Piercing the veil is a legal doctrine that allows a claimant against an LLC to disregard the LLC’s liability shield and additionally assert its claim against a member of the LLC. Plaintiffs are often motivated to raise a veil-piercing claim when the LLC has few or no assets.
Background. In most states the requirements for piercing the veil will include some disregard by the member of the LLC’s separate existence, and some degree of injustice, fraud, or wrongdoing. Veil-piercing cases come up frequently. Just this year I have written about them here (Georgia), here (New York Federal District Court, applying Delaware law), and here (Colorado).
In some situations an LLC member may find itself with direct, personal liability for actions taken on behalf of an LLC, even without piercing the veil. That can happen when the member’s actions on behalf of the LLC constitute a tort against the claimant, such as fraud or breach of fiduciary duty. Then there is no need to pierce the veil – the member is directly liable for its own wrongdoing. For an analysis of such a case, see my article, here, about Sturm v. Harb Development, LLC, 298 Conn. 124, 2010 WL 3306933 (Aug. 31, 2010).
North Dakota Supreme Court. An LLC member can also be directly liable if it turns out that the LLC did not exist or that the claimant was not aware of its existence. The North Dakota Supreme Court recently had such a case in Bakke v. D & A Landscaping Co., LLC, No. 20110308, 2012 WL 3516859 (N.D. Aug. 16, 2012).
In 2006 Andrew Thomas discussed a landscaping project with Randall and Shannon Bakke. They were given Thomas’s business card, which referred to “D & A Landscaping” and “Your front to back landscaping company,” and showed his name with no title. Id. at *1. He later submitted a written proposal to the Bakkes, which indicated that it was “[r]espectfully submitted D & A Landscaping 426-4982 Per Andy Thomas,” and after that a second proposal submitted by “D & A Landscaping Per Andy Thomas.” Id.
In 2008 the Bakkes accepted the proposal and Thomas carried out the landscaping project. The Bakkes claimed that they only learned that D & A Landscaping was a legal entity when they received Thomas’s invoice, which directed payment to “D & A Landscaping, Inc.” Id. They later learned that D & A Landscaping Company, LLC was formed in 2005 and dissolved in 2008. Id.
In 2010 the Bakkes sued D & A Landscaping Company, LLC and Thomas, alleging fraud, breach of contract, and negligence in connection with the landscaping project. At trial the jury found that D & A Landscaping Company, LLC was not liable to the Bakkes, and that Thomas was liable to the Bakkes for breach of contract, negligence, and fraud. Thomas argued on appeal that there were insufficient facts to pierce the veil of D & A Landscaping Company, LLC and hold Thomas personally liable. Id. at *2.
Court’s Analysis. The court pointed out that “[t]he precursor to piercing a legal entity’s veil to impose liability on the owner is entity liability.” Id. Because the jury found that the LLC was not liable to the Bakkes, there was no LLC liability to be transferred to Thomas, and the veil-piercing theory did not apply. The jury had instead found that Thomas acted individually, on his own behalf, when he entered into and then breached the contract with the Bakkes.
The Supreme Court found that there was evidence to support the jury’s finding that Thomas was individually liable. That evidence included Thomas’s business card, the estimate, a drawing, and proposals, none of which showed that D & A Landscaping was an LLC or that Thomas was acting as an agent for the LLC. Id. at *3. Thomas’s veil-piercing argument therefore failed, and the jury’s verdict was affirmed. Id. at *5.
Comment. Lao-tzu says in the Tao Te Ching that “a journey of a thousand miles begins with a single step.” Likewise, starting and running a business without unexpected personal liability should begin with the formation of a corporation or an LLC, and using it correctly. Thomas’s dispute came to a bad end, from his perspective, because he didn’t properly use the LLC he had formed. He used the company name without any indication that it was an LLC, and he never used a title or indicated he was acting on behalf of the LLC he had formed.
The basic rules are straightforward:
- In printed materials such as contracts, advertising, and business cards, always use the full name of the LLC, including the entity designator such as “LLC” or “limited liability company”.
- Always use the title of the LLC’s representative in letters, business cards, emails, and other communications from the representative. E.g., President, or Manager.
- When signing a contract on behalf of the LLC, always use the full name of the LLC, the title of the person signing, and an indicator that the signer is signing in a representative capacity, such as “By” or “Its”. An example would be:
Acme Limited Liability Company