EiA Properties, LLC v. Fenwick Equestrian, LLC et al
Filing
61
MEMORANDUM OPINION AND ORDER: The Court DENIES EiA's 31 Motion for Summary Judgment and GRANTS the Fenwick entities' 36 and 37 Motions for Judgment on the Pleadings. The Court will enter a separate judgment. Signed by Magistrate Judge Robert E. Wier on September 28, 2015. (AWD) cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
LEXINGTON
EIA PROPERTIES, LLC,
Plaintiff,
v.
FENWICK EQUESTRIAN, LLC, et al.,
Defendants.
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No. 5:14-CV-328-REW
MEMORANDUM OPINION AND
ORDER
*** *** *** ***
Plaintiff, EiA Properties, LLC (“EiA”), moved for summary judgment. DE #31.
Defendants, Fenwick Equestrian, LLC, and Fenwick Farm, Inc. (collectively, “the
Fenwick entities”), responded. DE ##34, 35 (identical save for party name and
descriptions). EiA replied. DE #40 (combined Reply and Response) (identical). The
Fenwick entities moved for judgment on the pleadings. DE ##36, 37 (identical). EiA
responded. DE ##41, 42 (identical). The Fenwick entities replied. DE ##45, 46
(identical). The matters are fully briefed and ripe for consideration. For the reasons that
follow, the Court DENIES EiA’s motion for summary judgment (DE #31) and
GRANTS the Fenwick entities’ motions for judgment on the pleadings (DE ##36, 37).
South Carolina law applies and provides EiA no avenue to obtain the particular relief it
seeks.
I.
BACKGROUND
This case represents EiA’s endeavor to enforce a state court judgment adverse to
Wilhelmina McEwan (“McEwan”) against the Fenwick entities. EiA, in the state action,
sought to collect on a $150,000 promissory note and foreclose on a mortgage on certain
1
Fayette County real estate, known as the Snow Goose Property. The Fayette Circuit
Court entered final judgment in the amount of $351,418.31 (according to the Complaint)1
and an order confirming the sale of the Snow Goose Property. DE ##1-1 (Final Judgment
and Order of Sale). The Master Commissioner sold Snow Goose to bidder EiA for
$182,667.00. DE #1-2 (Report of Sale), at 1. The sale amount was credited against the
final judgment, leaving a deficiency balance of $168,751.37 (again, according to the
Complaint),2 plus post-judgment interest and other costs and expenses.
EiA states that “[t]his is an action seeking to recover on an outstanding state court
judgment against [McEwan] from her alter egos, [the Fenwick entities], by piercing the
corporate veils of the alter egos.” DE #1 (Complaint), at 1. EiA is a Kentucky LLC
whose sole member is a citizen of Virginia. DE #48 (curative pleading), at 1. Both
Fenwick entities are creatures of South Carolina law, and the LLC’s two members are
citizens of South Carolina. Id. at 1-2. EiA “seeks to enforce a judgment obtained in a
state-court foreclosure action[.]” DE #1, at 2. EiA requests “a judicial piercing of the
corporate veil as necessary to hold [the Fenwick entities] liable for the Deficiency
Balance[,]” compensatory damages equivalent to the Deficiency Balance, and costs and
expenses, including attorney fees. Id. at 6.
1
The Court has difficulty independently computing the total figure. The principal is
$150,000. Pre-judgment interest through 10/25/10 is $181,269.86. Pre-judgment interest
from 10/25/10 to 1/13/11 is $36.99 per day for 80 days, which totals $2,959.20. Costs and
expenses are $17,198.31. These amounts total $351,427.37, which is $9.06 greater than
the amount EiA claims.
2
Simply subtracting the sale price from the claimed judgment amount results in
$168,751.31, a 6-cent difference.
2
II.
CHOICE OF LAW
In this diversity case,3 the Court first must make a choice of law determination.
EiA argues that South Carolina law applies (or that the “question is superfluous”). DE
#31-1, at 3 (citing Restatement (Second) of Conflict of Laws § 307 and Howell
Contractors, Inc. v. Berling, 383 S.W.3d 465, 467-68 (Ky. Ct. App. 2012)). The Fenwick
entities contend that “[n]o choice of law analysis is necessary” to determine that
Kentucky law applies. DE #34, at 2-3 (factually distinguishing Howell and cataloguing
Kentucky ties). To determine which state’s substantive law applies, a federal court sitting
in diversity applies the choice of law rules of the forum state (here, Kentucky). Town of
Smyrna, Tenn. v. Mun. Gas Auth. of Ga., 723 F.3d 640, 645 (6th Cir. 2013); Miller v.
State Farm Mut. Auto. Ins. Co., 87 F.3d 822, 824 (6th Cir. 1996) (citing Klaxon Co. v.
Stentor Elec. Mfg. Co., 61 S. Ct. 1020, 1021-22 (1941)).
Determining and applying the applicable choice of law rule is the Sixth Circuit’s
normal approach in these circumstances. See, e.g., In re Dow Corning Corp., 778 F.3d
3
The Supreme Court has found a lack of federal question jurisdiction and ancillary
jurisdiction in a veil piercing case. Peacock v. Thomas, 116 S. Ct. 862, 866 (1996)
(“Piercing the corporate veil is not itself an independent ERISA cause of action, but
rather is a means of imposing liability on an underlying cause of action.” (internal
quotation marks and citation removed)). Here, the Court has diversity jurisdiction. See 28
U.S.C. § 1332(a); see also infra note 7.
Nothing categorically bars a federal court from properly entertaining a suit to
enforce a state court judgment, as EiA here seeks. See, e.g., Wells Fargo Bank, N.A. v.
Barber, 85 F. Supp. 3d 1308, 1316 (M.D. Fla. 2015) (maintaining jurisdiction over a suit
filed to enforce a state court Deficiency Judgment). “Federal courts are authorized to
enforce state court judgments.” Wright v. Bank of Am., N.A., 517 F. App’x 304, 308 (6th
Cir. 2013) (citing Berke v. Northcutt, 798 F.2d 468, at *2 (6th Cir. 1986) (table)
(“Plaintiff alleges that he has a judgment and that defendant has failed to pay on the
judgment. Several federal courts, adhering to 28 U.S.C. § 1738, have adjudicated actions
seeking enforcement of a state court judgment. . . . Further, it has not been considered a
bar to such an action that the federal district court in which enforcement is sought sits in
the same state in whose courts the judgment in issue was rendered.”)).
