Tuesday, March 29, 2016
Wyoming Cleans Up Veil Piercing in LLC Act
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:(i) Fraud;(ii) Inadequate capitalization;(iii) Failure to observe company formalities as required by law; and(iv) Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them.
The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.
(d) In any analysis conducted under subsection (c) of this section, a court shall not consider factors intrinsic to the character and operation of a limited liability company, whether a single or multiple member limited liability company. Factors intrinsic to the character and operation of a limited liability company include but are not limited to:(i) The ability to elect treatment as a disregarded or pass-through entity for tax purposes;(ii) Flexible operation or organization including the failure to observe any particular formality relating to the exercise of the company’s powers or management of its activities;(iii) The exercise of ownership, influence and governance by a member or manager;(iv) The protection of members’ and managers’ personal assets from the obligations and acts of the limited liability company.
I also like the point made by some others that a properly applied fraudulent conveyance doctrine could negate a need for veil piercing and improve the area -- though I have not studied the argument enough to say for sure.
Posted by: Stefan Padfield | Mar 30, 2016 7:27:00 AM
Stefan, I agree that better application of the fraudulent conveyance doctrine (and a more robust sense of what constitutes an improper transfer) would help a lot, but that still limits recovery to what was in the entity as some point. I find that consistent with the concept of limited liability, but it makes some people hinky. And Joan, I agree that law is still murky and sends inconsistent signals, but it's modestly better, I think. Hopefully I have a good sense of enterprise liability, but it may be that I am off. More soon!
Posted by: Joshua Fershee | Mar 30, 2016 7:33:39 AM
Intermingling of assets in most states is sufficient to pierce the veil and is honestly the predominant reason that the veil is pierced. Requiring another factor in addition to that one likely makes the analysis more difficult to apply in practice and doesn't really reflect the equities in those circumstances where it is hard to tell what is and is not LLC property.
Posted by: ohwilleke | Mar 31, 2016 2:52:45 PM
I guess I will agree that the new statute is an improvement. But it's still the same old unclear veil piercing doctrine underneath it all, imv. We'll see.
But I totally am with you on the enterprise liability point raised at the end of the post, if I understand you properly. I will look forward to your subsequent post on that. I do think many misunderstand the doctrine (unless I misunderstand it).
Posted by: joanheminway | Mar 29, 2016 7:39:36 PM