Wednesday, June 22, 2016

Once Again, An LLC and Its Members Are Legally Distinct

Once Again, An LLC and Its Members Are Legally Distinct
      In a recent decision by a federal court in Virginia, the court held, inter alia, that “Question Eight” on an insurance application about prior criminal acts of the “applicant,” where the applicant for the insurance policy is the LLC, did not extend to any criminal activity by that LLC’s sole member. Jeb Stuart Auction Services, LLC v. West American Insurance Co., Case No. 4:14-cv-00047 (2016 WL 3365495 (W.D. Va. June 16, 2016).
      Jeb Stuart Auction Services, LLC (“Jeb Stuart”) was a single member LLC wholly owned by Robin Hiatt. Jeb Stuart applied for an insurance policy to be issued by West American, West American being represented by Burch Hodges Stone, Inc. With respect to a question on the application regarding certain criminal convictions within the past five years, the “Question Eight,” Hiatt, on behalf of Jeb Stuart, answered “no.” While it was true that the LLC had not been convicted of any such crime, Hiatt had himself, within that time period, been convicted of insurance fraud. Ultimately the insured property would suffer a fire loss. In investigating the claim, counsel for West American learned of Hiatt’s criminal convictions. On the basis thereof, West American denied the claim. Needless to say, that lead to litigation.
      This decision is focused upon whether Jeb Stuart could recover from West American attorney’s fees expended in successfully challenging the denial of coverage. In the course of this opinion, however, the Court refers to certain prior summary judgment determinations it had made to the effect that, while Hiatt may have been the sole member of Jeb Stuart, Hiatt’s crimes were not attributable to and were not those of Jeb Stuart. Specifically, the Court wrote:
At the summary judgment stage, I held that, by its terms, Question Eight only addressed the “applicant’s” criminal history and that, because Jeb Stuart was a legal entity separate and apart from Hiatt, Hiatt’s answer to Question Eight was correct. As a result, West American wrongfully voided Jeb Stuart’s policy and was liable for the appropriate coverage. (citation to record and footnote omitted).

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