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Presenting a live 90-minute webinar with interactive Q&A

Piercing the LLC Veil: Avoiding

Member Liability for Business Debts Protecting the Limited Liability Benefits of LLCs Amid Evolving State Law

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 13, 2015

Markus May, Esq., May Law Firm, Naperville, Ill.

Paul Porvaznik, Davis McGrath LLC, Chicago

1

Piercing the LLC Veil: Avoiding Member Liability for Business Debts

Paul B. Porvaznik Davis McGrath, LLC 125 S. Wacker Drive

Suite 1700 Chicago, Illinois 60606

312.332.1506 pporvaznik@davismcgrath.com

http://paulporvaznik.com

Piercing Pros and Cons

Pros

- Piercing remedy provides an additional source of funds where a business entity is

dissolved or has no assets

- Piercing allows discovery to third parties who may have assets or property of the

business entity

- Settlement leverage: corporate principal doesn’t want to risk litigating piercing. This

often results with the corporation coming to the table with a settlement offer

Cons – expensive, risk of bankruptcy; fishing expedition – get bogged down with discovery. If

judgment is under $50K, probably not worth it.

Situations Where Piercing Potentially Applies

Post-judgment

- Can’t pierce in supplementary proceedings

- Must file new lawsuit

- Res judicata defense should fail

Pre-judgment

- Pre-suit investigation shows that there is lack of separateness between LLC and the

dominant member or manager

- Piercing LLC to obtain jurisdiction over LLC member

At the outset, I work with my client to investigate possible grounds for piercing so that I can

name all permutations of possible defendants without first having to go through the exercise of

getting a judgment against the corporation and then filing a separate action against the

shareholder(s).

Also – before attempting to pierce, it’s worthwhile searching state and Federal court records for

bankruptcies and prior judgments. If there is a lot of activity, it may be cost-prohibitive to try to

pierce.

2

Statutes

Minnesota 322B.303(2)

Wyoming § 17-29-304(b)

Washington State RCWA 25.15.060 (Effective until January 1, 2016)

Colorado - C.R.S.A. § 7-80-107

Florida

California Corporations Code Section 17703.04 (b) A member of a limited liability company shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation; except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the limited liability company where the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers.

Practical Considerations

“Back Door Piercing”(?) – Post-judgment

In post-judgment proceedings, you can serve third-party citations on individuals or businesses

whom you believe have property or assets of the debtor. If you find that a third party has

property of the debtor, you can move for a turnover order in the supplementary/post-judgment

proceeding. That sometimes obviates the need for a formal and separate piercing action.

Pleading

I plead in the alternative.

Count I will be directed to the corporation.

Count II will be pled in the alternative and name the individual member/manager as the party

defendants. Same cause of action, same facts, but additional allegations to show existence of

piercing factors.

3

If filing a piercing claim AFTER prior judgment, I allege same underlying facts as those pled in

prior lawsuit but add allegations of (1) piercing factors and (2) reference the judgment against

the corporation and that it is unpaid.

Defense – Res judicata

Expect res judicata defense – “you could have filed against the shareholder in the earlier suit

but you didn’t.”

Counter-argument is that plaintiff didn’t know there was a basis to pierce until after judgment

entered and after post-judgment discovery.

Trends

- LLC Piercing Claims Are Analyzed Under Same Framework as Piercing of Regular

Corporation

- Non-shareholder liability

- Buckley v. Abuzir, 2014 IL App (1st) 2014 (dismissal of complaint reversed);

- Konrad Motor & Welder Service, Inc. v. Magnetech Industrial Services, Inc., 973 N.E.2d

1158, 1165 (Ind. Ct. App. 2012);

- Roohan v. First Guarantee Mortgage, LLC, 97 A.D.3d 891 (N.Y. App. Div. 2012)

States that allow non-shareholder liability under piercing or alter-ego theory: Delaware,

Colorado, Connecticut, Louisiana, Alabama, Alaska, Hawaii, Mass., Minn., Montana,

Nebraska, Nevada

States that do not allow piercing against a non-shareholder: Maine, Maryland, North

Carolina, Texas

- Heightened pleading – Rule 8, 9

(yes - Superkite PTY Limited v. Glickman, 2014 WL 1202577 (N.D.Ill. 2014); no -

Landstar Inway v. Samrow, 181 Wash.App. 109 (2014)

- Heightened burden of proof

- see In re: Opus East, LLC, 528 B.R. 30 (USBC Delaware 2015); Also, see Fontana v.

