
Scott Peterson contended that this amendment to the
partnership agreement extinguished the agreement's requirement
of pro rata distributions to partners, although the amendment
did not expressly alter its pro rata payout requirement.
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Peterson also argued that money used by his son to pay
Peterson's own personal expenses were repayments of loans
Peterson had made to his respective companies."
C.
The federal district court held that C.F. Trust and
Atlantic Funding had "conclusively established the grounds
necessary to support piercing the corporate veil in reverse."
C.F. Trust, Inc. v. First Flight Ltd. P'ship, 140 F.Supp.2d
628, 645 (E.D. Va. 2001). The federal district court applied
this Court's precedent for traditional veil piercing and
required that C.F. Trust and Atlantic Funding prove (i) a
"unity of interest and ownership" between Peterson and First
Flight, and (ii) that Peterson "used the corporation to evade
a personal obligation, to perpetrate fraud or a crime, to
commit an injustice, or to gain an unfair advantage." Id. at
643 (quoting O'Hazza v. Executive Credit Corp., 246 Va. 111,
115, 431 S.E.2d 318, 320 (1993)). The federal district court
concluded that First Flight was the alter ego of Barrie
Peterson and "that the 'separate personalities of [First
Flight and Barrie Peterson] no longer exist[ed].' " C.F.
Trust, 140 F.Supp.2d at 644 (quoting O'Hazza, 246 Va. at 115,
431 S.E.2d at 321).
III.
A.
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First Flight argues that this Court should not permit
outsider reverse piercing of a limited partnership by a
creditor of a limited partner. Responding, C.F. Trust and
Atlantic Funding assert that this Court has permitted
traditional veil piercing and that the same principles this
Court applied in those instances would also permit reverse
veil piercing in the present case.
We have stated that "[t]he proposition is elementary that
a corporation is a legal entity entirely separate and distinct
from the shareholders or members who compose it. This
immunity of stockholders is a basic provision of statutory and
common law and supports a vital economic policy underlying the
whole corporate concept." Cheatle v. Rudd's Swimming Pool
Supply Co., Inc., 234 Va. 207, 212, 360 S.E.2d 828, 831
(1987); accord Beale v. Kappa Alpha Order, 192 Va. 382, 397,
64 S.E.2d 789, 797 (1951). The decision to ignore the
separate existence of a corporate entity and impose personal
liability upon shareholders for debts of the corporation is an
extraordinary act to be taken only when necessary to promote
justice. O'Hazza, 246 Va. at 115, 431 S.E.2d at 320; Cheatle,
234 Va. at 212, 360 S.E.2d at 831.
We have stated that "no single rule or criterion
. . . can be applied to determine whether piercing the
corporate veil is justified," O'Hazza, 246 Va. at 115, 431
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S.E.2d at 320, and that the corporate entity will be
disregarded and the veil pierced only if:
"[T]he shareholder sought to be held personally
liable has controlled or used the corporation to
evade a personal obligation, to perpetrate fraud or
a crime, to commit an injustice, or to gain an
unfair advantage. . . . Piercing the corporate veil
is justified when the unity of interest and
ownership is such that the separate personalities of
the corporation and the individual no longer exist
and to adhere to that separateness would work an
injustice."
Greenberg v. Commonwealth, 255 Va. 594, 604, 499 S.E.2d 266,
272 (1998) (quoting O'Hazza, 246 Va. at 115, 431 S.E.2d at
320-21); accord Lewis Trucking Corp. v. Commonwealth, 207 Va.
23, 31, 147 S.E.2d 747, 753 (1966). The decision to disregard
a corporate structure to impose personal liability is a fact-
specific determination, and the factual circumstances
surrounding the corporation and the questioned act must be
closely scrutinized in each case. Greenberg, 255 Va. at 604,
499 S.E.2d at 272.
This Court has been very reluctant to permit veil
piercing. We have consistently held, and we do not depart
from our precedent, that only "an extraordinary exception"
justifies disregarding the corporate entity and piercing the
veil. Id.; Cheatle, 234 Va. at 212, 360 S.E.2d at 831; Beale,
192 Va. at 397, 64 S.E.2d at 797-98.
10
Traditionally, a litigant who seeks to pierce a veil
requests that a court disregard the existence of a corporate
entity so that the litigant can reach the assets of a
corporate insider, usually a majority shareholder. In a
reverse piercing action, however, the claimant seeks to reach
the assets of a corporation or some other business entity, as
in this instance the assets of a limited partnership, to
satisfy claims or a judgment obtained against a corporate
insider. This proceeding, often referred to as "outsider
reverse piercing," is designed to achieve goals similar to
those served by traditional corporate piercing proceedings. 1
We conclude that there is no logical basis upon which to
distinguish between a traditional veil piercing action and an
outsider reverse piercing action. In both instances, a
claimant requests that a court disregard the normal
protections accorded a corporate structure to prevent abuses
of that structure. Therefore, we hold that Virginia does
recognize the concept of outsider reverse piercing and that
this concept can be applied to a Virginia limited partnership.
Indeed, limited partnerships, like corporations, have a legal
existence separate from the partners in the limited
partnership, and the structure of the statutorily-created
1
See Gregory S. Crespi, The Reverse Pierce Doctrine:
Applying Appropriate Standards, 16 J. Corp. L. 33 (1990).