3
545, 548-52 (6th Cir. 2015) (applying North Carolina choice of law rules to determine
North Carolina substantive law applies without first determining if the potentially
applicable substantive laws conflict); Bahr v. Tech. Consumer Prods., Inc., 601 F. App’x
359, 365 (6th Cir. 2015) (applying Ohio choice of law rule to determine Minnesota law
applies without first analyzing possible conflict); Sun v. CM Prods., Inc., 393 F. App’x
283, 286 (6th Cir. 2010) (applying Kentucky choice of law rule to determine District
Court did not err in applying Illinois law without previously determining if substantive
laws conflict); Miller, 87 F.3d at 824-25 (holding Pennsylvania law applies under Ohio
choice of law rules without first deciding if the Pennsylvania and Ohio substantive laws
conflict); but see CenTra, Inc. v. Estrin, 538 F.3d 402, 409 (6th Cir. 2008) (grappling
with “some important questions as to the appropriate choice of law” concerning “matters
of professional responsibility” and ultimately not deciding what Michigan’s choice of law
principles would dictate because “Michigan’s standards of professional conduct are
consistent with the other possible sources of law”); Dow Corning, 778 F.3d at 555
(Sutton, J., dissenting) (“The first imperative of a conflict-of-laws problem is: a conflict.
When all roads lead to the same result, there is no conflict to resolve.”).
Here, it is far from clear whether applying South Carolina and Kentucky law
would end in the same result, and the analytical approach under each state’s law—when
neither state has spoken with clarity (if at all) on the relevant legal issue—would most
certainly vary. In this context—with the states’ respective legal posture sufficiently
different, and with the variety of related issues the Court faces—the Court resolves the
choice of law question and applies the appropriate state’s law. See also Williams v. Toys
“R” Us, 138 F. App’x 798, 803 (6th Cir. 2005) (District Court did not err in applying
4
Michigan state law where there was no conflict of laws.). Even if both roads might lead
to the same result, they would traverse wholly different unblazed paths in so reaching.
See also infra note 19.
In the usual case, characterization of the cause of action determines the applicable
choice of law rule.4 For example, “Kentucky articulates two different choice of law rules
with respect to contract and tort actions. Kentucky precedent dictates that the ‘any
significant contacts’ test applies to tort actions, whereas the Restatement’s ‘most
significant contacts’ test applies to contract disputes.” Weingartner Lumber & Supply
Co., Inc. v. Kadant Composites, LLC, No. 08-181-DLB, 2010 WL 996473, at *3 (E.D.
Ky. Mar. 16, 2010) (citing Saleba v. Schrand, 300 S.W.3d 177, 181 (Ky. 2009)).
Determining Kentucky’s choice of law approach here is somewhat theoretically
complicated—although the difficulty falls away in practice—because “piercing the
corporate veil . . . [is] not—standing alone—[a] cause[] of action.” Weingartner, 2010
WL 996473, at *4 (holding Kentucky law applies). To add another layer of (at least
abstract) complexity, this is not a straightforward veil piercing case; instead, it seeks
reverse veil piercing (a concept explored later).
4
Courts have noted the generally provincial nature of Kentucky’s choice of law rules.
See, e.g., Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382, 391 (6th Cir. 2000)
(noting the District Court’s characterization of Kentucky’s rules as “egocentric” and
having a “provincial tendency”); Asher v. Unarco Mat. Holding, Inc., 737 F. Supp. 2d
662, 667 (E.D. Ky. 2010) (“[A] strong preference exists in Kentucky for applying
Kentucky law.”). “Kentucky’s choice of law rules favor application of its own law
whenever it can be justified.” Johnson v. S.O.S. Transport, Inc., 926 F.2d 516, 519 n.6
(6th Cir. 1991); see also Louisville/Jefferson Cnty. Metro Gov’t v. Hornblower Marine
Servs.-Ky., Inc., No. 3:06-CV-348-S, 2009 WL 3231293, at *3 (W.D. Ky. Oct. 2, 2009)
(“Kentucky courts apply their own law where Kentucky has a significant interest in the
case.” (citing Wessling v. Paris, 417 S.W.2d 259 (Ky. 1967)).
5
The Court, conceptually, sees three possibilities: applying (1) Kentucky’s veil
piercing / corporate choice of law rule (Howell / § 307), (2) Kentucky’s contractual
choice of law rule (because the underlying adjudged matter concerns contract, keeping in
mind the Commonwealth’s background preference for its own law), or (3) the traditional
property rule where the law of the situs state controls (because the adjudged matter
involves real estate), see, e.g., Barber, 85 F. Supp. 3d at 1316 (“[T]he legal issue in this
case sounds in property. In Florida, the law of the situs of the property controls.”); Mazza
v. Mazza, 475 F.2d 385, 388 & 388 n.6 (D.C. Cir. 1973); In re Barrie’s Estate, 35
N.W.2d 658, 661, 663 (Iowa 1949). Facing this uncertainty, the Court perceives
Kentucky’s veil piercing / corporate choice of law approach to be most appropriate and
thus applies it. See, e.g., Milliken & Co. v. Haima Grp. Corp., No. 08-22891-MC, 2010
WL 1286462, at *3 (S.D. Fla. Mar. 1, 2010) (applying Florida’s choice of law rule
governing “claims involving corporations” to a reverse veil piercing claim); In re
Friedlander Capital Mgmt. Corp., 411 B.R. 434, 442 (Bankr. S.D. Fla. 2009) (applying
Florida’s choice of law rule governing corporate internal affairs to a reverse veil piercing
claim and determining the local law of Connecticut, the state of incorporation, applies).
The present dispute solely concerns the propriety of reverse veil piercing as remedy; it
does not directly implicate the underlying contract / mortgage or threaten to affect the
subject real estate.
In a traditional corporate veil piercing case, Kentucky courts apply Restatement
(Second) of Conflict of Laws § 307, which states that “[t]he local law of the state of
incorporation will be applied to determine the existence and extent of a shareholder’s
liability to the corporation for assessments or contributions and to its creditors for
6
corporate debts.” See Howell, 383 S.W.3d at 467 (quoting § 307 and applying Ohio law
to a veil piercing claim against an Ohio LLC, but, in dicta, reaching the same result under
Kentucky law).5
Howell determined that “the rights, duties and obligations of an Ohio LLC and its
members are governed by Ohio law.” Id. (citing § 307 and cases from the Second Circuit,
the District of Columbia, Louisiana, Oklahoma, and Wisconsin).6 True, as the Fenwick
entities point out, Howell and this case differ factually. There, Howell, a Kentucky
corporation, sued Berling (an individual) and Westview (an Ohio LLC) in Kentucky
court for breach of contract concerning Ohio real estate development. Howell asked the
court to disregard LLC status and hold Berling personally liable for Westview’s debt.
