Kus v. Irving

Facts

KUS V. IRVING

736 A.2d 946 (1999)

NATURE OF THE CASE: Dubicki and Gamassar (Ds) moved for summary judgment in Kus’ (P) suit against Irving (D). 

FACTS: Kus (P) claims that Irving (D), a partner in Irving, Dubicki, and Camassar got her to sign a fee agreement to pay him a fee of 25 percent of what he collected on the life insurance policy of the husband of P before suit was filed and 33 percent of any proceeds after suit was brought. P alleges that D had already received the $400,000, but nevertheless filed suit to collect the larger fee of 33 percent. D took a fee of $135,365.63, which P claims was $33,841.41 too high. P sued all three partners in the firm. Dubicki and Camassar filed affidavits stating they had no personal knowledge of the case. They claim they are immune from suit as the firm is a limited liability partnership. P claims that the Ds are guilty of negligence, wrongful acts and misconduct.

ISSUE: Is a partner in a registered limited liability partnership liable directly or indirectly for any debts, obligations and liabilities chargeable to the partnership or another partner or partners arising in the course of the partnership business while the partnership is a registered limited liability partnership and that person is not under direct supervision or control?

RULE OF LAW: A partner in a registered limited liability partnership is not liable directly or indirectly for any debts, obligations, and liabilities chargeable to the partnership or another partner or partners arising in the course of the partnership business while the partnership is a registered limited liability partnership and that person is not under direct supervision or control.

HOLDING AND DECISION: (Hurley, Judge Trial Referee) The motion is granted. Section 34-327 (d) supersedes both subsections of the rule except where the other person is under the partners' 'direct supervision or control.' Here, the sworn affidavits deny that this was the case. Accordingly, since the two defendants shared no benefit, did not have direct supervision or control over Irving and did not know about the matter until nine days after the funds were distributed, the court finds that they are protected from liability by 34-327 (c).

LEGAL ANALYSIS: This is a matter of piercing the LLC veil. 

From Dean’s Law Dictionary (www.deanslawdictionary.com): As a general rule, a corporation is a separate entity distinct from the individuals comprising it. Opal Mercantile v. Tamblyn, 616 P.2d 776, 778 (Wyo. 1980). Wyoming statutes governing corporations do not address the circumstances under which the veil can be pierced. However, since 1932, courts espoused the concept that a corporation’s legal entity will be disregarded whenever the recognition thereof in a particular case will lead to injustice. See Caldwell v. Roach, 44 Wyo. 319, 12 P.2d 376, 380 (1932). 

In Miles v. CEC Homes, Inc., 753 P.2d 1021, 1023 (Wyo. 1988) (quoting Amfac Mechanical Supply Co. v. Federer, 645 P.2d 73, 77 (Wyo. 1982)), the court summarized the circumstances under which the corporate veil would be pierced pursuant to Wyoming law: 

Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation, has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.’ Quoting Arnold v. Browne, 27 Cal. App. 3d 386, 103 Cal. Rptr. 775 (1972) (overruled on other grounds). 

The court provided the following factors to be considered in determining whether a corporate entity may be disregarded:

Among the possible factors pertinent to the trial court’s determination are: commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; the treatment by an individual of the assets of the corporation as his own; the failure to obtain authority to issue or subscribe to stock; the holding out by an individual that he is personally liable for the debts of the corporation; the failure to maintain minutes or adequate corporate records and the confusion of the records of the separate entities; the identical equitable ownership in the two entities; the identification of the equitable owners thereof with the domination and control of the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; the failure to adequately capitalize a corporation; the absence of corporate assets, and undercapitalization; the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation; the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest or concealment of personal business activities; the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities; the use of the corporate entity to procure labor, services or merchandise for another person or entity; the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another; the contracting with another with intent to avoid performance by use of a corporation as a subterfuge of illegal transactions; and the formation and use of a corporation to transfer to it the existing liability of another person or entity [citation]. 645 P.2d at 77-78 (quoting Arnold v. Browne, supra, 103 Cal. Rptr. at 781-82). Miles, 753 P.2d at 1023-24. 

Wyoming courts, as well as courts across the country, have typically utilized a fact-driven inquiry to determine whether circumstances justify a decision to pierce a corporate veil. Opal Mercantile, 616 P.2d at 778. 

