A new case, out just yesterday from the Southern District of Ohio, makes a mess of LLC veil piercing law. It appears that the legal basis put forth by the court in granting a motion to dismiss a veil piercing claim was probably right, but the statement of veil piercing law was not quite there.  

The case is ACKISON SURVEYING, LLC, Plaintiff, v. FOCUS FIBER SOLUTIONS, LLC, et al., Defendants., No. 2:15-CV-2044, 2017 WL 958620, at *1 (S.D. Ohio Mar. 13, 2017).  Here are the parties: the defendant is FTE Networks, Inc. (FTE), which filed a motion to dismiss claiming a failure to state a claim. FTE is the parent company of another defendant, Focus Fiber Solutions, LLC (Focus). The plaintiff, Ackison Surveying, LLC (Ackison) filed  a number of claims against Focus, added an alter ego/veil piercing claim against FTE. Thus, Ackison is, among other things, seeking to pierce the veil of an LLC (Focus). Focus appears to be a Pennsylvania LLC, based on a search here.

Pennsylvania law provides the liability cannot be imposed on a member of an LLC for failing to observe formalities. The law states: 

The failure of a limited liability partnership, limited partnership, limited liability limited partnership, electing partnership or limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a partner, member or manager of the entity for a debt, obligation or other liability of the entity.
15 Pa. Stat. and Consol. Stat. § 8106 (2017). 
 
However, the S.D. Ohio court states that a threshold question of whether an LLC’s veil can be pierced includes an assessment of the following factors: 
(1) grossly inadequate capitalization,
(2) failure to observe corporate formalities,
(3) insolvency of the debtor corporation at the time the debt is incurred,
(4) [the parent] holding [itself] out as personally liable for certain corporate obligations,
(5) diversion of funds or other property of the company property [ ],
(6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the [parent company].
ACKISON SURVEYING, LLC, Plaintiff, v. FOCUS FIBER SOLUTIONS, LLC, et al., Defendants., No. 2:15-CV-2044, 2017 WL 958620, at *3 (S.D. Ohio Mar. 13, 2017) (alterations in original). 
 
The opinion ultimately find that the complaint made only legal conclusions and failed to provide any facts to support the allegations of the LLC as an alter ego of its parent corporation, and further determined that a proposed amended claim was equally lacking.  As such, the court dismissed FTE from the case.  This conclusion appears correct, but it still suggests that, in another case, one could support a veil piercing claim against an LLC by showing that the LLC’s “failure to observe corporate formalities,” formalities it may have no legal obligation to follow.  
 
This remains my crusade. When courts get cases like this, they should (at a minimum) provide a clear veil piercing law for LLCs that accounts for the differences between LLCs and corporations.  I keep saying it, again and again, and I will keep beating the drum. If state law allows for LLC veil piercing, then fine, but get the law right. LLCs and corporations provide limited liability for their residual interest holders, but they are not the same entity. You Can’t Pierce the Corporate Veil of an LLC Because It Doesn’t Have One, but the LLC does have a limited liability veil.  In cases such as these, courts should take the time make the law clearer so that future courts can stop applying the incorrect standards.  And lawyers bringing such cases could help, too, by framing their claims and responses appropriately.  Please.