Here, on the other hand, EiA, a Kentucky LLC, sued the Fenwick entities, a South
Carolina LLC and corporation, to collect on a judgment against McEwan, a South
Carolina citizen, concerning a foreclosure on Kentucky real estate. The key differences
are the location of the involved real estate (in or out of the forum state) and the posture of
the individual vis-à-vis the entity (i.e., traditional v. reverse veil piercing).7 The Kentucky
5
Not all courts read § 307 literally. See, e.g., Chrysler Corp. v. Ford Motor Corp., 972 F.
Supp. 1097, 1102-03 (E.D. Mich. 1997) (Sections 307 and 309 “apply the law of the state
of incorporation except where another state has a more significant relationship to the
parties and the transaction.”); see generally Gregory Scott Crespi, Choice of Law in VeilPiercing Litigation: Why Courts Should Disregard the Internal Affairs Rule and Embrace
General Choice-of-Law Principles, 64 N.Y.U. Ann. Surv. Am. L. 85 (2008). This is not
the approach the Kentucky Court of Appeals adopted.
6
This is consistent with the general background principle that “the law of the state of
incorporation normally determines issues relating to the internal affairs of a corporation.”
First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 103 S. Ct. 2591,
2597 (1983) (emphasis removed); see also, e.g., Casden v. Burns, 306 F. App’x 966, 974
(6th Cir. 2009).
7
In general terms, this case features competing interests in the choice of law analysis. On
one hand, Kentucky is the forum, the place of the injury, the location of the underlying
state litigation, EiA’s origin state (EiA’s sole member, though, is a citizen of Virginia),
7
Court of Appeals did not premise its reliance on § 307 on Howell’s particular facts, as
evidenced by its citation to multiple other parallel cases. The court’s concern was
generally applying the law of the state of organization when determining an entity’s
rights, duties, and obligations. The Court notes that § 307, by its terms, only applies to “a
shareholder’s liability to the corporation[,]” not, as here, the inverse—an entity’s liability
for debts of a member or shareholder. The Kentucky court, however, took § 307 to stand
for a broader principle: the applicable choice of law rule regarding a veil piercing claim
implicating the rights, duties, and obligations of a business entity in general.8
situs of the concerned real estate, and state of the underlying mortgage. Each of these
factors favors applying Kentucky law. On the other hand, the case implicates South
Carolina law as the state of the Fenwick entities’ creation. Fenwick Equestrian’s two
members—Wilhelmina and Frederick McEwan—are citizens of South Carolina. DE #48,
at 1-2. The factors weigh in favor of applying South Carolina law. The parties have not
litigated the existence of personal jurisdiction over the Fenwick entities. See, e.g., King v.
Taylor, 694 F.3d 650, 660 (6th Cir. 2012) (District Court abused its discretion in holding
Taylor had not forfeited his lack of personal jurisdiction defense when he “voluntary[il]y,
active[ly], and extensive[ly] participat[ed] in the litigation” until the dispositive motion
phase.). Ultimately, any interest balancing or relationship weighing must yield to
Howell’s conclusion that Ohio law applied to a dispute concerning the rights, duties, and
obligations of an Ohio LLC and its member.
8
A Sixth Circuit Bankruptcy Appellate Panel characterized Howell broadly as
“look[ing] to the law of the state in which the entity for which derivative liability is
sought was incorporated[.]” In re Appalachian Fuels, LLC, 493 B.R. 1, 18 (B.A.P. 6th
Cir. 2013).
The Court properly relies on Howell absent Kentucky Supreme Court guidance on
the question. Stoner v. New York Life Ins. Co., 61 S. Ct. 336, 338 (1940) (“Federal courts,
under the doctrine of Erie . . . must follow the decisions of intermediate state courts in the
absence of convincing evidence that the highest court of the state would decide
differently.”); Curtis 1000, Inc. v. Martin, 197 F. App’x 412, 421-22 (6th Cir. 2006).
The Court notes that Howell’s choice of law approach is consistent with the
apparent majority rule. See Tomlinson v. Combined Underwriters Life Ins. Co., 684 F.
Supp. 2d 1296, 1298 (N.D. Okla. 2010) (“[T]he vast majority of jurisdictions addressing
this question have applied the law of the state of incorporation to veil-piercing claims.”).
The Kentucky Supreme Court has twice discussed Howell and its use of Ohio law
without any indication the choice was error. Pannell v. Shannon, 425 S.W.3d 58, 75 n.15
(Ky. 2014); Turner v. Andrew, 413 S.W.3d 272, 277 (Ky. 2013).
8
The Sixth Circuit has also given guidance on choice of law in the veil piercing
context. “Under the long-standing Erie doctrine, in actions brought in federal court
invoking diversity jurisdiction, a court must apply the same substantive law as would
have been applied if the action had been brought in a state court of the jurisdiction where
the federal court is located.” Corrigan v. U.S. Steel Corp., 478 F.3d 718, 723 (6th Cir.
2007) (applying Ohio law) (citing Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 604 (6th
Cir. 2005) (looking “to the choice of law provisions of the forum state” to determine
which substantive law applies)). “When the success of a state law claim brought in
federal court under diversity jurisdiction is dependent on piercing the corporate veil, this
question of substantive law is governed by the law of the state in which the federal court
sits.”9 Id.
Corrigan’s recognition that forum law governs the substantive question of veil
piercing is not inconsistent with Howell and indeed incorporates the forum state’s choice
of law rules. The Sixth Circuit’s direction to “apply the same substantive law as would
have been applied if the action had been brought in a [Kentucky] court” further supports
this conclusion. Corrigan, 478 F.3d at 723; accord Montgomery v. Wyeth, 580 F.3d 455,
459 (6th Cir. 2009) (“Because this is a diversity action, the law of the forum state,
9
The United States District Court for the Western District of Kentucky took this
statement to mean that Kentucky substantive law applies without regard to Kentucky’s
choice of law rules (i.e., Kentucky’s “local law” or “internal law”). Pro Tanks Leasing v.
Midwest Propane & Refined Fuels, LLC, 988 F. Supp. 2d 772, 782 (W.D. Ky. 2013)
(citing Corrigan and not applying Missouri, the state of incorporation, law). Pro Tanks,
decided after Howell, does not discuss or cite Howell. Corrigan, on which Pro Tanks
relied, did not involve Kentucky law and did not limit its statement to only local or
internal law. See also Schwan’s Sales Enters., Inc. v. SIG Pack, Inc., 476 F.3d 594, 597
(8th Cir. 2007) (At least in a contractual choice of law provision, reference to a state’s
“law,” as opposed to a state’s “local law[,]” “means the totality of its law including its
choice of law rules[.]” (quoting Restatement (Second) of Conflict of Laws § 186 cmt. b)).