TLD Builders, Inc., 362 Ill.App.3d 491, 500 (2nd Dist. 2005)

- Factors will vary from state to state. It’s easier to pierce in some states than others

- The more specifics, the better chance of surviving summary judgment and 12(b)(6)

motion (or state law analog (Illinois 2-615, 2-619 motions)

4

Macey & Mitts Study

Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil, 100

Cornell L. Rev. 99 (2014); http://scholarship.law.cornell.edu/clr/vol100/iss1/2

“The entire universe of piercing cases can be explained as judicial efforts to remedy one of the

following three problems.” Id., p. 101.

(1) Courts pierce the corporate veil as a tool of statutory application. That is, to bring

corporate behavior into conformity with a particular statutory scheme. Courts will

disregard the corporate form to accomplish a legislative goal as expressed in the statute;

(2) Courts pierce in order to remedy what appears to be fraudulent conduct that does not

satisfy the strict elements of common law fraud (see Greenhunter, e.g.);

(3) Courts pierce to promote “bankruptcy values” – to prevent fraudulent conveyances and

preferential transfers and to promote orderly disposition of debtor assets so that all

creditors are treated equally.

The authors – a Yale Professor and a PHD candidate in economics believe that any confusion

in piercing law is based on court’s failure to understand this three-party framework.

Illinois

State Court Seater Const. Co. v. Deka Investments, LLC 2013 IL App(2d) 121140-U

- Piercing applies to LLC - Judgment for LLC members where no evidence of fraud or commingling - Undercapitalization factor less pertinent in breach of contract case because parties are

presumed to enter into contracts of their own volition IL ND Tahir v. Import Acquisition Motors, LLC, 2014 WL 985351 (N.D.Ill. 2014)

- Breach of contract and consumer fraud claim involving $100K Bentley - Veil-piercing standards apply to LLCs (Westmeyer v. Flynn, 382 Ill.App.3d 952 (2008) - Piercing claim survives summary judgment

7th Circuit

On Command Video Corporation v. Roti, 705 F.3d 267 (7th Cir. 2013) Promotion of injustice prong of piercing test asks whether if business entity breaches contract, will the other party have a remedy? $1,000 in lawsuit involving hotel in $600K contractual and fraud dispute is insufficient; Illinois law applies to piercing claim involving Illinois entity No piercing where no reliance on shareholder’s fraud

5

No piercing where no proof that controlling shareholder personally benefitted from fraud

Other Cases

In re Suhadolnik, 2009 WL 2591338 (C.D.Ill. 2009)

Westmeyer v. Flynn, 382 Ill.App.3d 952 (2nd. Dist. 2008)(applying Delaware law)

Miner v. Fashion Enterprises, 342 Ill.App.3d 405 (2003)

In re Polo Builders, Inc., 388 B.R. 338 (Bankr.N.D.Ill.2008)

Cohen v. Basil, 2013 IL App(2d) 120785-U (piercing judgment for LLC members affirmed in

construction contract case)

A.G. Cullen v. Burnham Partners, LLC, 2015 IL App (1st) 122538 - applying Delaware law, reversed trial court’s judgment for LLC members in piercing case - where plaintiff shows evidence of fraud by the LLC, piercing is warranted GoHealth, LLC v. Simpson, 2014 WL 2866222 (N.D.Ill. 2014) Piercing is theory of liability; not a standalone cause of action Piercing is proper where (1) unity of interest and ownership such that there is no separation between corporation and its officers; and (2) maintaining fiction of separateness would promote injustice or inequitable circumstances Eleven (11) unity of interest factors: - piercing claim dismissed for lack of specificity under Rule 9 Superkite PTY Limited v. Glickman, 2014 WL 1202577 (N.D.Ill. 2014)

- Motion to dismiss piercing counterclaim denied - Rule 9 heightened pleading standard applies

Washington State

Landstar Inway v. Samrow, 181 Wash.App. 109 (2014)

