Tuesday, January 24, 2017

Alaska LLC Veil Piercing at Crossroads: A Chance to Get it Right

Friend and co-blogger Marcia Narine Weldon sent me a news article from Alaska discussing a "piercing of the corporate veil" claim for an LLC.  

The City and Borough of Juneau demolished the Gastineau Apartments and is trying to get hold members of Gastineau Apartments LLC, apparent owners of the building liable for the $1.4 million demolition costs. Demolition cost more than the land is worth, so the suit is seeking to have the owners of the LLC, Camilla and James Barrett, pay the bill because they missed deadlines to repair or demolish the property.

 

The article reports:

At issue before Juneau Superior Court Judge Philip Pallenberg is the legal concept of “piercing the corporate veil.” It would allow legal action against the Barretts, who controlled Gastineau Apartments LLC.

Defense Attorney Robert Spitzfaden had argued that the Barretts should remain shielded from liability. But the judge noted that the defendants had allowed their limited liability corporation to be dissolved after missing filing deadlines with the state.

“It’s clear that the Barretts were not always clear to observe the formal legal requirements of their LLC,” Judge Pallenberg said from the bench.

A quick review of Alaska LLC law did not make clear to me that LLCs in the state have formal requirements that would be implicated in this case.  If the main reason that the LLC did not pay the bills was a mere lack of money, there is no reason to pierce the veil. It's just a failed venture.  Sure, the Barretts should have gone followed the appropriate processes, but it cannot be that the fact that the Barretts "allowed their limited liability corporation [author's note: it's an LLC] to be dissolved after missing filing deadlines with the state" is sufficient to support veil piercing."  

Imagine the same scenario, but the building had value. Would missing deadlines and allowing the land owned by LLC to be automatically transferred to the Barretts?  Even if there were other creditors?  I think not.  

Perhaps there is more to this case than the article reveals, but this looks a lot like a lack of entity funds is the only issue, and a lack of funds (on its own) should not be sufficient for veil piercing, especially in a property case where the property can be forfeited.  If the city or state wants to make a law making individuals liable, then fine, but this looks like a bad case for veil piercing and a possible summary judgment case. I look forward to seeing if Alaska analyzes this one right at trial.  

http://lawprofessors.typepad.com/business_law/2017/01/alaska-llc-veil-piercing-at-crossroads-a-chance-to-get-it-right.html

Corporations, Joshua P. Fershee, LLCs | Permalink

Comments

Interesting case. Makes me appreciate the Texas approach, in which disregard of formalities for either a corporation or an LLC is irrelevant. You can pierce the veil only if the entity has been used to commit actual fraud for the benefit of the owners. None of the other stuff -- commingling funds, "alter ego," etc., matters unless the owners were deliberately committing fraud for their own benefit.

Posted by: Frank Snyder | Jan 25, 2017 8:51:17 AM

The Klein, Ramseyer & Bainbridge casebook, which I use for my Business Associations course, includes a case, New Horizons Supply Cooperative v. Haack, which seems to be spot on with this Alaska case.

Posted by: Jim Hayes | Jan 25, 2017 10:34:14 AM

Thanks for the comment. Haack is similar, but in that case there was a distribution of assets to the LLC member. The court noted “we conclude that entry of judgment against Haack on the New Horizons’ claim was proper because she failed to establish that she took appropriate steps to shield herself from liability for the company’s debts following its dissolution and the distribution of its assets.” The distribution of assets in that instance suggests an attempt to circumvent the debt, which could be viewed as fraud (though I would still argue there’s a good claim that the member should only be liable to the amount of the distribution). The Wisconsin court noted and cited to a statute discussing asset distribution at dissolution as predicate for liability. The Haack court noted: “If the dissolved limited liability company’s assets have been distributed in liquidation . . . .” (citing Section 183.0909, Wisc. Stats.))

Posted by: Joshua Fershee | Jan 25, 2017 10:53:35 AM

Joshua, thanks for the thoughtful response. I think you're right about the distinction between the cases, but I wonder what effect the administrative dissolution of the Alaska LLC had the assets (i.e,, the apartment property). Did ownership devolve to the members by operation of law upon administrative dissolution? If not (and probably not), can individual members of an LLC avoid liability for allowing the LLC property to become blighted or polluted (at great expense to the public) by simply not filing the LLC's annual statements with the state? It seems this is more than a case of merely not paying its bills as a failed venture (as you observe in your original post), but rather a tort injury inflicted on the public. Wouldn't veil piercing be justified as a fraudulent use of limited liability, based on public policy?

Posted by: Jim Hayes | Jan 25, 2017 12:54:44 PM

Thanks for the engaging questions, Jim. I agree administrative dissolution probably does not devolve property to members by operation of law. So, to the question of “can individual members of an LLC avoid liability for allowing the LLC property to become blighted or polluted (at great expense to the public) by simply not filing the LLC's annual statements with the state?” I think the answer is clearly yes. Unless there are some other obligations by law that attached to members of an LLC and not just the LLC, they can do that. In the same way that had they done the appropriate filings with the state to keep the LLC active – they did not have the money. Maybe I am missing something, but I don’t see how the failure to file forms led to the inability to pay. Forms or not, the LLC was broke, as I understand it.

As to whether veil piercing would be justified as a fraudulent use of limited liability, based on public policy, my response is a resounding no. (I know that there are plenty of people who would agree with the concept, though. But I think if it is a public policy concern, then there should be a statute that addresses this directly, not a judicially derived remedy. I see this as directly analogous to Walkovsly v. Carlton, where the court said it might consider enterprise liability, but that a mere failure to be able to compensate a tort victim for the full medical bills and other harm from an accident was not enough to pierce the veil where the taxi company met the statutory requirements for insurance coverage. Here, if the member of the LLC did something (or failed to do something) required by law, then maybe. But I don’t see their inability to pay to bills as a fraud or a tort. If people don’t like limited liability, then the law can be changed, but if a simple inability to pay bills is sufficient to pierce the veil, then limited liability is an illusion. I don’t think there is any way this case is even a question if the LLC has 20 members, so, at least based on the facts I have found, I don’t see how the Barretts should be on the hook either.

Posted by: Joshua Fershee | Jan 26, 2017 7:41:58 AM

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