9
including the choice-of-law rules, apply.”). A Kentucky court, applying Howell, would
determine that South Carolina law (as the law of the state of incorporation) governs this
dispute. Thus, recognizing Corrigan and applying Kentucky law, Howell (the Kentucky
precedent most on point) directs the Court to apply the law of the state of the Fenwick
entities’ organization—South Carolina.
The Court is mindful that reverse veil piercing does not fit squarely within Howell
and § 307’s box. Still, EiA asks the Court to set aside corporate formalities and
traditional structure to hold a corporation and LLC liable for debts of an individual.
Indeed, the Fenwick entities may lay claim to a greater corporate interest than in
straightforward veil piercing cases due to the potential for greater, more direct corporate
liability. Applying South Carolina law in these circumstances honors the letter and intent
of Kentucky law—to apply the law of the state of organization to determine “the rights,
duties and obligations” of the Fenwick entities. Howell, 383 S.W.3d at 467.
III.
STANDARDS OF REVIEW
A.
Summary Judgment
EiA moved for summary judgment. DE #31. A court “shall grant summary
judgment if the movant shows that there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A reviewing
court must construe the evidence and draw all reasonable inferences from the underlying
facts in favor of the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
Corp., 106 S. Ct. 1348, 1356 (1986); Lindsay v. Yates, 578 F.3d 407, 414 (6th Cir. 2009).
Additionally, the court may not “weigh the evidence and determine the truth of the
10
matter” at the summary judgment stage. Anderson v. Liberty Lobby, Inc., 106 S. Ct. 2505,
2511 (1986).
The burden of establishing the absence of a genuine dispute of material fact
initially rests with the moving party. Celotex Corp. v. Catrett, 106 S. Ct. 2548, 2553
(1986) (requiring the moving party to set forth “the basis for its motion, and identify[]
those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any,’ which it believes demonstrate an absence of a
genuine issue of material fact”); Lindsay, 578 at 414 (“The party moving for summary
judgment bears the initial burden of showing that there is no material issue in dispute.”).
If the moving party meets its burden, the burden then shifts to the nonmoving party to
produce “specific facts” showing a “genuine issue” for trial. Celotex Corp., 106. S. Ct. at
2253; Bass v. Robinson, 167 F.3d 1041, 1044 (6th Cir. 1999). However, “Rule 56(c)
mandates the entry of summary judgment . . . against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial.” Celotex Corp., 106 S. Ct. at 2552.
If the movant bears the burden of persuasion at trial, “that party must support its
motion with credible evidence—using any of the materials specified in Rule 56(c)—that
would entitle it to a directed verdict if not controverted at trial.” Id. at 2556 (Brennan, J.,
dissenting) (citation omitted); see also Arnett v. Myers, 281 F.3d 552, 561 (6th Cir. 2002)
(noting that, when the movant also bears the burden of persuasion at trial, the moving
party’s initial summary judgment burden is “higher in that it must show that the record
contains evidence satisfying the burden of persuasion and that the evidence is so
11
powerful that no reasonable jury would be free to disbelieve it” (citation and internal
quotation marks omitted)).
A fact is “material” if the underlying substantive law identifies the fact as critical.
Anderson, 106 S. Ct. at 2510. Thus, “[o]nly disputes over facts that might affect the
outcome of the suit under the governing law will properly preclude the entry of summary
judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Id. A
“genuine” issue exists if “there is sufficient evidence favoring the nonmoving party for a
jury to return a verdict for that party.” Id. at 2511; Matsushita Elec. Indus. Co., 106 S. Ct.
at 1356 (“Where the record taken as a whole could not lead a rational trier of fact to find
for the non-moving party, there is no ‘genuine issue for trial.’”) (citation omitted). Such
evidence must be suitable for admission into evidence at trial. Salt Lick Bancorp. v.
FDIC, 187 F. App’x 428, 444-45 (6th Cir. 2006).
B.
Judgment on the Pleadings
The Fenwick entities moved for judgment on the pleadings. DE ##36, 37; see Fed.
R. Civ. P. 12(c). In reviewing the motion, the Court “construes the complaint in a light
most favorable to the plaintiff, accepts all factual allegations as true, and determines
whether the complaint states a plausible claim for relief.” HDC, LLC v. City of Ann
Arbor, 675 F.3d 608, 611 (6th Cir. 2012). However, the Court “need not accept as true
legal conclusions or unwarranted factual inferences.” Id. (internal quotation marks and
citation removed). The Court applies Twombly and Iqbal pleading requirements to Rule
12(c) motions. Id. “[A] complaint must contain sufficient factual matter, accepted as true,
to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949 (2009) (internal quotation marks removed) (quoting and citing Bell Atl. Corp. v.
12
Twombly, 127 S. Ct. 1955, 1974 (2007)). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 127 S. Ct. at
1965). “Merely pleading facts that are consistent with a defendant’s liability or that
permit the court to infer misconduct is insufficient to constitute a plausible claim.” HDC,
675 F.3d at 611 (citation removed).
IV.
ANALYSIS
Traditionally, when a court pierces the corporate veil, it sets aside the separate
legal existence of a corporation to hold shareholders or directors directly liable for
corporate liabilities. See, e.g., Anderson v. Abbott, 64 S. Ct. 531, 538 (1944). Here,
however, in a reverse veil piercing scenario, EiA asks the Court to set aside the separate
legal existence of a corporation and LLC to hold the entities directly liable for the
obligations of a shareholder and owner. EiA seeks to hold the Fenwick entities liable for
a state court judgment against McEwan.
EiA’s Complaint characterizes McEwan’s lack of functional separateness from
the Fenwick entities (even if they maintain formal legal distinctions). The Complaint
plausibly alleges that the Fenwick entities are McEwan’s alter egos and that she uses
them to shield her assets to avoid paying the Deficiency Balance. The Fenwick entities do
not dispute “the factual statements attributed to Ms. McEwan that form the basis for the
Plaintiff’s Summary Judgment Motion” (the entire deposition transcript is at DE #31-4)
but emphasized that she only spoke in an individual capacity, a distinction of doubt here.
DE #34, at 4-5.
