McBride Law Blog

LLC Law Update: Piercing the Corporate Veil (Post 3)

McBride Law Blog

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Wyoming.

Wyoming courts allow veil piercing in about 61.90% of cases, far exceeding the national average, though the small size of the dataset (21) makes it difficult to say that the rate is statistically meaningful.[1]  In Wyoming, veil piercing law was also modified by statute around the time this number came out, so that failure of an LLC to observe any particular corporate formalities is no longer a ground for imposing liability on the members or managers for the liabilities of the company.[2]  This change was based on the Wyoming legislature’s recognition that informality is “common and desirable” in an LLC[3] and, thus, failure to observe corporate formalities in and of itself should not justify piercing the corporate veil.

In Greenhunter Energy v. Western Ecosystems,[4] a creditor sought to pierce the LLC’s veil to hold the LLC’s sole member (corporation) liable for the LLC’s unpaid contractual obligations, after learning that the LLC had no assets.  Arguing that the sole member was the LLC’s alter ego, the creditor presented evidence that the LLC was consistently undercapitalized and that the sole member decided when and how much money to advance to the LLC to allow it to pay its accounts payable.[5]  The creditor also presented evidence that the sole member and the LLC had the same business address and all bookkeeping and financial management of the LLC were performed by the employees of the sole member.[6]  Moreover, the tax returns of the two entities were consolidated and federal tax law permitted the LLC to be treated as a disregarded entity.[7]  The lower court found in favor of the creditor and allowed the LLC’s veil to be pierced.

On appeal, the court stated that the veil of an LLC may be pierced under exceptional circumstances when: (1) the LLC is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the LLC; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.[8]  In other words, the court explained, the test is fact-driven and flexible, and it focuses on whether the LLC has been operated as a separate entity as contemplated by statute, or whether the member has instead misused the entity in an inequitable manner to injure a third party.[9]  The court agreed with the lower court that the LLC was continually undercapitalized due to manipulation by its member, the LLC’s and the member’s finances were intermingled, and the member misused the LLC in order to improperly manipulate the situation to avoid paying for services.[10]  Thus, even though there was no fraud in the classic and technical sense, the court found that the evidence was sufficient to justify piercing the LLC’s veil.[11]

Our next post will look at veil piercing under Texas law.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258, shawn.mcbride@mcbrideattorneys.com, or www.mcbrideattorneys.com.

[1] Oh, supra n.2, at 116.

[2] Wyo. Stat. § 17-29-304.  See also id. § 17-16-732 (for corporations).

[3] Dale W. Cottam et al., The 2010 Wyoming Limited Liability Company Act: A Uniform Recipe with Wyoming “Home Cooking, Wyo. Law Rev., Vol. 11, No. 1, 2011, at 64 (quoting Revised Unif. Ltd. Liab. Co. Act § 304 cmt. to subsec. (b) (2006)).

[4] Greenhunter Energy, Inc. v. W. Ecosys. Tech., Inc., No. S-14-0036, 2014 WL 5794332 (Wyo. No. 7, 2014).

[5] Id. at 2.

[6] Id.

[7] Id.

[8] Id. at 8 (internal quotations omitted).

[9] Id.

[10] Id. at 19.

[11] Id.

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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