C.F. Trust, Inc. v. First Flight Limited Partnership
580 S.E.2d 806 (Va. 06/06/2003)
Virginia Supreme Court
Record No. 022212
266 Va. 3, 580 S.E.2d 806
June 06, 2003
C.F. TRUST, INC., ET AL.
FIRST FLIGHT LIMITED PARTNERSHIP
The opinion of the court was delivered by: Chief Justice Leroy R. Hassell, Sr.
Present: All the Justices
UPON QUESTIONS OF LAW CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR
THE FOURTH CIRCUIT
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
"(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?"
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.
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
"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 [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 pre-existing 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.
"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
"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 then directed BHG to pay more than $2 million of Peterson's
"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 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 transfer, Peterson purportedly surrendered legal control of First Flight
to Scott Peterson, although Peterson himself continued to manage First Flight's day-to-day
"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. 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."
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).
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 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.
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. *fn1
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 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 Inversions 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, 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).
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 simply no language in the Act
that prohibits a court from piercing the veil of a limited partnership.
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
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
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.
*fn2 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. *fn3 And, a litigant who seeks reverse veil piercing must prove
the necessary standards by clear and convincing evidence.
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.
*fn1 See Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate
Standards, 16 J. Corp. L. 33 (1990).
*fn2 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.
*fn3 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.