13
The Court notes, from the outset, that EiA’s attempt to pierce Fenwick
Equestrian, LLC’s veil presents a fundamental concern unaddressed by the parties:
“Piercing the corporate veil of an LLC has not yet been recognized in [South Carolina.]”
Oskin v. Johnson, 735 S.E.2d 459, 469 n.17 (S.C. 2012) (Hearn, J., concurring in part and
dissenting in part); see also S.C. Code § 33-44-303; id. § 33-44-201; but see A & J, LLC
v. KG Rescue, LLC, No. 2012-UP-194, 2012 WL 10841347, at *1 (S.C. Ct. App. Mar.
21, 2012) (per curiam) (rejecting an LLC veil piercing claim only after conducting a veil
piercing analysis). In light of the ambiguity (but mostly because it is not dispositive), the
Court considers EiA’s claims generally as to both entities.
In South Carolina, “the doctrine of piercing the corporate veil is not to be applied
without substantial reflection.” Drury Dev. Corp. v. Found. Ins. Co., 668 S.E.2d 798, 800
(S.C. 2008) (quoting Sturkie v. Sifly, 313 S.E.2d 316, 318 (S.C. Ct. App. 1984)). “[A]
corporation is an entity, separate and distinct from its officers and stockholders, and . . .
its debts are not the individual indebtedness of its stockholders.” Hunting v. Elders, 597
S.E.2d 803, 806 (S.C. Ct. App. 2004) (internal quotation marks and citation omitted). “If
any general rule can be laid down, it is that a corporation will be looked upon as a legal
entity until sufficient reason to the contrary appears; but when the notion of legal entity is
used to protect fraud, justify wrong, or defeat public policy, the law will regard the
corporation as an association of persons.” Id. (quoting Sturkie, 313 S.E.2d at 318).10 “The
party seeking to pierce the corporate veil has the burden of proving that the doctrine
should be applied.” Id. To determine veil piercing propriety, South Carolina uses a two
prong test. “The first prong analyzes the shareholder’s relationship to the corporation by
10
This language, in almost precisely the same form, tracks back to United States v.
Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (E.D. Wis. 1905).
14
evaluating eight factors. The second prong requires the plaintiff to demonstrate that
‘fundamental unfairness’ would result from recognition of the corporate entity.” Id.; see
also Multimedia Pub. of S.C. v. Mullins, 431 S.E.2d 569, 571 (S.C. 1993) (elaborating on
the two prongs).11 Not all of the first prong’s eight factors need be satisfied. Hunting, 597
S.E.2d at 807.12 Because “[t]he corporate form may be disregarded only where equity
requires the action to assist a third party[,]” “[t]he heart of the dispute . . . is whether the
preponderance of the evidence shows that if the separate identity of [the entity] is
regarded, the [third party] will suffer injustice or fundamental unfairness.” Sturkie, 313
S.E.2d at 318-19 (refusing to pierce veil where a third party sought to enforce a judgment
against the corporation against Sifly and Walter as corporate officers and directors).
Reverse veil piercing, in these circumstances, appears to be a matter of first
impression in South Carolina.13 EiA acknowledges that “there are no South Carolina
11
Some courts acknowledge that “[g]enerally, in determining whether to outside reverse
pierce the corporate veil, a court should review the same factors utilized in determining
whether traditional veil piercing is appropriate.” E.g., In re Phillips, 139 P.3d 639, 646
(Colo. 2006) (en banc); see also id. (noting that “some additional equitable
considerations apply in the outside reverse piercing context”); Floyd v. I.R.S., 151 F.3d
1295, 1299 (10th Cir. 1998) (noting “many problems” with reverse veil piercing,
including considerations of bypassing “normal judgment-collection procedures” and the
potential for unfair prejudice to third parties with an interest in the corporation).
12
Drury contemplates a litigant bringing a veil piercing claim “in a subsequent action.”
668 S.E.2d at 801; see also Carolina Marine Handling v. Lasch, 609 S.E.2d 548, 553 n.6
(S.C. Ct. App. 2005) (“[A]n attempt to pierce the corporate veil often occurs postjudgment[.]”); Drury, 668 S.E.2d at 801 n.2 (acknowledging the possibility of “a
subsequent action to pierce the corporate veil”). The Court would not dismiss EiA’s suit
solely on the cause of action / remedy distinction the Fenwick entities attempt to make.
13
Cases and academic literature delineate two types of reverse veil piercing: insider
and outsider. In general terms, insider reverse veil piercing involves an insider of the
corporation seeking to pierce the veil of his own corporation for his own benefit. Outsider
reverse veil piercing, on the other hand, involves a third party piercing the corporate veil
to reach the assets of a corporation to satisfy the debts of a corporate insider. See, e.g., In
re Howland, 516 B.R. 163, 166 (Bankr. E.D. Ky. 2014); Hibbs v. Berger, 430 S.W.3d
296, 309-10 (Mo. Ct. App. 2014) (distinguishing insider and outsider reverse veil
15
reverse veil piercing cases directly on point[.]” DE #31-1, at 4; see also DE #40, at 3
(“South Carolina . . . has no direct state law expressly recognizing reverse piercing[.]”).
EiA argues, however, that Kincaid v. Landing Dev. Corp., 344 S.E.2d 869 (S.C. Ct. App.
1986), “in fact applied the doctrine (without using the name)[.]” DE #40, at 3. In the
Court’s view, EiA stretches the meaning of Kincaid too far. Kincaid did not involve
holding a corporate entity liable for the debts of a shareholder. Instead, Kincaid and
Davidson sued for negligent construction and breach of warranty and obtained judgment
against three related corporations (LDC, RMG, and RCC). Id. at 871-72. The court
merely held that it was not error for the trial court to refuse to direct a verdict in favor of
RMG “since it was merely the sales and marketing agent” due to “an amalgamation of
corporate interests, entities, and activities so as to blur the legal distinction between the
corporations and their activities.” Id. at 874 (internal quotation marks removed). This
case, which is suggestive of direct liability on contract based on entity activity or
involvement, id. (identifying RMG as direct actor relative to causes of action), is far
afield from applying reverse veil piercing to hold RMG liable for the debts of a
shareholder. Accord Mid-South Mgmt. Co., Inc. v. Sherwood Dev. Corp., 649 S.E.2d 135,
piercing); Phillips, 139 P.3d at 644-45; Gregory Crespi, The Reverse-Pierce Doctrine:
Applying Appropriate Standards, 16 J. Corp. L. 33, 37-38 (Fall 1990); Michael
Richardson, The Helter Skelter Application of the Reverse Piercing Doctrine, 79 U. Cin.
