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Tuesday, November 14, 2017

No Need to Veil Pierce an LLC When Direct Liability Is Available (and LLCs Are Still Not Corps)

By Joshua Fershee

A new Maryland case deals with claims against a limited liability company that the plaintiff claimed was "registered as a limited liability corporation ('LLC')." Farm Fresh Direct Direct By a Cut Above LLC v. Downey, 2017 WL 4865481, at *2 (D. Md., 2017).  The court repeats the mistake, but the complaint is the original source, as it incorrectly identifies the LLC as a "corporation" and not a company.  The court then explains some of the allegations as follows: 
Plaintiff alleges that Sinsky violated 15 U.S.C. § 1125(a)(1)(A) and engaged in unfair and deceptive trade practices, in violation of Maryland common law. ECF 1, ¶¶ 17-22, 23-26. At its core, plaintiff's contention is that “Sinsky is the resident agent and incorporator” of Farm Fresh Home (ECF 1, ¶¶ 12-13), and in that capacity she “filed” the articles of organization for Farm Fresh Home, creating a name for the “competing company” that is “intentionally confusing” because of its similarity to Farm Fresh Direct. ECF 1, ¶ 12.
. . . .
*4 Farm Fresh Home is a limited liability company. As a threshold matter, I must determine whether Sinsky is subject to suit in light of Farm Fresh Home's status as a limited liability company.
Id. at *3–4. 
 
That is not quite right. The complaint alleges that Sinsky, by helping to form the LLC, violated the Lanham Act and Maryland common law (the court repeats the complaint's "incorporator" language, but presumably this is meant to refer to the formation of the LLC).  The question, at least initially, should not be whether Sinksy is subject to suit as a member of the LLC.  The question, then, is whether there is a direct claim against Sinsky for creating the competing entity.
 
The court seems to understand this is at least part of the analysis because the opinion discusses veil piercing (in the corporate context, of course) as well as the concept of direct liability.  As to direct liability, the opinion correctly explained: “An LLC member is liable for torts he or she personally commits, inspires, or participates in because he or she personally committed a wrong, not ‘solely’ because he or she is a member of the LLC.” Id. at *5 (quoting Allen v. Dackman, 413 Md. 132, 158, 991 A.2d 1216, 1228 (2010)). The opinion further states that there can be direct liability under the Lanham Act and for unfair trade practices, even when an entity is involved.  This is (at least conceptually) correct.  Despite this, the opinion ultimately misses the mark: 
The question here is not whether plaintiff will ultimately prevail. Its allegations as to Sinsky border on thin. But, for purposes of the Motion, plaintiff adequately alleges sufficient facts and inferences that Sinsky participated in the creation of Farm Fresh Home for the purpose of using a confusingly similar name to compete with Farm Fresh Direct. See A Society Without a Name, 655 F.3d at 346. Therefore, plaintiff is not entitled to the protection of the corporate shield at this juncture.
Id. at *7 (emphasis added). No and no. First, LLCs do not have corporate shields. They have LLC or limited liability shields, but You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One!  Second, there is no need to consider veil piercing at this point. The court has found sufficient claims as to Sinsky's participation to support direct liability. The inquiry should end there. And even if there were value in discussing both direct liability and veil piercing (there is not), the court's own citation to Allen v. Dackman should indicate that this section is not solely related to entity-derived liability.  
 
I don't mean to be too hard on anyone here.  This is not personal -- it simply about identifying and trying to correct errors related to entity status. I know that not all courts or practicing attorneys spend the amount of time I do with entities and their nuances.  And this case involves a pro se party, which can make things even more challenging.
 
I just still maintain that this is something we can correct. Apparently, one blog post at a time. 

https://lawprofessors.typepad.com/business_law/2017/11/no-need-to-veil-pierce-an-llc-when-direct-liability-is-available-and-llcs-are-still-not-corps.html

Accounting, Corporate Personality, Corporations, Intellectual Property, Joshua P. Fershee, Litigation, LLCs | Permalink

Comments

The themes you track are so recurring, I wonder if you or some committee or subcommittee of the Business Law Section of the ABA or other organization ought not produce a Model Limited Liability Act Clarification Amendments Act to tidy things up. (The Commission on Uniform State Laws could do that but it might take a decade or two.)