- Case filed by company against trucking company for damage to company’s goods when

truck hit overpass

- Piercing claim based on fraudulent misrepresentations of LLC member;

- LLC corporate veil may be pierced under certain circumstances

- LLC must be used to violate or evade duty

- LLC disregarded to prevent loss to an innocent party

Pleading requirement: Plaintiff does not have to comply with Rule 9 (heightened pleading)

because piercing is an equitable remedy, not a cause of action

6

Indiana

Burget v. R.A.M. Entertainment, LLC, 2015 WL 4490938 (N.D.Ind. 2015)(Indiana law) Piercing claim survives motion to dismiss Sufficient allegations of commingling Indiana’s eight factor test A money judgment is not required before a piercing claim will lie

Michigan

GlobalTap, LLC v. SmartTap, LLC, 2015 WL 791256 (N.D.Ill. 2015)(Mich. Law) Trade secrets case; court applies Michigan law Piercing available against LLC Fact-specific inquiry Piercing claim survives dismissal

Delaware

Trinity Industries Leasing Co. v. Midwest Gas Storage, Inc., 33 F.Supp.3d 947 (N.D.Ill.

2014)(Delaware law)

- Piercing claim survives motion to dismiss under Delaware law

- Delaware’s five-factored test: (1) inadequate capitalization; (2) whether company was

solvent; (3) whether corporate formalities were observed; (4) whether dominant

shareholder siphoned company funds; and (5) company functioned as a façade for a

dominant shareholder

In re: Opus East, LLC, 528 B.R. 30 (USBC Delaware 2015)

- Delaware law on piercing

- Standard of proof is higher than preponderance of the evidence; closer to a clear and

convincing standard

District of Columbia

- Parr v. Ebrahimian, 70 F.Supp.3d 123 (D.C. 2014) - Plaintiff sues single-member LLC for condominium defects - Summary judgment on piercing claim denied – question of fact on whether sole member

used LLC as personal conduit

Texas

Haferkamp v. Grunstein, 2012 WL 1632009 (Tex. App. May 10, 2012)

- Texas applies state law piercing rules to LLCs Copeland v. D & J Construction, LLC, 2015 WL 512590 (Tex.App.2015)

7

- Piercing requires actual fraud and direct personal benefit by the LLC member - Claims survive 12(b)(6) motion

Massachusetts

Kosanovich v. 80 Worcester Street, 2014 WL 2565959 (Mass.App.Div. 2014)

- Piercing judgment against LLC sole owner upheld in condominium property defect suit - “Pervasive control” (by sole owner) coupled with absence of corporate records was

enough to justify piercing LLC veil under Mass. Law.

But see Osorno v. Osorno, 478 B.R. 523 (Bkrptcy.D.Mass. 2012)

- Court applies 12-factor piercing test in bench trial and refuses to pierce LLC of which

debtor was manager

- Insufficient evidence of alter-ego/lack of separateness

Wyoming

GreenHunter Energy, Inc. v. Western Ecosystems Technology, Inc., 337 P.3d 454 (Wyo. 2014)

- Parent company (a publicly traded company) that was sole member of LLC pierced; - Constructive fraud (as opposed to actual fraud) can serve as basis for piercing; - Key factors: undercapitalization, commingling of funds and constructive fraud - No intent to defraud but court still pierced - Only $45K at stake

Kentucky

Tayloe v. Sellco Two Corp., 2014 WL 3674252 (Ky. 2015)

- Court pierces single-member LLC and holds member liable for $745K judgment;

- Key factors: (1) diversion of assets from LLC to a shareholder to the exclusion of

creditors of the LLC, (2) commingling of funds; and (3) failure to maintain arms-length

relationship among the related entities.

