McBride Law Blog

LLC Law Update: Piercing the Corporate Veil (Post 4)

McBride Law Blog

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Texas.

In Texas, veil piercing is in large part governed by the statute.  Specifically, a shareholder is not liable to the corporation or its creditors with respect to, among other things, contractual obligations of the corporation on the basis that the shareholder was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.[1]  As in Wyoming, a shareholder is also not liable for the corporation’s failure to observe any corporate formality, including the failure to comply with the statute or the certificate of formation or bylaws of the corporation.[2]  A shareholder, however, can be liable if the shareholder used the corporation to perpetrate an actual fraud primarily for the direct personal benefit of the shareholder.[3]  The introduction of this provision in the Texas statute was a legislative response to a famous (or infamous) court case in 1986 that justified veil piercing even where corporate formalities were observed and commingling was absent.[4]  This statutory change ended the era of permissive veil piercing to bring Texas closer to the national average: 40.76%.[5]  Needless to say, all these changes apply to LLC veil piercing.[6]

In Ogbonna v. USP Labs, LLC,[7] the plaintiff sought to impose liability on two individuals and four LLCs for the sale of allegedly harmful dietary supplements.  Three of the LLCs were Wyoming LLCs, the remaining LLC a Texas LLC, and the individual defendants Texas residents.  With respect to the Texas defendants, the court applied Texas law, which allows disregarding the corporate/LLC fiction where: (1) the fiction is used as a means to perpetrating fraud; (2) a corporation is organized and operated as a mere tool or business conduit [that is, as the alter ego] of another corporation; (3) the corporate fiction is resorted to as a means of evading an existing legal obligations; (4) the corporate fiction is employed to achieve or perpetrate monopoly; (5) the corporate fiction is used to circumvent a statute; and (6) the corporate fiction is relied upon as a protection of crime or to justify wrong.[8]

In this case, the plaintiff alleged the “alter ego” and the “sham to perpetrate a fraud” theories.  With respect to the alter ego theory, the plaintiff did not allege any factor other than the fact that the individual defendants owned and controlled the LLC, which is insufficient to allow veil piercing.[9]  With respect to the sham theory, the plaintiff did allege that the individual defendants formed the LLC solely to escape liability for selling dangerous products, but because it required a showing of fraud, the plaintiff also had to specifically allege the who, what, when, where, and how of the alleged fraud.[10]  The plaintiff failed to do so and the court dismissed the theory.[11]  Nevertheless, the court allowed the plaintiff to amend her complaint, so assuming the plaintiff alleges additional facts sufficient to justify veil piercing, the case is not dead yet.

Our next post will look at veil piercing under Maryland 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] Tex. Bus. Org. Code § 21.223(a).

[2] Id.  See also id. § 21.730 (close corporation).

[3] Id. § 21.223(b).

[4] See generally Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986).

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

[6] Ogbonna v. USP Labs, LLC, No. EP-13-CV-347-KC, 2014 WL 2592097 (W.D. Tex. June 10, 2014),

at *13 (quoting Adams Offshore Ltd. v. OSA Int’l, LLC, No. H-09-0465, 2011 WL 4625371, at *8 (S.D. Tex. Sept. 30, 2011)).

[7] Id.

[8] Id. at 14 fn. 8 (quoting SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 454 (Tex. 2008)).

[9] Id. at 17.

[10] Id. at 17–18.

[11] Id. at 20.

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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