This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Monday, December 22, 2014
Failure to Pay Rent Not Sufficient to Pierce LLC Veil
to Pay Rent Not Sufficient to Pierce LLC Veil
In a recent decision from Ohio, it was held that the failure of a
LLC to pay certain rental payments in accordance with the lease was not, but
self, conduct sufficient to pierce the LLC’s veil and impose liability on its
members.R.L.R. Investments, LLC v. Wilmington Horsemens Group, LLC, No. CA
2013-09-017, 2014 WL 5422203 (Ohio Ct. App. Oct.. 27, 2014).
Wilmington Horsemens Group, LLC was a tenant of RLR Investments.
Each of the members of Wilmington guaranteed the obligation to RLR under the
lease.The lease provided that, in the event rent was not paid within 10 days of the due date, a late charge of $500 per day would
Wilmington fell behind on its lease payments at a time when $302,594
was due and outstanding.In addition, there was alleged to be owed a further $532500 of late fees. RLR, in addition to seeking to hold the members liable under their personal guarantees of the lease, sought as well to pierce the veil of the LLC. Presumably, although this is not provided for in the opinion, they sought to do so in order to avoid certain limitations on enforcement that are available to guarantors and other sureties.
Ultimately, RLR moved for summary judgment against
and its members on the breach of contract claims; in response the members of Wilmington moved for summary judgment
on our RLR’s attempt to pierce the LLC’s veil. Ultimately, summary judgment would be granted RLR on its claims against the LLC under the lease, while at the same time summary judgment was granted to
the members to the effect that the veil of the LLC would not be pierced. In addition, it was found that the late fee of $500 per day was unconscionable
a penalty. On appeal, RLR challenged
that the LLCs veil should not be pierced and that the late fee is unenforceable.
As to the effort to pierce the LLC’s veil, the court reviewed Ohio law as to piercing the veil of a corporation; at no point did it raise, much less expand upon, any distinctions
to be made when considering
the LLC rather than a corporate veil. That said, the court found it was improper for the trial court to require RLR to plead all the elements of fraud in making a claim for piercing. Still, the determination
to dismiss the piercing claim was upheld as there was no evidence that the members "managed Wilmington
that it committed an illegal act or similarly unlawful act. Instead, the evidence established
failed to make timely rent payments since December
2005 and owes
RLR $302,594 in unpaid rent. Breach of contract without more is
to pierce the corporate
veil.” Slip op. at ¶ 17; 2014 WL 5422203, *4.
Even as RLR lost in its effort to pierce the LLC’s veil, it was successful
in reversing the
trial court's determination
that the guarantees were
therefore unenforceable. The guarantees themselves contained
date (i.e., they
did not run the same term as did the underlying
lease). Finding no ambiguity, the Court of Appeals enforced
for all liabilities incurred
prior to the expiration
date. “While the Individuals would
not be liable under the Guaranty for any liabilities incurred
pursuant to a contract after the Guaranty expired, the Individuals’ liabilities were
to the expiration of the Lease. Therefore, the Individuals are
liable for the entire breach of contract damages.” Slip op at ¶ 26, 2014 WL 5422203, *7.
Turning to the late fees, after reciting
Ohio law with respect to the excess liquidated
damages, they were held
to be an unenforceable
penalty in part because RLR failed to put forth evidence
that the amount of the late fee had any relationship
to the additional cost
by reason of the failure to timely satisfy the obligations under the lease.