If you are a shareholder in a corporation, creditors usually cannot “pierce the corporate veil” to collect money from the company that’s owed by you. The same is generally true for owners of LLCs, or Limited Liability Companies. But there are limits to the protection a court will allow.

The owner of an LLC involved in a case recently decided by the California Court of Appeal’s Fourth District, in San Diego, certainly seemed determined to test those limits.

James P. Baldwin, a real estate developer, put a substantial amount of funds into JPB Investments LLC, or JPBI. He owned 99% of JPBI and was its chief executive officer, while his wife owned the remaining 1%.

In 2006, Baldwin borrowed $5.5 million from a lender, who later sold the note to Circi Investments. Repayment was due in 2009. When Baldwin did not pay, Circi went to court and got a judgment against him. Baldwin still didn’t pay, so Circi went back to court and obtained an order against 36 business entities owned by Baldwin, including JPBI.

In October of 2012, the court ordered that any money distributed to Baldwin by JPBI had to be turned over to Circi.

The LLC had distributed $178 million to Baldwin and his wife between 2006 and 2012. But it made no distributions at all after the court order was filed.

In June of 2015, Circi asked the court to add JPBI as a judgment debtor, and to allow Circi to “pierce the corporate veil” of the LLC.

It argued that JPBI was Baldwin’s alter ego, and that he was using JPBI to avoid paying the judgment. Allowing him to continue to enjoy the protection provided by the structure of an LLC would create an unjust result, it said.

Circi was asking the court to allow “reverse veil piercing.”

Traditional piercing of a corporate veil occurs when a creditor seeks to hold an individual responsible for the act of an entity he or she controls.

A corporation or LLC is normally treated as a separate legal entity from its stockholders, officers and directors, with its own liabilities and obligations. But if the corporation or LLC is used by an insider to commit fraud or violate a law, its actions can be deemed to be those of the persons who actually control it. That means the assets of those individuals can be seized to satisfy claims against the company.

In this case the situation was reversed. Circi wanted to satisfy the debt of an individual, Baldwin, from the assets of JPBI, the legal entity of which he was an insider.

Baldwin opposed Circi’s petition, citing a precedent which appeared to bar reverse piercing of a corporate veil in California. The trial court, relying on that precedent, ruled in his favor. Circi then appealed.

“There is no litmus test to determine when the corporate veil will be pierced,” the appellate court noted. That depends on the circumstances of the particular case.

The upper court said the precedent cited by Baldwin at trial did not block Circi from trying to collect from JPBI. That’s because the precedent case involved a corporation, not an LLC, and the decision was expressly limited to corporations.

It also noted that, if a court allows a creditor to seize the shares of a company to satisfy a debt, the creditor then has the rights the shareholder had, including collecting dividends, voting the shares or selling them.

But with an LLC, a creditor can only obtain a court order against any distributions made by the LLC to the member. The debtor continues to be a member of the LLC, able to manage and control it and decide when distributions are made. That leaves the creditor in a position not much better than before it got the court ruling.

Baldwin, the appellate court noted, “appeared to be using JPBI as a personal bank account.”

It said he blocked Circi’s efforts to collect its debt for almost five years through “nonresponsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he has an interest.”

Through his 99% ownership of JPBI and the 1% owned by his wife (who was also a signatory on the debt to Circi), and his position as CEO, “Baldwin effectively has complete control over what JPBI does and does not do,” the appellate judges noted.

In light of these circumstances, they ruled, reverse veil piercing may well be an appropriate remedy for Circi. Whether that piercing actually happens will be up to the trial court; the case was sent back to the lower court, which will look at the facts of the case and make the final decision.

For business owners, however, the clear message from the higher court is to refrain from treating your LLC like your personal piggy bank.

By M. Laurie Murphy