Business Law

Manichaean Capital, LLC v. Exela Technologies, Inc. (Ct. of Chancery, Del.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:

The Delaware Court of Chancery (the “Court”) recently ruled that in appropriate circumstances reverse veil piercing was an available remedy for a judgment creditor who could not collect directly from the judgment debtor, in this particular instance allowing collection activities against subsidiaries of the corporate judgment debtor. Manichaean Capital, LLC v. Exela Technologies, Inc. 2021 WL 2104857 (Crt of Chancery, Delaware, May 25, 2021).

To view the opinion, click here.


In Delaware, when a corporation’s board of directors decides to merge the company, the stockholders have two options: participate in the merger as negotiated by the board or dissent and seek a statutory appraisal which values the dissenters’ share and then orders the corporate entity to pay that value. Here, the plaintiffs were equity holders in SourceHOV Holdings, Inc., (“Holdings”) prior to its acquisition by Exela Technologies, Inc. (“Exela”) in the subject merger. Exela, a Delaware corporation, sits atop a network of subsidiaries, identified by the Court as the “SourceHOV Subsidiaries” (the “Subsidiaries”). The network operates in the business process automation space.

The plaintiff shareholders opted for the statutory appraisal and were awarded a judgment, affirmed on appeal, for almost $58 million against the corporate entity Holdings. As part of the merger structure, the Holdings shares held by plaintiffs were transferred to Exela over their dissent to the merger and therefore it was Exela which was ultimately responsible to pay the judgment because it held the shares in question. As the Court characterized, “in appraisal actions, it is the acquirer [here Exela], not the target, who is ‘the real party in interest on the respondent’s side of the case.’” However, the judgment debtor was Holdings, a company with no fixed assets or accounts but with a right to receive pass-through payments which would flow from the Subsidiaries to Exela.

When Holdings did not pay the judgment on demand, the plaintiffs obtained a charging order that in essence required any distributions that Exela would receive from the Subsidiaries below Holdings, which would normally flow through Holdings, be paid first to the judgment creditors before they reached Exela. Post judgment, in complex transactions the details of which are not relevant to this review, Exela orchestrated a procedure to get around the charging order by receiving the payments directly from the Subsidiaries. As a result, the judgment remained unpaid. Thwarted otherwise in their collection efforts, the plaintiffs filed a complaint which sought a Court order for reverse veil piercing, which would allow them to collect directly from the Subsidiaries. Defendants brought a motion to dismiss, which in pertinent part was denied by the Court, allowing the reverse veil piercing claim to stand.


In a thorough analysis of the reverse veil piercing issue in Delaware, the Court first explored the rationale for statutory appraisal and then reviewed traditional veil piercing. It noted that Delaware courts consider a number of factors in determining whether to disregard the corporate form and pierce the veil. These factors include (1) whether the company was adequately capitalized; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether a dominant shareholder obfuscated company funds; and (5) whether, in general, the company simply functioned as a façade for the dominant shareholder. The Court found these factors were also important to reverse piercing and considered them in making its decision. However, it acknowledged that other concerns must also be in play because “reverse veil-piercing involves the imposition of liability on a business organization for the liabilities of its owners.”

After determining that many of the traditional factors to allow piercing were adequately pled, including insolvency which had been orchestrated by the fraud and injustice of Exela’s actions, the Court explored those other factors, the primary one being the impact of reverse piercing on innocent parties. Earlier attempts to impose reverse piercing in Delaware had failed because of the risk that such action would cause harm to innocent shareholders and third-party creditors. In particular, when third-party creditors had relied on a subsidiary’s assets and overall net worth when extending credit to it, a suggestion that the subsidiary may also be liable to other creditors for its parent’s debt could totally upset the dynamics of that business analysis, undermining responsible credit analysis by the subsidiary’s creditors.

The Court considered both Delaware and other states’ cases which had rejected reverse piercing, but then also took into account published decisions which allowed it in limited and monitored situations. It concluded that there were important policies in play, particularly when fraudulent acts contributed to the inability of the judgment debtor to pay the judgment. “Delaware embraces and will protect ‘corporate separateness’, but Delaware will not countenance the use of the corporate form as a means to facilitate fraud or injustice.” Rather than reject reverse piercing per se, the Court concluded the better approach was to recognize it could be an appropriate remedy, so long as the risk of harm to third parties was recognized and managed by the relevant court. It emphasized, however, that it should only be sanctioned in the most “exceptional circumstances.” The Court concluded by listing eight factors which courts must weigh in determining whether to allow reverse piercing, which incorporated and embellished the traditional five factors and added considerations for fraudulent behavior and avoiding harm to innocent third-party creditors.


Whether reverse veil-piercing should be a remedy for a judgment creditor who is otherwise stymied in collection is controversial, the subject of numerous opinions analyzing mostly state law and several commentaries in legal publications. California, for one, has flip flopped on the issue in the last ten years, with one appellate division disallowing it because of third-party creditor concerns, only to have another appellate court allow it in a case with egregious facts. It is indeed an equitable remedy and one that must be applied with care. On the one hand, as noted by the Court here, it can be utilized to combat fraudulent or evasive corporate behaviors which essentially “hide the corporate wealth” by making judgment debtor entities insolvent at the same time the corporate “family” is thriving. On the other hand, it can wreak havoc in the credit market when an innocent third-party creditor has extended credit to a subsidiary based on a balance sheet which can be turned upside down when it is exposed to liability for its parent’s debt. Although the Court here talked of “managing” the risk of harm, the difficulties in implementing that management must be taken into consideration.

Reverse veil piercing has a sister procedure in the bankruptcy system: substantive consolidation, a court-created doctrine for bringing into a bankruptcy proceeding non-debtor entities who have co-mingled their assets with the debtor’s or otherwise undertaken fraudulent activities to cause the debtor’s insolvency while feathering their own nests. There as here, the potential harm of substantive consolidation is the almost inevitable negative effect on the creditors of the non-debtor entities who never planned to share their “collateral” or credit worthiness with a whole host of creditors of different entities. Only recently have bankruptcy courts started to compel a party moving for substantive consolidation to identify and serve all those additional creditors, so that they may have a voice in the court’s decision. As that trend grows, the utilization of substantive consolidation might wane as being unwieldy and harmful to third-party creditors in many circumstances.

This submission was authored by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group, with editorial assistance from Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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