Wyoming

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Okay, so limited liability is probably not going away, though it appears that some would have it that way. “Eroding” is probably a better term, but that’s less provocative.  

In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case  (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.

One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing.  Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard.  Neither of these outcomes is productive.  

In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.”  To begin:

+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership,

…

 The Supreme Court of Wyoming recently decided to pierce the limited liability veil of a single-member LLC.   Green Hunter Wind Energy, LLC (LLC), had a single member: Green Hunter Energy, Inc. (Corp). LLC entered into a services contract with Western Ecosystems Technology, Inc. (Western).  The court determined that veil piercing – thus allowing Western to recover LLC’s debts from Corp – was appropriate for several reasons. I think the court got this wrong.  The case can be accessed here (pdf).  

The court provides the following rule for piercing the veil of a limited liability company, providing three basic factors 1) fraud; 2) undercapitalization; and 3) “intermingling the business and finances of the company and the member to such an extent that there is no distinction between them.”  The court noted that the failure to following company formalities was recently dropped as a factor by changes to the state LLC statute.

Here’s where the court goes wrong: 

(1) As to undercapitalization, the court completely ignores the fact that Western freely contracted with the LLC with little to no cash.  If Western wanted the parent Corp to be a guarantor, it could have required that. If Western thought LLC was acting…