Title: C.F. Trust Inc. v. First Flight

State: virginia

Issuer: Virginia Supreme Court

Document:

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 
 
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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. 
 
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 
 
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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 
 
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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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