C.F. Trust, Inc. v. First Flight Ltd. Partnership

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


                                  2
[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.




                                  3
     "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




                                4
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


                                5
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.


                               7
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.


                                8
     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


                                 9
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,


                               12
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.


                                14
     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.

                                15