The United States Bankruptcy Court for the Middle District of Pennsylvania recently found that a bankruptcy trustee could not either pierce the corporate veil of a limited liability company to reach the owners of the LLC, nor could the trustee “reverse-pierce” the corporate veil of the owners of the LLC to reach a separate restaurant business that they owned. The plaintiff, the Chapter 7 bankruptcy trustee for the LLC, had brought claims against both the owners and the restaurant alleging, among other things, that the owners were “alter egos” of the LLC and thus jointly liable for its debts. The trustee also claimed that the restaurant should also be liable for the debts of its owners, the alleged “alter egos” of the LLC.
The Bankruptcy Court found that in order to pierce the corporate veil, the trustee must show that the defendants disregarded the corporate form by a combination of four factors: (i) undercapitalizing the business; (ii) failing to adhere to corporate formalities; (iii) substantially intermingling corporate and personal affairs; and (iv) the use of the corporate form to perpetrate a fraud. The Court held that the plaintiff had failed to show any of these factors. In particular, the trustee argued that there was substantial intermingling of corporate and personal affairs because the defendants had used personal credit cards to make purchases for the LLC and both the owners and the restaurant had paid bills directly for the LLC. However, the Court found that this was not commingling of assets sufficient to trigger a piercing of the corporate veil, and it noted that the trustee had failed to cite a single example of funds from the LLC being deposited in a personal account for either the owners or the restaurant. Therefore, the Court found that while “there may have been an intermingling of identities, there appears to be no evidence of the commingling of assets, financial records, or employees.” Finally, the Court held that since the owners were not personally liable for the debts of the LLC, liability could not be extended to the restaurant under the “reverse-piercing of the corporate veil” theory. (In re LMcD, Bankruptcy No. 5-05-bk-54237, 2009 WL 545746 (Bkrtcy.M.D.Pa. Mar. 4, 2009))