Tuesday, December 30, 2014
I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies." That's annoying, but not especially interesting at this point.
One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim. The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014). In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.
This case has all sorts of good lessons. Lesson 1: don't forget that all named parties matter. Get this:
Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered as to both the corporate and individual defendants on July 3, 2014 (Item 9). Defense counsel did not move to vacate the default and in fact did not respond in any way until the default judgment was entered on September 17, 2014. Item 12. Even then, the defense motion was framed as one for an extension of time in which to file an answer (Item 14), rather than a motion to vacate the default or default judgment. Inexplicably, in his papers, defense counsel states that a default judgment has not been entered. See Item 17. Since good cause is to be construed generously and doubts resolved in favor of the defaulting party, see Enron Oil Corp., 10 F.3d at 96, the court will accept the explanation of defense counsel as evidence of a careless lack of attention to procedural detail rather than an egregious and willful default on the part of defendant Goho [the individual and apparent owner of the LLC].
McKee v. Whitman & Meyers, LLC
, No. 13-CV-793-JTC, 2014 WL 7272748, at *1 (W.D.N.Y. Dec. 18, 2014). A link to a free version of the case is here
Wow. I concede there are some procedural details here, but this sure sounds substantive to me, as well.
Lesson 2: if you name someone in the caption, you probably want to have some allegations about them as a defendant. Fortunately for defense counsel, the plaintiff's counsel was not on the ball, either. Though Goho was named in the caption, the complaint did not describe Goho as a party or contain allegations about Goho's individual liability for the FDCPA violations. The defendant's Prayer for Relief also only sought judgment from the Whitman & Myers, LLC. (The court conveniently skips the fact that court probably should have noticed these deficiencies the first time around, before entering default judgment against Goho.)
Lesson 3: You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One
. The plaintiff argued that "the court should pierce the corporate veil and hold defendant Goho personally liable." The court's response: "[T]here is nothing on the face of the complaint or in the record that would support individual liability for defendant Goho on the basis of corporate veil-piercing . . ."
The court is, of course, correct. However, the sentence should be followed by one that says, "This is because there is no corporation named as a party to this case, so there is no corporate veil to pierce." Obviously, the court could have gone on to note that even if the plaintiffs meant for the court to pierce the limited liability veil of the LLC, the allegations were insufficient for that, too.
As a side note, it would have been interesting to see how the court would have dealt with the argument that Goho and his LLC were so intertwined that they share legal counsel and that even his own counsel did not immediately recognize the individual and the entity as separate until after default judgment was entered. (I don't see that as a winning argument, but it's better than what was argued.)
Moving forward, I'd like to see courts tell plaintiffs that a request to "pierce the corporate veil" of an LLC amounts to a failure to state a claim. The court should allow counsel to amend the complaint to get the language right. Until there is a consequence, even a minor one, for merging LLCs and corporations, attorneys and courts will continue to get it wrong.
Thus, a New Year's Resolution for Courts: "We will treat corporations and LLCs as separate entity types." And, please, after making sure to always call LLCs "limited liability companies," move on to creating separate veil piercing language.