Georgia

Functional Products Trading, SA v. JITC, LLC, 2014 WL 3749213 (Ga. 2014)

- Corporate piercing rules apply to LLCs

- Piercing judgment entered on motion for default

Ralls Corp. v. Huerfano River Wind, LLC, 27 F.Supp.3d 1303 (N.D. Ga. 2014)

- Alter-ego allegations survive motion to dismiss

- Plaintiff must allege fraud, abuse of corporate form, commingling and insolvency at time

of transaction

8

Maryland

Serio v. Baystate Properties, LLC, 209 Md.App. 545 (2013)(Maryland)

- No piercing where no showing of fraud, alter-ego (“complete domination” not only of

finances but of policy and business practices) or attempts to evade creditors

Recycling Solutions, Inc. v. Orrs’ Environmental, LLC, 2015 WL 3948981

- Court enters default judgment against sole member of LLC where allegations

established that member used LLC to evade creditors under commercial lease

transaction

Colorado

Martin v. Freeman, 272 P.3d 1182 (Colo.App. 2012) - Single-member LLC pierced under Colorado law - No showing of wrongful intent required

Louisiana

Cargill, Inc. v. Clark, 2015 WL 4715010 (M.D.La. 2015)

- Louisiana federal court grants summary judgment on piercing claim

- Commingling of funds is key factor in piercing single-member LLC

- Under “single business enterprise” doctrine, an affiliated company can be held liable for

a connected entity’s obligations

Iowa

Hawkeye Land Co. v. ITC Midwest, LLC, 2015 WL 4741141 (N.D.Iowa 2015)

- Iowa employs six-factor test: (1) undercapitalization, (2) no separate books, (3)

commingling of finances, (4) LLC pays individual member’s obligations, (5) entity is used

to promote fraud or illegality; (6) entity is merely a sham

- Motion to dismiss granted where piercing allegations are conclusory

Alabama

Stewart v. Bureaus Investment Group, LLC, 24 F.Supp.3d 1142

- Piercing claim survives motion to dismiss

- Under Alabama law, LLC can be pierced under alter-ego theory or fraudulent purpose of

LLC

Preferred Product Placement v. Right Way Nutrition, 2015 WL 667894 (U.S.D.C. Utah

2015)

9

- Utah recognizes piercing

- Alter ego claim survives summary judgment based on questions of fact concerning

commingling, trying to evade creditors, failure to keep related entities separate from

debtor entity

New Jersey

Delzotti v. Morris, 2015 WL 5306215 (U.S.D.C. NJ 2015)

- Alter-ego allegations of commingling, dominant shareholder controlling LLCs, survives

12(b)(6) motion

Oregon

Joe Hand Productions v. Holmes, 2015 WL 5144297 (U.S.D.C. Oregon)

- A plaintiff can pierce LLC corporate veil but it is an “extraordinary remedy”

- Allegations insufficient to sustain piercing claim

Tennessee

Appolo Fuels, Inc. v. Claiborne Heavy Hauling, 2014 WL 2803141 (E.D.Tenn. 2014)

- Piercing claim survives summary judgment

- 11 factors – including nonissuance of stock, failure to collect paid in capital, sole

ownership of stock by one individual

- No one factor is determinative. The factors are considered in combination

New York

Ebin v. Kangadis Mgmnt., LLC, 2014 U.S.Dist.LEXIS 169454 (S.D.N.Y. 2014)

- Fraud allegations for piercing must go beyond allegations of fraud in the underlying

action

- There must be additional fraud alleged against shareholder aside from fraud alleged

against corporation

California

- Piercing applies in two settings: (1) alter ego and (2) single enterprise theory. Greenspan

v. LADT LLC (2010) 191 Cal.App.4th 486, 512)

Connecticut

. In re Carrano, Bkrtcy.D.Conn.2015, 530 B.R. 540.

10

- Court applies “instrumentality” rule – where corporation is instrumentality of controlling

individual, piercing is justified

Other Remedies

- Fraudulent Transfer – Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/1 et seq., 735 ILCS 5/2-1402(c)(3)

UFTA recognizes actual fraud and constructive fraud

- Successor Liability - Merger, consolidation, express assumption, fraud, mere continuation

- - Charging Order – exclusive remedy for a judgment creditor of an LLC member to satisfy

a judgment out of the debtor’s distributional interest in an LLC. 810 ILCS 180/30/20

Unity of interest Factors:

(i) Inadequate capitalization

- shareholders should put unencumbered capital reasonably adequate for the corporation’s prospective liabilities

- to determine whether a corporation is adequately capitalized, one must compare the amount of business to be conducted and obligations to be fulfilled

- in a contract case, the undercapitalization issue is less important since parties are free to contract with whom they want and presumably have the ability to conduct due diligence on their contracting partners;

