Substance Over Form: Second Circuit Confirms that Equitable Ownership Entitles Judgment Creditor to Reverse Veil Pierce LLCs

Chief Justice Marshall defined a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law ... possess[ing] only those properties which the charter of its creation confers upon it ... .”¹ Corporations and their modern counterparts, LLCs, and other limited liability entities, have always been distinct and separate from their owners and operators. The individuals are not responsible for the entity’s creditors or obligations. And vice versa. This, however, is not and has never been unqualified. Courts will elevate substance over form and extend corporate liabilities to directors and owners of these entities when it’s warranted—and will do the same in reverse, finding entities responsible for obligations of controlling individuals. Most recently, the Second Circuit Court of Appeals affirmed a Southern District of New York decision finding two LLCs liable for the personal judgment of an equitable owner under a reverse veil piercing theory relating to an unsatisfied $40 million judgment held by Citibank.

In Citibank N.A. v. Aralpa Holdings Limited Partnership, the Second Circuit Court of Appeals on January 24, 2025 affirmed the district court’s reverse veil piercing decision finding that two corporate entities housing trophy real estate properties in New York and Miami controlled by Mexican business titan Rodrigo Lebois Mateos—entities with no connection to the underlying Citibank loan or judgment—were liable for a judgment against Lebois.² This article follows our previous analysis discussing last year’s trial court decision.

While the opinion is straightforward and relatively unremarkable, it appears to be the Second Circuit’s first substantive ruling on reverse veil piercing in more than a decade.

Reverse Veil Piercing

Under traditional veil piercing law in New York, an otherwise immune shareholder or director may be held personally liable for the debts of an entity if the owners or directors have (1) exercised complete domination of the business, and (2) such domination was used to commit a fraud or wrong against the plaintiff.

The domination element is assessed through a variety of non-exhaustive factors, including a business’s undercapitalization, failure to follow corporate formalities, commingling of corporate and personal funds, and personal use of corporate property.

Reverse veil piercing involves the logical corollary: attaching the judgment liability of a corporation's directors or owners to the business entity through a similar analysis.

District Court

In 2017, Citibank provided Aralpa Holdings Limited Partnership with a $20 million line of credit that was personally guaranteed by Lebois. Under the guaranty, "Lebois represented that he had a net worth of 'not less than $200 million,' and agreed to provide personal financial statements to Citibank on a semi-annual basis."

Lebois' guaranty was amended three times:  The line was increased to $50 million, and Lebois agreed to maintain a net worth of not less than $400 million in each version.

Lebois provided Citibank with the personal financial statements and each statement listed specific personal assets Lebois owned, including tens of millions of dollars' worth of art, boats and jewelry.

The statements also included a personal real estate section, listing (a) an asset labeled "NY, NY," and another one called (b) "Miami, FL (Fisher Island)." These properties were legally owned by separate corporate entities.

The New York property referenced a high-rise condominium on Billionaires' Row in Manhattan owned by One57 36B LLC, and the Miami property referred to a luxury home on the exclusive Fisher Island held by Aralpa Miami Investments LLC. This home was sold for nearly $9 million in early 2023—the proceeds of which were not deposited in Aralpa Miami's bank account.

One57 was a single-member limited liability company that identified Lebois as president and his daughter as secretary. The sole member of each LLC was Mexican corporation Aralpa Capital SA de DV, an entity for which Lebois served as president, and his daughter was an authorized signer.

Aralpa Miami's sole member was also Aralpa Capital.

Neither One57 nor Aralpa Miami maintained an office or conducted any business beyond holding the real estate. Each relied on Lebois' personal accounts to cover mortgage and property management expenses. The entities had no other purpose and did nothing except own title to the real estate.

Trial Court Decision

To satisfy the $40 million judgment against Lebois, the bank moved post-judgment to hold One57 and Aralpa Miami liable as well—seeking to secure the New York property and Aralpa Miami's bank account—under a reverse veil piercing theory. The court determined that Lebois' repeated representations to Citibank—by way of his personal financial statements—that the properties were his own when it benefited him, only to disclaim any control once a creditor came calling, was a clear judgment-proofing fraud that warranted reverse veil piercing and attaching liability to the entities. The court did not base its conclusion on Lebois owning interests in One57 or Aralpa Miami, directly or indirectly. Rather, it found that he was an equitable owner of each—the distinction being that an individual who exercises sufficient control over a corporation can be deemed to own it in equity, notwithstanding the fact that they are not a legal shareholder or member.

Circuit Court Appeal

Lebois and Aralpa Miami challenged the decision by claiming, substantively, that the district court erred because Citibank failed to reverse veil pierce each entity within the corporate structure. They argued that because each of the property-owning LLCs had the same member, Mexican corporation Aralpa Capital SA de DV, then Citibank should have to perform the same two step reverse veil piercing analysis on that entity before working up the chain and assessing Lebois’ relationship to the LLCs.

The three-judge panel rejected the appeal, citing decades-old, precedential Second Circuit and New York law supporting the proposition that reverse veil piercing liability can be placed upon equitable owners regardless of legal ownership. Lebois’ (a) domination of the LLCs, demonstrated by being listed as personal assets funded out of personal accounts, and being undercapitalized, and the (b) “fraud or wrong” he perpetuated on Citibank, by listing the New York and Miami Properties as his assets on personal financial statements to induce Citibank to lend, only to disclaim any control during the enforcement proceedings, made this a cut and dry case for the appellate panel.

Impact

The Circuit Court adoption of the trial court’s decision offers a helpful road map for creative and diligent creditor’s counsel who aggressively take advantage of post-judgment discovery tools and methodically pursue recalcitrant debtors. This decision is especially welcome as judgment debtors continue to employ sophisticated and complex asset protection schemes that all too easily add to the costs and burdens of creditors left holding the bag.

Ultimately, while reverse veil piercing remains a highly fact-specific claim, the Aralpa decision reminds us that courts will not shirk from apportioning liability to parties and related corporate entities that abuse and misuse the corporate form to evade obligations to judgment creditors.