Courts have long recognized that piercing the corporate veil is an equitable doctrine. State ex rel. Christensen v. Nugget Coal Co., 60 Wyo. 51, 144 P.2d 944, 952 (1944). The concept of piercing the corporate veil is a judicially created remedy for situations where corporations have not been operated as separate entities as contemplated by statute and, therefore, are not entitled to be treated as such. The determination of whether the doctrine applies centers on whether there is an element of injustice, fundamental unfairness, or inequity. The concept developed through common law and is absent from the statutes governing corporate organization. See Wyo. Stat. Ann. §§ 17-16-101 to -1803 (LexisNexis 2001). 

“Every state that has enacted LLC piercing legislation has chosen to follow corporate law standards and not develop a separate LLC standard.” Philip P. Whynott, The Limited Liability Company § 11:140 at 11-5 (3d ed. 1999). Statutes which create corporations and LLCs have the same basic purpose-to limit the liability of individual investors with a corresponding benefit to economic development. Eric Fox, Piercing the Veil of Limited Liability Companies, 62 Geo. Wash. L. Rev. 1143, 1145-46 (1994). Statutes created the legal fiction of the corporation being a completely separate entity which could act independently from individual persons. If the corporation were created and operated in conformance with the statutory requirements, the law would treat it as a separate entity and shelter the individual shareholders from any liability caused by corporate action, thereby encouraging investment. However, courts throughout the country have consistently recognized certain unjust circumstances can arise if immunity from liability shelters those who have failed to operate a corporation as a separate entity. Consequently, when corporations fail to follow the statutorily mandated formalities, co-mingle funds, or ignore the restrictions in their articles of incorporation regarding separate treatment of corporate property, the courts deem it appropriate to disregard the separate identity and do not permit shareholders to be sheltered from liability to third parties for damages caused by the corporations’ acts. 

There is no reason, in either law or policy, to treat LLCs differently than courts treat corporations. If the members and officers of an LLC fail to treat it as a separate entity as contemplated by statute, they should not enjoy immunity from individual liability for the LLC’s acts that cause damage to third parties. Most, if not all, of the expert LLC commentators, have concluded the doctrine of piercing the veil should apply to LLCs. See generally Fox, supra; Gelb, supra; Robert G. Lang, Note, Utah’s Limited Liability Company Act: Viable Alternative or Trap for the Unwary?, 1993 Utah L. Rev. 941, 966 (1993) (Part 2); Stephen B. Presser, Piercing the Corporate Veil § 4.01[2] (2002); Ann M. Seward & Laura Stubberud, The Limits of Limited Liability-Part Two, Limited Liability Company Reporter 94-109 (January/February 1994); Schwindt, supra. It also appears that most courts faced with a similar situation-LLC statutes which are silent and facts which suggest the LLC veil should be pierced-have had little trouble concluding the common law should be applied and the factors weighed accordingly. See, e.g., Hollowell v. Orleans Regional Hospital, No. Civ. A. 95-4029, 1998 WL 283298 (E.D. La. May 29, 1998); Ditty v. Checkrite, Ltd., Inc., 973 F. Supp. 1320 (D. Utah 1997); Tom Thumb Food Markets, Inc. v. TLH Properties, LLC, No. C9-98-1277, 1999 WL 31168 (Minn. Ct. App. Jan. 26, 1999). 

The various factors which would justify piercing an LLC veil would not be identical to the corporate situation for the obvious reason that many of the organizational formalities applicable to corporations do not apply to LLCs. The LLC’s operation is intended to be much more flexible than a corporation’s. Factors relevant to determining when to pierce the corporate veil have developed over time in a multitude of cases. Attention is directed to commentators who have opined on the appropriate factors to be applied in the LLC context. Fox, supra; Gelb, supra; Curtis J. Braukmann, Comment, Limited Liability Companies, 39 U. Kan. L. Rev. 967 (1991); Presser, supra; Seward & Stubberud, supra; Larry E. Ribstein & Robert R. Keatinge, Members’ Limited Liability, Limited Liability Companies § 12.03 (1999); Robert R. Keating et al., The Limited Liability Company: A Study of the Emerging Entity, 47 The Business Lawyer 375 (1992). 

No reason exists in law or equity for treating an LLC differently than a corporation is

treated when considering whether to disregard the legal entity.

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Issues

Rule of Law

Holding and Decision

Legal Analysis

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