- where paid-in capital is liened or encumbered by security interest or line of credit, this can lead to finding of undercapitalization. Wachovia Securities, LLC v. Banco Panamerico, 674 F.3d 743 (7th Cir. 2012)

- McCracken v. Olsen Companies, 149 Ill.App.3d 104 (1st Dist. 1986)(company with consistent negative retained earnings and no cash on hand is undercapitalized)

(ii) a failure to issue stock

- People v. V&M Indus., Inc., 298 Ill.App.3d 733 (5th Dist. 1998)

11

(iii) failure to follow corporate formalities (less important or non-existent with LLCs – see various statutes)

- absence of corporate resolutions authorizing corporate promissory note payments to a shareholder;

- construction company failed to attach legal descriptions to corporate resolutions authorizing corporation to sell properties

(iv) nonpayment of dividends

- Ted Harrison Oil Co., Inc. v. Dokka, 247 Ill.App.3d 791 (4th Dist. 1993)(failure to pay dividends for more than a 10-year period)

(v) insolvency of the corporate debtor – (obvious)

(vi) non-functioning corporate officers

- where company President testified at trial she didn’t know she was the sole shareholder of a company, lacked any knowledge of corporate books and records, and all company decisions were made by someone else, there was adequate showing of non-functioning officers (Fontana, at 506; also see Wachovia Securities, LLC v. Banco Panamerico, 674 F.3d 743 (7th Cir. 2012)(50% shareholder controlled financial aspects of company; remaining 50% shareholders were effectively “non-functioning”)

(vii) absence of corporate records

- not enough to have by laws, articles of incorporation, tax returns and separate bank account;

- where company has no record of shareholder loans, no corporate resolutions or any

documents evidencing corporate indebtedness, this is a failure to maintain adequate corporate records.

(viii) commingling of funds,

- where company funds went directly to personal accounts of officers, there was blatant commingling;

- Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir. 1991) - Wikelund Wholesale Company, Inc. v. Tile World, 57 Ill.App.3d 269 (1st Dist.

1978)(shareholder shifted money between accounts of different companies owned by the shareholder)

(ix) diversion of corporate assets to shareholders instead of creditor’s

See Wachovia Securities LLC v. Banco Panamerico, 674 F.3d 743 (7th Cir. 2012)(corporation paying money to insiders and related entities constitutes diversion of assets)

12

(x) no arm’s-length dealings with related entities;

(xi) whether the corporation is a façade or front from the dominant shareholders.

Copyright 2014: Markus May 630-864-1004 mmay@illinois-business-lawyer.com

Piercing the Corporate Veil

If a company acts as the alter ego of an individual, courts can “pierce the corporate veil” and go after

your personal assets. If enough of the following factors exist and there is “injustice”, courts will pierce

the corporate veil and your personal assets will be at risk:

(1) Diversion of assets from the company by or to a stockholder or other person or entity to the

detriment of creditors. If the company is doing poorly, do not make preferential payments to

shareholders.

(2) Failure to maintain arm's-length relationships among related entities. Do not give

preferential treatment to individuals or related entities. For example, charge a fair market rental rate for

leased real estate and a fair market interest rate on loans.

(3) Inadequate capitalization. The amount of initial capitalization should be sufficient to meet the

anticipated needs of the business. The courts frown on flimsy organizations set up solely to escape

personal liability.

(4) Failure to observe corporate formalities. Always sign your title after your name when signing

contracts. Adopt bylaws. Have annual corporate minutes appointing directors and officers, plus

corporate minutes documenting other major transactions, including loans/payments from/to

shareholders. Hold annual and other meetings of the shareholders and board of directors as necessary.

Keep the company registered with the Secretary of State. Maintain a company record book to keep

official documents in one place.

(5) Commingling of funds. Keep separate bank accounts. Do not use company funds to pay

personal expenses and do not transfer money to an individual account without proper resolutions.

(6) Absence of corporate records. Document everything – especially the flow of money and major

transactions. Use promissory notes to document loan terms in detail. Use written contracts – this also

makes business sense. Have financial statements and keep track of invoices issued and received.

