Early this month, the United States
District Court for the Middle District of
Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549, (M.D.Pa. 10-10-2013). The outcome of the case is not really objectionable (to me), but some of the
language in the opinion is. As with many courts, this court conflates LLCs and
corporations, which is just wrong. The
court repeatedly applies “corporate” law principles to an LLC, without
distinguishing the application. This is
a common practice, and one that I think does a disservice to the evolution of
the law applying to both corporations and LLCs.
I noted this in a Harvard Business Law Review Online article a while back:
Many courts thus seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).
To be clear, though, Pennsylvania law applies
equitable concepts, such as piercing the corporate veil, to LLCs. Still, courts should not discuss LLCs as
though they are the same as corporations or improper outcomes are likely to
follow. When dealing with LLCs, the
concept should be referred to as “piercing the LLC veil” or “piercing the veil
of limited liability.” Instead, though,
courts tend to discuss LLCs and corporations as equivalents, which is simply not accurate.
By way of example, the Gentex court
states:
Helicopterhelmet.com's principal place of
business is in South Carolina, while Helicopter
Helmet, LLC is a Delaware corporation with its principal place of business
also in South Carolina.
Gentex Corp. v. Abbott, 3:12-CV-02549, 2013 WL
5596307 (M.D. Pa. Oct. 10, 2013) (emphasis added). It is not!
It is a Delaware LLC!
Further, the court says:
From the record, it does not appear that
Helicopter Helmet LLC was
anything less than a bona fide independent corporate
entity, or that Plaintiff intends to allege as much.
Id. (emphasis
added). Again – no. An LLC is NOT a corporate entity. It is as, Larry Ribstein liked to say, an
uncorporation. In fact, I would argue that Pennsylvania law, in Title 15, is called Corporations and Unincorporated Associations for a reason. Chapter 89 of that title is called Limited
Liability Companies.
In fairness to Judge Brann, who wrote the Gentex opinion, Pennsylvania courts have merged the concepts of LLC and corporate veil piercing in other cases, even when discussing the
differences between the two. In Wamsley
v. Ehmann, C.A. No. 1845 EDA 2009 (Pa. Super. Ct. Feb. 28, 2012), summarized nicely here, the court
explained:
These factors [for determining whether to
pierce the veil] include but are not limited to: (1) undercapitalization; (2) failure
to adhere to corporate formalities; (3) substantial intermingling of corporate
and personal affairs; and (4) use of the corporate form to perpetrate fraud. [citing Village at Camelback
Property Owners Assn. Inc.] . . .Certain corporate formalities may be relaxed
or inapplicable to limited liability corporations and closely held companies.
Advanced Telephone Systems, Inc., supra at 1272. An LLC does not need to adhere to
the same type of formalities as a corporation. Id. (finding lack of financial statements,
bank accounts, exclusive office space, and tax returns was not evidence of
failure to adhere to corporate formalities because entity was LLC with limited
scope). In fact, the appropriate formalities for an LLC “are few” and,
depending on the purpose of the LLC, it may not need to be capitalized at all.
Id. Moreover, not all corporate formalities are created equal. Id. at 1279. To
justify piercing the corporate veil, the lack of formalities must lead to some
serious misuse of the corporate form. Id.
Okay, got
that? The rules that apply to
corporations apply to LLCs. Except when
they don’t because LLCs are sometimes different. To justify piercing the “corporate veil,” then, an LLC must have seriously misused the corporate form, even though an LLC is a
distinct form from the corporation. This is not especially helpful, I am afraid.
Veil piercing is
difficult enough to plan around, and the seemingly random nature of veil
piercing is often noted (with some, such as Prof. Bainbridge, arguing that we should do away with it altogether). There has not been much of a move to abolish veil piercing, and there hasn't even been much progress to make the standards for veil
piercing more clear. Still, given the prevalence of LLCs, it’s high time courts at least help
LLC veil piercing law evolve into murky standards specifically designed for
LLCs. That doesn’t seem like too much to
ask.