L. Rev. 1605, 1605-06 (2011). Generally, fewer courts permit insider piercing than
outsider. See, e.g., Turner, 413 S.W.3d at 277 (insider “adopted by a very few states”);
Phillips, 139 P.3d at 645-46 (“[A] significant number of jurisdictions also recognize
outside reverse piercing.”). South Carolina’s courts, while giving no guidance on reverse
piercing, permit “[t]he corporate form [to] be disregarded only where equity requires the
action to assist a third party.” Hunting, 597 S.E.2d at 806 (quoting Woodside v.
Woodside, 350 S.E.2d 407, 410 (S.C. Ct. App. 1986)). This leads the Court to be
especially hesitant to predict South Carolina would recognize insider reverse veil
piercing. This case falls into the outsider reverse veil piercing category. EiA seeks to
pierce the Fenwick entities’ veils to satisfy McEwan’s debts, consistent with the case law
and scholarship’s outsider definition. The Court proceeds with this distinction in mind.
16
144-45 (S.C. Ct. App. 2007) (refusing to hold parent company liable for debt of
subsidiary company and distinguishing Kincaid as “not a situation in which one company
owed a judgment and the court imposed liability upon the parent company or a
shareholder”).
One bankruptcy court decision addresses (nearly) the salient topic. See In re Elkay
Indus., Inc., 167 B.R. 404 (Bankr. D.S.C. 1994). The court defined reverse veil piercing
as when “the shareholder attempts to have the corporate form of his own corporation
disregarded for his own benefit.” Id. at 410. There, “the trustee [wa]s attempting to have
the corporate form disregarded for the benefit of the debtor’s estate.” Id. The trustee
wanted the debts of a subsidiary corporation considered as the debts of the parent-debtor
corporation. Id. The court allowed trustee reverse veil piercing despite no guidance from
the South Carolina state courts: “Because the court is aware of no South Carolina law
accepting or rejecting the remedy of reverse piercing, the court adopts the well-reasoned
opinion [in In re Schuster, 132 B.R. 604 (Bankr. D. Minn. 1991) (concluding under
Minnesota law that the trustee could assert a cause of action for reverse veil piercing for
the benefit of the estate)] and determines that the bankruptcy trustee in this case can
assert that the debtor corporation was the alter ego of its subsidiary corporation.” Elkay,
167 B.R. at 411.
Elkay does not address the question EiA presents.14 First, Elkay only
contemplated a shareholder attempting to have corporate formalities disregarded for his
14
Bankruptcy courts have subsequently characterized Elkay differently. See, e.g., In re
Levitsky, 401 B.R. 695, 712 (Bankr. D. Md. 2008) (citing Elkay for the proposition that
“when a debtor in bankruptcy treats a corporation as his alter ego, the corporate assets
become part of the bankruptcy estate”); In re Wardle, BAP No. NV-05-1000-KMoB,
2006 WL 6811026, at *6 (B.A.P. 9th Cir. Jan. 31, 2006) (rejecting factual reliance on
17
own benefit (insider), not the third-party (outsider) claim EiA brings. Second, it
considered only the debts of a subsidiary corporation—not those of an individual—as
debts of the to-be-pierced corporation. Third, it involved bankruptcy trustee action, a
distinct area of the law with different underlying interests and values than simple thirdparty judgment collection.15 More fundamentally, the Court doubts Elkay’s analytical
approach to resolving a novel question of state law is sound, and the Court certainly is
not bound by a bankruptcy court’s determination (via Minnesota law) of how South
Carolina would rule on a question of law that South Carolina’s courts have never
addressed.16 See In re Dornier Aviation (N. Am.), Inc., 320 B.R. 831, 839 (Bankr. E.D.
Va. 2005); see also Howland, 516 B.R. at 170 (“[B]ankruptcy courts cannot create
substantive rights that are otherwise unavailable under applicable law.” (citing United
States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986) and Pertuso v. Ford Motor Credit
Co., 233 F.3d 417, 423 n.1 (6th Cir. 2000))) (rejecting Elkay’s approach and refusing to
apply reverse veil piercing without guidance from Kentucky state courts).
Elkay and stating it authorized the trustee “to assert an action to pierce the corporate veil
in reverse” where “the trustee sought to recover a prepetition preference payment made
by the debtor”); In re Mar-Kay Plastics, Inc., 234 B.R. 473, 480 (Bankr. W.D. Mo. 1999)
(describing reverse veil piercing and stating Elkay “allow[ed] shareholder-parent
corporation to pierce the corporate veil of its wholly owned subsidiary corporation to
recover the fraudulent transfer of assets to a third party”); In re Mass, 178 B.R. 626, 630
(Bankr. M.D. Pa. 1995) (stating Elkay “recognize[ed] reverse piercing of the corporate
veil under South Carolina law”).
15
Indeed, Elkay recognized that Schuster “determined that the bankruptcy context
provides a sufficient basis for allowing reverse piercing.” 167 B.R. at 411; see also
Howland, 516 B.R. at 166 (“The Trustee is in a unique position.”).
16
In fact, South Carolina’s courts rejected a (nominal) reverse piercing claim in a
different context. Mangum v. Md. Cas. Co., 500 S.E.2d 125, 127 (S.C. Ct. App. 1998)
(rejecting “reverse piercing” in the UIM setting while citing traditional veil piercing
cases; shareholders could not stack under corporation’s policy). Mangum’s particular
facts and specific legal context counsel against wider application of its holding.
18
With no South Carolina state law on point—in truth, no such law addressing the
question at any level of generality—the Court is mindful of its limited role. It cannot
“simply substitute its judgment for that of the state court.” Assicurazioni Generali, S.p.A.
v. Neil, 160 F.3d 997, 1002 (4th Cir. 1998). “[F]ederal courts sitting in diversity rule
upon state law as it exists and do not surmise or suggest its expansion.” St. Paul Fire &
Marine Ins. Co. v. Jacobson, 48 F.3d 778, 783 (4th Cir. 1995) (quoting Burris Chem.,
Inc. v. USX Corp., 10 F.3d 243, 247 (4th Cir. 1993)). “[T]he federal courts in diversity
cases, whose function it is to ascertain and apply the law of a State as it exists, should not
create or expand that State’s public policy.”17 Id. However, the Court may “look to the
practices of other states in predicting how” the South Carolina Supreme Court would
rule. Wade v. Danek Med., Inc., 182 F.3d 281, 286 (4th Cir. 1999); accord Twin City Fire
17
For instance, “[a]bsent a clear statement by the Supreme Court of Utah that it has
adopted the variant reverse piercing theory[,]” the Tenth Circuit declined to “invent a
new theory of liability” not recognized under state law. Cascade Energy & Metals Corp.