(7) Nonpayment of dividends. Show how money flows from the company to

individuals/shareholders. This is usually via a salary, bonus, dividend, distribution or repayment of a

shareholder loan. Avoid just transferring money into an account without a company resolution stating

what the transfer is for.

(8) Nonfunctioning officers or directors. Only appoint functioning officers and directors.

(9) Failure to issue stock. Make sure stock is properly issued and recorded in your corporate book.

(10) Insolvency of the debtor company. If the company is doing poorly, be extra careful where the

money goes and document all transactions.

(11) Whether, in fact, the company is a mere facade for the operation of the dominant

stockholders. Ultimately, look at all the facts and decide if the company is just the alter ego of another

entity or entities.

10/8/2015 Like Pulling Teeth: The Struggles of Collecting Judgments from Corporate Debtors

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Like Pulling Teeth: The Struggles ofCollecting Judgments from CorporateDebtors

May 7, 2013 by PaulP

 

As someone who does some collection work, I experience first‑hand how difficult itis to collect on judgments – especially from small corporate debtors.  A 2011Second District case illustrates in stark relief just how challenging and frustratingenforcing a judgment can be.

In Conserv v. Von Bergen Trucking, 2011 IL App (2d) 101225U (2011), the Courtfollowed Pyshos v. Heart‑Land Development Co., 258 Ill.App.3d 618 (1994) and heldthat a judgment creditor cannot try to pierce the corporate veil of a corporatedefendant in citation proceedings.  In doing so, the court narrowly construed post‑judgment proceedings (or supplementary proceedings) and clarified that a piercingclaim (one where the creditor tries to hold the corporate officer personally liable forthe corporate debt) is beyond the scope of a citation/supplementary proceeding.

If ever there was a case for piercing, this was it.  Even when the trial court deniedthe creditor’s motion to pierce the corporate veil, the court noted thatthe defendant was “definitely getting away with something.  But the law allowshim to get away with something.”  Cold comfort for the creditor indeed.

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In Conserv, once the money judgment was entered, the corporatedebtor immediately emptied its bank accounts and began operating under adifferent (though similar) name.  The “new” corporation was grosslyundercapitalized, commingled personal and corporate funds and failed to followany corporate formalities (keeping minutes, filing annual reports, paying requiredfees, etc).

The reincarnated corporation was a blatant sham or alter‑ego of the principalofficer.  Still, the court denied the creditor’s piercing motion stating that a citationproceeding’s only relevant inquiries are (1) whether the judgment debtor possessesassets that can be applied toward the judgment; or (2) whether a third party isholding assets of the judgment debtor.  Period.

So – what should a creditor do when it learns that a corporate debtor is an alter‑egoof an individual?  The answer:  (1) issue a third‑party citation  against theshareholders or against another corporation the creditor believes ha s assets of thedebtor corporation; or (2) file a new breach of contract claim against thecorporation.

Under option (2) above, you argue that the officer is responsible for thecorporation’s debts because that corporation is a hollow front for the officer’sbusiness dealings.

 

 

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Filed Under: Post‑judgment ‑ Collections  Tagged With: 2‑1402, alter ego, citation, LLC,Molzahn, piercing the corporate veil, Porvaznik, post‑judgment, Reed & Rouse, Rocco,supplementary proceedings, third‑party citation

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10/8/2015 Piercing the Corporate Veil in Illinois

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Piercing the Corporate Veil in IllinoisMay 7, 2013 by PaulP

In Illinois, a corporation is a legal entity that exists separate and apart from itsshareholders, officers and directors.  In fact, a major purpose of incorporating isto insulate yourself from personal liability.  This liability‑reducing function ofcorporations does have its limits though.  If someone is abusing the corporateform, a court can disregard the corporation and “pierce the corporate veil.”

For instance, if I incorporate Paul, Ltd. and you enter a contract with Paul, Ltd. tosell widgets and Paul, Ltd. breaches, generally, you will not be able to sue mepersonally for Paul, Ltd.’s debts.  Because, the law views me as a separate“person” from Paul, Ltd.  However, if Paul, Ltd. is simply my alter‑ego, or a pass‑through entity – then the court can pierce Paul, Ltd.’s veil of limited liability andhold me responsible for Paul, Ltd.’s debts!

