Tuesday, March 4, 2014

Kentucky Court of Appeals Affirms Piercing the Veil of an LLC (Although it is Not Clear This is a Piercing Case)

Kentucky Court of Appeals Affirms Piercing the Veil of an LLC
(Although it is Not Clear This is a Piercing Case)

In a recent decision, the Kentucky Court of Appeals affirmed the determination to pierce the veil of an LLC and hold the members thereof liable on a pre-dissolution contract.  Mountain Paving and Construction, LLC v. Workman, 2014 WL 272463, No. 2012-CA-001822-MR (Ky. App. Jan. 24, 2014).  (Not to be Published). 
Mountain Paving and Construction, LLC was owned by Sam Doyle and James Boyd.  Workman contracted, in 2007, for Mountain Paving to pave his driveway.  The performance on that job was unsatisfactory.  Because weather and equipment problems precluded redoing the job right away, Boyd, on a “company printed proposal pad”, wrote:
I agree to come and spray and re-surface with 1½” of asphalt and 100% signed garentee (sic) for 1 yr after resurfacing.
Workman paid $8,000 for this job to be done.  Mountain Paving did not, however, in 2008 return to re-do the job.  As described by the Court of Appeals, “Mountain Paving was dissolved as a  [LLC] shortly” after this written document was presented to Workman.
As to the timing of the dissolution vis-à-vis the giving of the written document, the opinion is rather confusing.  The LLC was administratively dissolved on November 3, 2009, and was then both reinstated and affirmatively dissolved on April 6, 2010.  Either way, the dissolution appears to have occurred at least two years after the written document quoted above was presented.
Regardless, Workman filed suit against Mountain Paving, Doyle and Boyd for failure to perform upon the contract.  The opinion states that the suit was initiated on June 11, 2007, but this would appear to be an error if the earlier statement that the initial contract was entered into in 2007 is correct.  Regardless, Workman asserted that:
Doyle and Boyd transferred the assets of the [LLC] to themselves without paying its lawful debts, and that the corporate veil should be pierced to hold them individually liable.
Ultimately, a jury would award Workman $6,000 in damages.  At a subsequent bench trial, it was determined that the LLC should be pierced and Doyle held liable on the claim.  The decision of the Court of Appeals does not indicate that any liability for the LLC’s obligations was imposed upon Boyd.  This is curious in that it was Boyd who gave the “garentee” document to Workman.
The Court of Appeals began by reciting the statutory rule that the members of an LLC are protected from liability on its debts and obligations.  KRS § 275.150(1).  The Court then referenced the rule of piercing the corporate veil as applied to corporations, noting that:

There is no legal basis why this equitable doctrine should not also be applicable to LLCs. 
After reviewing the factors for piercing identified in Inter-Tel Technologies, the court recited the factual finds that it alleged support same.  Curiously, throughout the court refers to an LLC as “the corporation.”  The balance of the Court of Appeals’ decision responds to the defendant’s assertions that the individual factors that justify piercing were not in this instance satisfied.  Ultimately, the Court of Appeals would find that the decision of the trial court were sufficiently supportive of those determinations and were not clearly erroneous. 
So there you have it, the Court of Appeals applying the law applicable to piercing the veil of a business corporation to piercing the veil of an LLC.  The decision is, however, unsatisfactory on a number of bases.
First, the Court nowhere explains that why it is that Doyle should be held liable for the LLC’s debts, rather than being a joint obligation of Doyle and Boyd.
Second, the LLC Act provides rules by which an LLC may dissolve, including the distribution of assets.  Essentially, upon dissolution, company assets must first be applied to the satisfaction of creditor claims.  Clearly, Workman was a creditor of the LLC.  If and to the extent company assets were distributed to one or more of the members before the satisfaction of those claims, the members were liable to return those assets to the LCC in order that they could be properly diverted to the creditor’s claim.  See KRS § 275.310; § 275.325(4)(b).  If, as asserted by Workman, the members of Mountain Paving “transferred the assets of the [LLC] to themselves without paying its lawful debts,” then there was a statutory mechanism by which those assets could be recovered without reference to the equitable remedy of piercing.  Rather, the General Assembly having determined how this factual situation should be addressed, there should have not have been reference to other law.
Also of concern is the court’s reliance upon the fact that certain of the equipment utilized by Mountain Paving was in fact owned by Doyle.  First, with respect to the assertion that the company assets were transferred back to the members, if that equipment had never been conveyed by Doyle to the LLC, it was not the LLC’s with which to satisfy its debts or obligations.  Second, it is not uncommon that business owners will retain in their personal ownership certain assets that are utilized by the business venture.  In Stettenbenz v. Butch’s Rod Shop, 2013 WL 4779862 (Ky. App. Sept. 6, 2013), a decision involving a claim for piercing that is reviewed HERE IS THE LINK, the fact that the individual owners owned the tools used in the shop was not a basis for piercing the veil.
Piercing law is maddingly murky in that piercing is an equitable remedy that within the constraints of the various decisions is based upon the judge’s assessment of the equities.  For this reason, it is especially incumbent upon the courts to clearly and precisely identify what is and what is not the basis for a determination to pierce.  Sadly, this decision does not meet that standard.

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