You have likely heard the term “piercing the veil.” This legal doctrine permits a court to ignore corporate formalities and hold an individual owner liable for a company’s debt. But you may be less familiar with the doctrine of reverse veil piercing, which permits a court to hold a company liable for the debt of an individual owner.

Although courts in most states have eliminated any meaningful distinction between these related doctrines, which treat a company and its owner as alter egos, a recent decision by the California Court of Appeal in Blizzard Energy, Inc. v. Schaefers confirms that reverse veil piercing does not apply in certain situations in California.

Blizzard Energy is the latest in a trilogy of cases in California involving reverse veil piercing.

Back in 2008, the California Court of Appeal held, in Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal.App.4th 1510, that reverse veil piercing does not apply to corporations. As that court noted, such a remedy is unnecessary because a creditor could simply levy and liquidate the individual owner’s interest in a judicial sale of the owner’s corporate shares. The court hypothesized, however, that reverse veil piercing may apply to a single-member limited liability company.

In 2017, in Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214, the California Court of Appeal expanded that hypothetical and held that reverse veil piercing permitted the trial court to add a limited liability company to a judgment against an individual judgment debtor who owned 99% of that LLC (his wife owned the other 1%). As the court explained, the first element of an alter ego analysis is a “substantial identity of ownership and control” between the debtor and the entity. That element was satisfied by the judgment debtor’s ownership of 99% of the LLC.

Most recently, in Blizzard Energy, the California Court of Appeal reversed the trial court’s order that used reverse veil piercing to add a limited liability company to a fraud judgment against an individual judgment debtor who owned only 50% of the LLC. The judgment debtor’s wife owned the other 50%, and they both acquired their ownership interest after they had legally separated more than 15 years ago. As the Court of Appeal explained, the trial court improperly assumed that the wife’s 50% ownership interest in the LLC was community property of the marriage, which called into question whether there was a “substantial identity of ownership” between the judgment debtor and the LLC necessary to apply reverse veil piercing. Because it was possible that the wife was an innocent member of the LLC, the Court of Appeal remanded the case to the trial court for further proceedings to determine whether it would be inequitable to use reverse veil piercing to add the LLC as an additional judgment debtor given that the wife owns half of that LLC.

Blizzard Energy teaches us that reverse veil piercing remains a restricted remedy in California. It is limited to LLCs and applies only when the plaintiff can demonstrate that there is a substantial identity of ownership and control between an individual judgment debtor and the LLC in question. And that is only the first element of the alter ego test. The plaintiff also must show that conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form. Mere difficulty in enforcing a judgment or collecting a debt does not satisfy this standard.