Illinois courts apply a two‑prong test to determine whether to pierce the corporate veil: (1) unity of interest and ownership is such that separatepersonalities of the corporation and the other person no longer exist; and(2) adherence to the fiction of separate corporate existence would sanction fraudor promote injustice.  Fontana v. TLD Builders, 362 Ill.App.3d 491 (2005).

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The content of this blog is intended forinformational purposes only. It is notintended to solicit business or to providelegal advice. Laws differ by jurisdiction, andthe information on this blog may not applyto every reader. You should not take, orrefrain from taking, any legal action basedupon the information contained on this blogwithout first seeking professional counsel.

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10/8/2015 Piercing the Corporate Veil in Illinois

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Within this two‑part framework, courts analyze the following factors: (1)inadequate capitalization (opening a corporate bank account with minimal $); (2)failure to issue stock; (3) nonpayment of dividends; (4) nonfunctioning officersor directors; (5) absence of corporate records (Articles of Incorporation?  What’sthat?!!); (6) insolvency of debtor corporation; (8) commingling of funds; (9)diversion of corporate assets to a dominant shareholder, among others.

Afterword: It’s difficult to demonstrate grounds for piercing.  A creditor seekingto pierce has a very heavy burden.  For this reason, when dealing with acorporation with whom you don’t have a prior relationship or that doesn’t have atrack record, doing pre‑contract due diligence (running credit reports, checkingtrade references, etc.) is critical.

In addition, getting a personal guaranty from a corporate officer is helpful. Thisassures that a real live person actually has some skin in the game.  Otherwise,you run the risk of getting an uncollectable judgment.

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Filed Under: Business Torts, Corporate, Post‑judgment ‑ Collections  Tagged With: alterego, corporate veil, limited liability, piercing, supplementary proceedings

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10/8/2015 Piercing the LLC Corporate Veil: Publicly­Traded Parent Corp. Is Responsible for Controlled LLC’s Debts – Wyoming Court

http://paulporvaznik.com/piercing­the­llc­corporate­veil­publicly­traded­parent­corp­is­responsible­for­controlled­llcs­debts­wyoming­court/7903 1/3

Paul PorvaznikChicago Business Lawyer

You are here: Home / Real estate litigation / Piercing the LLC Corporate Veil: Publicly‑Traded ParentCorp. Is Responsible for Controlled LLC’s Debts – Wyoming Court

Piercing the LLC Corporate Veil:Publicly­Traded Parent Corp. IsResponsible for Controlled LLC’s Debts– Wyoming Court

March 20, 2015 by PaulP

An ill‑fated wind turbine project in Southeast Wyoming sets the unlikely stagefor a court’s encyclopedic corporate liability history lesson.  In GreenhunterEnergy, Inc. v. Western Ecosystems Technology, Inc., 2014 WY 144, 337 P.3d 454(Wyo. 2014), the Wyoming Supreme Court traces the evolution of the corporateform (and later, the equitable piercing the corporate veil remedy), from its pre‑Biblical origins through the modern day where the limited liability company isthe business vehicle of choice for start‑ups and entrepreneurs across the country.

The plaintiff got about a $44K judgment against an LLC defendant  forconsulting work the plaintiff did as part of a wind turbine development.  Inpost‑judgment discovery, the plaintiff learned that the LLC was controlled inevery way by its parent company – a publicly‑traded entity – who decided whatLLC creditors would and wouldn’t be paid.

The plaintiff then added the corporate parent as a defendant and the lower courtpierced the LLC’s veil of protection and found the parent company responsiblefor the judgment.  Affirming the piercing judgment, the Wyoming SupremeCourt held:

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Old But Relevant: Piercing Claim Subjectto Seven Year Limitations Period toEnforce Judgment – IL Court

Debtor’s (Non‑Spousal) Inherited IRA NotExempt from Civil Judgment – IL FirstDistrict Rules

Time Of Essence Clauses and InstallmentPayments: How Late Is Too Late?

“Make Sure You Get My Good Side” –Blogger’s Use of Photo is Transformative,Fair Use – Defeats Copyright Suit (11thCir.)

