Tuesday, December 3, 2013

You Can't Pierce Your Own LLC (and You Don't Want To): An Exam Note

Here in West Virginia, it's exam time for our law students.  For my Business Organizations students, tomorrow is the day.  For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.  

Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here):   In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer.  A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of  Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck.  Andrew filed suit against the employee and M & W Milling  claiming personal property damage to the truck and the loss of income derived from the use of damaged truck.  Notably, the LLC was not a named plaintiff in the lawsuit.

Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.) 

After noting the LLC was never named as a plaintiff, despite claims of lost income, the court explained:
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.
Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013). 
 
The plaintiff (Andrew) argued that as the sole owner of the LLC, and because his business operated from his residence, the LLC could be disregarded and he could seek recovery for the lost income directly.  He can ask, I suppose, but what's concerning here is that the Court of Appeals accepted the argument.  
 
At this point, it should be clear to courts and lawyers that LLCs and corporations are separate entities with their own rights and obligations.  Those obligations will be carried out by individuals, but the grant of limited liability is not free.  If you want the benefit of limited liability protection, you must, at some basic level, respect the entity form.  
 
Fortunately, the court recognized this and explained that the limited instances where an LLC's separate entity status may be disregarded is in the interest of equity, done through the process of "piercing the LLC veil" (I appreciate the use of that phrase, too, as I have noted before) or perhaps reverse piercing, neither of which were appropriate here.   
 
So here's the deal: this was not hard.  Respect the limited liability entity and just name the LLC as a plaintiff when seeking to recover lost income to the LLC. It's not that hard.  Really.  Oh, and reply to discovery requests if you actually want to recover anything.  

http://lawprofessors.typepad.com/business_law/2013/12/you-cant-pierce-your-own-llc-and-you-dont-want-to-an-exam-note.html

Business Associations, Corporations, Joshua P. Fershee, LLCs, Teaching | Permalink

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