v. Banks, 896 F.2d 1557, 1576-77 (10th Cir. 1990). Subsequently, Utah did not apply
reverse veil piercing on the facts presented. Transamerica Cash Reserve, Inc. v. Dixie
Power & Water, Inc., 789 P.2d 24, 26-27 (Utah 1990) (noting reverse piercing “follows
logically from the basic premise of the alter ego rule and appears consistent with our case
law” but requiring a showing “that the corporation itself played a role in the inequitable
conduct at issue”); see also In re McCauley, 520 B.R. 874, 889 (Bankr. D. Utah 2014)
(“[A]lthough the Utah Supreme Court has not definitively adopted this doctrine, it
appears that Utah law allows such a claim” (citing Colman v. Colman, 743 P.2d 782
(Utah Ct. App. 1987))) (rejecting reverse piercing on the facts). Many doctrinal nuances
and general approach indeterminacy characterize the relevant case law, leading the Court
to be hesitant to choose an analytical framework for South Carolina without guidance
from its courts. Reverse piercing potentially implicates different interests than traditional
piercing, another reason for judicial caution in expanding state law without sufficient
guidance. See, e.g., Floyd, 151 F.3d at 1299 (recognizing other values to examine when
considering reverse piercing). Additionally, Zahra Spiritual Trust v. United States does
not stand for the proposition EiA claims. DE #40, at 7. It did not imply state law
recognition of reverse veil piercing from recognition of traditional veil piercing. Instead,
it applied Texas precedent to determine state law provided for reverse piercing claims.
910 F.2d 240, 243-45 (5th Cir. 1990) (“[A] few Texas cases shed light on this unusual
application of corporate disregard.”).
19
Ins. Co. v. Ben Arnold-Sunbelt Beverage Co., 433 F.3d 365, 370 (4th Cir. 2005) (looking
“to other sources, including decisions in other states, for guidance as to how the Supreme
Court of South Carolina would rule”).
Scholarship and case law indicate that other states’ application of reverse veil
piercing widely varies. “Each jurisdiction attempting to find the proper rule of law—or at
least proper resolution of the case at bar—has looked at different factors in determining
where to draw the line between acceptable and unacceptable reverse piercing of the
corporate veil.” Richardson, 79 U. Cin. L. Rev. at 1616. Mindful that more courts accept
outsider reverse piercing than insider, the Court must observe and acknowledge that the
law remains generally unsettled. Some states permit outsider reverse piercing; some do
not. Compare C.F. Trust, Inc. v. First Flight L.P., 580 S.E.2d 806, 810 (Va. 2003)
(holding Virginia recognizes outsider reverse piercing and collecting cases), with Postal
Instant Press, Inc. v. Kaswa Corp., 77 Cal. Rptr. 3d 96, 101-02 (Ct. App. 2008) (rejecting
outsider reverse veil piercing), and Acree v. McMahan, 585 S.E.2d 873, 874 (Ga. 2003)
(“We reject reverse piercing, at least to the extent that it would allow an ‘outsider,’ such
as a third-party creditor, to pierce the veil in order to reach a corporation’s assets to
satisfy claims against an individual corporate insider.”); see also Floyd, 151 F.3d at 12991300 (noting “many problems” with reverse piercing and stating, “The IRS has presented
no authority suggesting that Kansas does or would recognize an outside reverse-piercing
claim, and our own review of Kansas law provides no authoritative support for that
proposition.”); but see Hibbs, 430 S.W.3d at 309 (noting the “increasing frequency” with
which jurisdictions have employed reverse veil piercing). South Carolina’s two
neighboring states—North Carolina and Georgia—split on the issue. Compare Fischer
20
Inv. Capital, Inc. v. Catawba Dev. Corp., 689 S.E.2d 143, 151-52 (N.C. Ct. App. 2009)
(“[R]everse veil piercing is a recognized legal theory in North Carolina[.]”), with Acree,
585 S.E.2d at 874 (“We reject reverse piercing[.]”).18 With South Carolina silent, no
consensus, and a direct split in neighboring states, the Court declines to predict, peering
into the kaleidoscope of other states’ laws, that South Carolina would adopt reverse veil
piercing. Such a debatable decision is for its courts, not this one.
EiA next invokes South Carolina’s general approach to equity. See Drury, 668
S.E.2d at 801 (“South Carolina courts have long observed that equity looks beneath rigid
rules of law to seek substantial justice[.]”). “An action to pierce the corporate veil lies in
equity[.]” Hunting, 597 S.E.2d at 806. As with “all forms of equitable relief, ‘the equities
of both sides are to be considered, and each case must be decided on its own particular
facts.’” Drury, 668 S.E.2d at 801 (quoting Carroll v. Page, 215 S.E.2d 203, 205 (S.C.
1975)). The Court has considered the equities of the case—including the Fenwick
entities’ acquiescence to McEwan’s (at least personal capacity) deposition statements—in
light of applicable legal principles. See also Quail Hill, LLC v. Cnty. of Richland, 692
S.E.2d 499, 506 (S.C. 2010) (“[E]quity follows the law.”) (internal quotation marks and
citation omitted); Watson v. Xtra Mile Driver Training, Inc., 732 S.E.2d 190, 196 (S.C.
Ct. App. 2012) (same); Smith v. Barr, 650 S.E.2d 486, 490 (S.C. Ct. App. 2007) (same);
Annely v. De Saussure, 12 S.C. 488, 518-19 (1879) (“Equity does not deny the
fundamental principles of law.”). The equities appear to favor EiA, but this cannot
overcome the state of the law or define what South Carolina would do. The Court also
18
Georgia rejects reverse piercing at least when there are “other adequate remedies
available at law.” Carrier 411 Servs., Inc. v. Insight Tech., Inc., 744 S.E.2d 356, 360 (Ga.
Ct. App. 2013).
21
notes the possibility of other available remedies. See, e.g., Richardson, 79 U. Cin. L. Rev.
at 1623-24 (discussing alternatives to reverse piercing); see also DE #34, at 5 (noting EiA
“has filed suit in South Carolina . . . in a further effort to collect on its judgment and is
currently proceeding in that case”). Thus, Plaintiff may well have remedies that would
include execution on McEwan’s ownership interests in the entities and/or the pursuit of
fraudulent conveyance claims as to McEwan assets transferred without consideration to
the entities. E.g., DE ##1 (Complaint), at ¶ 31; 31-4 (McEwan Depo.), at 83-87
(discussing personal asset transfer). EiA does not address the existence or inefficacy of
such remedies, which would impact the fundamental unfairness aspect of any equitable
calculus.