Commercial Landlord’s Suit for RentDamages Accruing After PossessionOrder Survives Tenant’s Res JudicataDefense

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10/8/2015 Piercing the LLC Corporate Veil: Publicly­Traded Parent Corp. Is Responsible for Controlled LLC’s Debts – Wyoming Court

http://paulporvaznik.com/piercing­the­llc­corporate­veil­publicly­traded­parent­corp­is­responsible­for­controlled­llcs­debts­wyoming­court/7903 2/3

– the cardinal features of an LLC are limited liability and flexibility.  LLC’s havethe personal liability protections of a corporation with the taxation benefits of apartnership (no “double taxation” at entity and personal levels, e.g.);

– Wyoming’s LLC Act provides that a failure of an LLC to observe corporateformalities isn’t enough to impose liability on LLC members or managers for LLCobligations (Wyo. Stat. Ann. s. 17‑29‑304).

– although Wyoming’s LLC Act provides that LLC members aren’t responsible foran LLC’s debts, an LLC’s veil of limited liability can be pierced where there is aunity of interest between the LLC and a dominating person or entity, and whererecognizing corporate existence will lead to injustice or sanction a fraud;

– A Wyoming LLC can be pierced not only where there is actual fraud(misrepresentation of fact, scienter, reliance, damages, e.g.) but also where there isconstructive fraud – conduct that doesn’t rise to the level of (intentional) fraud butis treated the same because of its similar harmful consequences;

– Two key factors involved in the piercing equation include undercapitalizationand commingling: the degree to which a business is intermixed with the affairs ofits member;

– No single factor is determinative on its own and the court’s piercing calculus isfact‑driven.

(¶¶ 12‑33)

The defendant and the LLC were separate entities and had separate bankaccounts. Still the court upheld the lower court’s piercing of the LLC’s corporateveil to bind the defendant.

The undercapitalization factor weighed heaviest in the court’s analysis.  There isno magic capital infusion number that equals adequate capitalization.  The courtnoted that over a several‑month period during the time plaintiff was submittingbills to the LLC, that it (the LLC) had a zero bank balance and that the defendantdictated what bills the LLC would and wouldn’t pay.

Since the LLC was continually unfunded by choice instead of by external marketforces, the LLC was inadequately capitalized.  (¶¶ 40‑43).

The court also found that the LLC and its corporate parent intermingled theirbusiness and finances.  Key facts cited by the court included: (i) the sameaccountants managed both the LLC’s and the defendant’s finances; (ii) the LLCdidn’t have any employees.  Instead, defendant’s employees negotiated andinked contracts for the LLC; (iii) the LLC had no revenue separate from thedefendant and the defendant used the LLC to “pass through” funds for billpayment; and (iv) the defendant claimed tax deductions for the LLC’s businesswithout assuming responsibility for any of the LLC’s debts.  

In short, the defendant enjoyed all the benefits of an LLC without alsoshouldering the responsibility for its operation.  (¶¶ 44‑45).

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10/8/2015 Piercing the LLC Corporate Veil: Publicly­Traded Parent Corp. Is Responsible for Controlled LLC’s Debts – Wyoming Court

http://paulporvaznik.com/piercing­the­llc­corporate­veil­publicly­traded­parent­corp­is­responsible­for­controlled­llcs­debts­wyoming­court/7903 3/3

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Q: But Shouldn’t the Plaintiff Have Gotten A Guaranty?

The defendant’s last argument was that the plaintiff should have protected itselfby insisting on a guaranty from the corporate defendant.  The court rejected this,noting that the “reality of the marketplace” is that companies like the plaintiffare often in a competitively vulnerable position compared to large corporationslike the defendant and lack the leverage to require a guaranty from thecorporation.

Taken together, these factors led the to find the conditions ripe for piercing andheld the defendant responsible for the judgment.

Afterwords:

A significant opinion for its exhaustive analysis of piercing litigation with aspecial focus on piercing an LLC.;

Piercing was allowed here even though there was no finding of actual orconstructive fraud and where Wyoming’s LLC Act specifically provides that LLCmembers are not liable for LLC debts;

Time will tell whether this case and others like it will embody a major change incorporate liability law making it easier to pierce the veil of limited liabilitywhere a dominant entity controls a weaker, affiliated one.

A special thanks to Robert Ansell of Silverman Acampora (Jericho, NY) for alerting me tothisRAnsell@SilvermanAcampora.com

 

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