11
limited partnership limits the potential liability of each
limited partner. See Code § 50-73.24.
We note that the following jurisdictions also have
approved the concept of reverse veil piercing. See, e.g., In
re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999); American Fuel
Corp. v. Utah Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d
Cir. 1997); Stoebner v. Lingenfelter, 115 F.3d 576, 579-80
(8th Cir. 1997); Towe Antique Ford Found. v. IRS, 999 F.2d
1387, 1390 (9th Cir. 1993); Permian Petroleum Co. v. Petroleos
Mexicanos, 934 F.2d 635, 643 (5th Cir. 1991); Valley Fin.,
Inc. v. United States, 629 F.2d 162, 171-72 (D.C. Cir. 1980),
cert. denied, 451 U.S. 1018 (1981); Litchfield Asset Mgmt.
Corp. v. Howell, 799 A.2d 298, 309, 312 (Conn. App. Ct. 2002);
Estudios, Proyectos e Inversiones de Centro America, S.A. v.
Swiss Bank Corp. (Overseas) S.A., 507 So. 2d 1119, 1120-21
(Fla. Dist. Ct. App. 1987); Minich v. Gem State Developers,
Inc., 591 P.2d 1078, 1084 (Idaho 1979); Lambert v. Farmers
Bank, 519 N.E.2d 745, 748-49 (Ind. Ct. App. 1988); Central
Nat'l Bank & Trust Co. of Des Moines v. Wagener, 183 N.W.2d
678, 682 (Iowa 1971); Roepke v. Western Nat'l Mut. Ins. Co.,
302 N.W.2d 350, 352 (Minn. 1981); LFC Mktg. Group, Inc. v.
Loomis, 8 P.3d 841, 846 (Nev. 2000); Winey v. Cutler, 678 A.2d
1261, 1262-63 (Vt. 1996); Olen v. Phelps, 546 N.W.2d 176, 181
(Wis. Ct. App. 1996). But see Floyd v. IRS, 151 F.3d 1295,
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1298-99 (10th Cir. 1998); Scholes v. Lehmann, 56 F.3d 750, 758
(7th Cir.), cert. denied, 516 U.S. 1028 (1995); Sturtevant v.
Town of Winthrop, 732 A.2d 264, 270 (Me. 1999).
B.
Virginia has adopted the Revised Uniform Limited
Partnership Act, Code § 50-73.1, et seq. First Flight argues
that the Act "specifies whether and when a limited partner may
be held liable for the debts of the partnership, and thereby
provides a statutory remedy analogous to the judicially-
created remedy of piercing the corporate veil. . . . More
importantly, the Act also provides a remedy for creditors of a
limited partner by specifying the manner in which the assets
of a limited partnership may be subjected to a creditor's
claims." Continuing, First Flight claims that the Virginia
Revised Uniform Limited Partnership Act prescribes the only
methods that creditors may utilize to reach assets of a
limited partnership.
We agree with First Flight that the Virginia Revised
Uniform Limited Partnership Act prescribes certain statutory
remedies for creditors of a limited partnership. For example,
Code § 50-73.46, which is a part of the Act, permits a court
to charge the partnership interest of a limited partner
against whom a judgment has been entered. However, there is
13
simply no language in the Act that prohibits a court from
piercing the veil of a limited partnership.
IV.
When determining whether reverse piercing of a limited
partnership is appropriate, a court must consider the same
factors summarized in Part III.A. of this opinion that this
Court considers when determining whether traditional veil
piercing should be permitted. Also, as we have stated in Part
III.A. of this opinion, even though no single rule or
criterion is dispositive, the litigant who seeks to disregard
a limited partnership entity must show that the limited
partnership sought to be pierced has been controlled or used
by the debtor to evade a personal obligation, to perpetrate a
fraud or a crime, to commit an injustice, or to gain an unfair
advantage.
In Virginia, unlike in some states, the standards for
veil piercing are very stringent, and piercing is an
extraordinary measure that is permitted only in the most
egregious circumstances, such as under the facts before this
Court. The piercing of a veil is justified when the unity of
interest and ownership is such that the separate personalities
of the corporation and/or limited partnership and the
individual no longer exist, and adherence to that separateness
would create an injustice.
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Additionally, a court considering reverse veil piercing
must weigh the impact of such action upon innocent investors,
in this instance, innocent limited partners or innocent
general partners. 2 A court considering reverse veil piercing
must also consider the impact of such an act upon innocent
secured and unsecured creditors. The court must also consider
the availability of other remedies the creditor may pursue. 3
And, a litigant who seeks reverse veil piercing must prove the
necessary standards by clear and convincing evidence.
V.
In view of the foregoing, we answer the first certified
question in the affirmative, and we answer the second
certified question by referring the United States Court of
Appeals for the Fourth Circuit to Parts III.A. and IV. of this
opinion.
Certified question answered in the affirmative.
2
We note that based upon the facts contained within the
order of certification and the federal district court's
opinions, there are no innocent limited or general partners
involved in this proceeding.
3
Based upon the facts contained within the order of
certification and the federal district court's opinions, C.F.
Trust and Atlantic Funding exhausted all remedies available to
them.
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