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

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.