Posted by: Craig Sparks | Nov 15, 2017 9:56:09 AM

I read the opinion and I think you were a bit hard on the judge. The court was ruling on a 12(b)(6) motion to dismiss by the defendant on the grounds that she was not personally liable for trademark infringement under the Lanham Act or Maryland common law unfair business practices and veil-piercing doctrines because of the LLC’s limited liability shield. In other words, she argued that the plaintiff failed to state a claim against her because she was protected by the LLC's limited liability shield under any theory. The court had to “consider veil-piercing at this point” because the plaintiff raised it one of the as grounds for the defendant's liability, and the defendant argued those allegations failed to state a claim as a matter of law. The court correctly observed “when an individual defendant who is otherwise protected by an organization’s limited liability shield commits a tort or violates the Lanham Act, she may be held individually liable.” Therefore, the court concluded that the plaintiff’s allegations were sufficient on this point and consequently that “[defendant] is not entitled to the protection of the [company] shield at this juncture.” The court was on the mark in leaving the factual finding of the defendant’s individual liability, whether under the Lanham Act, state law unfair business practices or veil-piercing, for a later stage of the proceedings.

Posted by: Jim Hayes | Nov 15, 2017 5:58:07 PM

Craig: Thanks for the comment. I agree that would be a good idea, and it’s definitely something I’d like to do. I need to think about the best way to do it, then actually find the time to make it happen.

Jim: Thank you for your comment, as well, but I respectfully disagree. I pulled both the complaint and the motion to dismiss, and there is no mention of veil piercing from any party in those documents. There was no veil-piercing allegation, nor were there sufficient facts in the complaint to suggest the defendant in question could be liable on a veil-piercing claim, so I think raising it sua sponte was improper from the outset. Moreover, even if one thinks that a veil-piercing discussion is necessary (I maintain it is not, but reasonable people can disagree), it is still clearly improper to say that the “corporate” shield of an LLC had anything to do with the Lanham Act or Maryland common law unfair business practices claims. Those were direct claims.

At a minimum, something like this would have been more accurate to end the paragraph stating the Sinsky would remain in the case: “Therefore, the allegations against plaintiff are sufficient, at this point, to support possible liability under the Lanham Act and Maryland common law unfair business practices claims, and there remains potential liability under a veil-piercing claim, making dismissal inappropriate at this time.” But again, I still think the veil-piercing statement would be wrong as applied, but a more accurate statement of the law.

Posted by: Joshua Fershee | Nov 16, 2017 6:01:47 AM

Hi Josh,

Thanks for the reply. First, I want to say I’m a regular reader of this blog, and I find it valuable for information, analysis, and BA teaching techniques. I hope you will consider me a “friend of the blog.”

I read the complaint and motion, too. I believe the judge merely mentioned veil-piercing as a plausible theory of relief supported by the allegations, along with the Lanham Act and unfair business practices. That was her job on a motion to dismiss – to “liberally construe” the allegations as supporting any plausible alternative claim for relief. The opinion doesn’t stand for more than that. I don’t think it was “improper” for her do this and I believe that assessment is a bit harsh.

But I do think this case is an example of “watch what you sign.” If a significant other asks you to sign the articles of organization of his or her LLC, don’t follow your heart. Ask a lot of questions!

Posted by: Jim Hayes | Nov 17, 2017 3:56:30 PM

Jim: I most certainly consider you a friend of the blog, and I very much appreciate your comments. I still maintain that the foray into veil piercing was unnecessary and ill conceived, but that’s okay. Reasonable people can disagree. I very much agree that this case is cautionary tale. Thanks very much for sharing your thoughts. I suspect you are not alone in your view.

Posted by: Joshua Fershee | Nov 18, 2017 6:15:41 AM

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