South Carolina’s courts have not squarely addressed Elkay’s result or conclusion
in the 21 years since it issued. With no precise guidance from the state courts, this Court
declines to set sail into the uncharted reverse veil piercing waters and refuses to extend
(create) South Carolina law as EiA requests. Cf. Jacobson, 48 F.3d at 783 (“Although
Fedele is now in its fiftieth year, the Virginia Court has never cited that case for the
proposition argued by St. Paul and has never expanded the statement . . . . Accordingly,
we decline to extend the public policy as announced in the Fedele case[.]”); Romig v.
Pella Corp., Nos. 2:14-mn-1-DCN, 2:14-CV-433-DCN, 2014 WL 7264388, at *6
(D.S.C. Dec. 18, 2014) (“[T]here is no indication that New York recognizes crossjurisdictional class action tolling and the court declines to establish such a rule in the first
instance.” (citing Jacobson, 48 F.3d at 783)).
Construing EiA’s Complaint in the light most favorable to EiA and accepting all
factual allegations as true, the Complaint does not state a plausible claim for relief. South
22
Carolina law supplies no mechanism for EiA to obtain the relief it seeks. South Carolina
has not recognized, and does not recognize, reverse veil piercing in these circumstances
(and may not provide for LLC veil piercing). It is not for this Court to unwarrantedly
create or expand the State’s law.19
19
A few words on Kentucky law. First, the Court reiterates that South Carolina law
applies. However, Kentucky law also does not appear to provide for reverse veil piercing
in these circumstances. Kentucky’s courts have certainly never explicitly blessed the
doctrine. Turner, 413 S.W.3d at 277 n.4 (In the high court’s own words: “Kentucky
courts have never addressed reverse piercing.”); Estate of Williams v. Estate of Oates,
No. 2012-CA-327-MR, 2014 WL 2937773, at *4 (Ky. Ct. App. June 27, 2014) (noting
that Turner did not adopt reverse veil piercing and that Williams failed “to provide any
thoughtful insights or compelling arguments as to why this concept should be adopted in
the Commonwealth”); Howland, 516 B.R. at 167 (discussing state of Kentucky law on
the topic). Further, two courts have noted “speculation that Kentucky would probably not
recognize reverse piercing[.]” Williams, 2014 WL 2937773, at *4; Turner, 413 S.W.3d at
277 n.4 (“[A]t least one commentator . . . has concluded that Kentucky would probably
not recognize reverse piercing[.]”).
Nutrition Rich Products, Inc. v. Nutritional Resources, Inc., No. 99-CI-483, 2003
WL 1339309 (Ky. Ct. App. Feb. 21, 2003), muddies Kentucky’s relevant legal water.
There, after invoking veil piercing, the court permitted a lien “against the assets or funds
of an alter ego corporation to satisfy the debts of the person who is the alter ego.” Id. at
*3. Invoking equity and “the interests of justice[,]” the court of appeals found the trial
court “may properly pierce the corporate veil[.]” Id. The court did not nominally discuss
or in any way analyze foundationally reverse veil piercing, and subsequent Kentucky
opinions do not recognize Nutrition Rich as standing for doctrinal adoption. There are
important differences between Nutrition Rich and this case, including the procedural
mechanism chosen by the party seeking enforcement to effect judgment satisfaction, but
the central holding—permitting use of corporate assets to satisfy a judgment against an
individual in favor of a third party—parallels this case. Nutritional Resources had moved
the state trial court for a writ of attachment against Nutrition Rich’s bank account for the
sums owed by the individual debtors. Id. at *1. The trial court found alter ego status and
permitted attachment (or non-wage garnishment of business proceeds, or a lien; the
appellate opinion uses variant terminology). The case was not, at least explicitly, an
action to pierce the corporate veil and impose direct liability, but rather sought
attachment or garnishment under CR 69.02. In the end, Nutrition Rich’s impact, given its
particular factual and procedural underpinnings and recent Kentucky opinions’ failure to
mention it, is far from clear. Culver v. Culver is even more indeterminate. 572 S.W.2d
617, 622 (Ky. Ct. App. 1978) (counting value of corporation toward the value of the
marital estate in the divorce property distribution context). One piece of scholarship
characterized Nutrition Rich as Kentucky “adopt[ing] the inverse method of piercing[,]”
meaning “tak[ing] the requirements of traditional veil piercing and appl[ying] them in the
23
V.
CONCLUSION
For the reasons stated, the Court DENIES EiA’s motion for summary judgment
(DE #31) and GRANTS the Fenwick entities’ motions for judgment on the pleadings
(DE ##36, 37). The Court will enter a separate judgment.20
This the 28th day of September, 2015.
context of a reverse pierce[.]” Nicholas B. Allen, Reverse Piercing of the Corporate Veil:
A Straightforward Path to Justice, 85 St. John’s L. Rev. 1147, 1157 & 1158 n.74 (2011).
Despite Nutrition Rich, which Turner ignored, Kentucky courts have not
explicitly recognized (even outsider) reverse piercing, and when they have mentioned the
doctrine generally, the discussion has been negative. While perhaps “it is not
unreasonable to conclude that Kentucky may ultimately adopt reverse veil piercing in the
right circumstances[,]” Howland, 516 B.R. at 168 (noting reverse veil piercing would
likely apply only “as a remedy; not as a basis for an independent cause of action”), the
Commonwealth has not yet explicitly done so. Such a conclusion “is not assured,
however[,]” even if “it is likely Kentucky courts would more readily accept outsider
reverse veil piercing than insider[.]” Id.
The Court need not resolve or predict an answer to the question, but merely notes
the unsettled nature of the present state of relevant Kentucky law. Because South
Carolina law applies to resolve the issues presented, the Court also does not address
Kentucky’s approach to related matters, such as the remedy / cause of action distinction
and the propriety of LLC piercing.
20
The ruling moots pending motions. The Court contemplated a ruling on the motion to
compel (DE #47) in advance of determining the dispositive motions. Although dubious of
the respondents’ conclusory privilege claims and skeletal, tardy privilege logs, the Court
decided that resolving the discovery disputes in no way impacted the legal analysis
required for the dispositive motion rulings. As such, and in an effort to preserve the
limited discovery practice intended by the parties and to avoid an unnecessary privilege
ruling, the Court elected to resolve the motion to compel as mooted by the dismissal
ruling.
24
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