Kentucky Court of
Appeals Affirms Piercing the Veil
In a decision rendered last
Friday, the Kentucky Court of Appeals affirmed the determination that the veil
of an LLC should be pierced, primarily on the basis, it would appear, that the
company was undercapitalized. Roscoe v.
Angelucci Acoustical, Inc., No. 2012-CA-001933-MR, 2014-CA-000536-MR, 2017
WL 655488 (Ky. App. Feb. 17, 2017).
In 2006, Lexhold Partners II Lot
14-A Exclusive, LLC (“Lexhold Partners”) was awarded the contract to construct
a building now occupied by Hewlett-Packard. Although, apparently, the property
is owned by the University of Kentucky, Lexhold Partners holds the lease vis-a-vis
Hewlett-Packard. In order to affect this project, another LLC, Lexhold Premier Commercial
Contractors, LLC (“Premier”), was formed. Upon completion of the project, Premier
was dissolved. Roscoe, one of the defendant in this action, was one of the two “managing
partners” of each of Lexhold Partners and Premier. It should be noted that, throughout this opinion, partnership and
corporate terminology is intermixed even as the decision is about an LLC.
Premier subcontracted with Angelucci
Acoustical, Inc. (“Angelucci”) for the installation of drywall and acoustical
ceilings. That subcontract had a price of $396,240.30. The building was
completed, and occupancy undertaken, even as Angelucci continued to complete
certain tasks. Angelucci alleged that it incurred an additional $88,053.70 in
completing those additional task, while Roscoe alleged that they were simply
additional punchlist items included in the original purchase price. Angelucci
filed suit against Premier, Lexhold Partners and Roscoe seeking those additional
amounts. Angelucci sought and was awarded partial summary judgment; that ruling
became final, and Roscoe did not appeal.
Nearly a year later, on bases
not fully identified in this decision, the trial court pierced the “corporate”
veil of Premier (the general contractor) to hold Roscoe liable on the
$88,053.70 (plus interest) judgment. This appeal followed. However, in
connection therewith, Roscoe did not file a supersedeas bond. Roscoe thereafter
failed to comply with requirements as to judgment discovery and,
notwithstanding having entered into a settlement agreement in the amount of
only $30,000, he failed to discharge that obligation. After hearing, the trial
court issued a judgment against Roscoe totaling $334,785.34, which amount
included compensatory and punitive damages and attorney’s fees. Roscoe then
filed this appeal.
With respect to the piercing
claim, the decision of the Court of Appeals is somewhat cryptic as to why that
was permitted. It appears that facts justifying piercing were as follows:
·
“the two managing
members of the Lexhold Partners are the same to managing members of Lexhold Premier,
Roscoe and Oliver. They developed Lexhold Premier Commercial Contractors, LLC
solely for the purpose of serving as the general contractor for the project.
This construction project was the only asset of Lexhold Premier.”; and
·
in two instances,
Lexhold Partners was identified as the “owner” of the property (Angelucci was
not a party to either of these agreement).
Quoting from the trial court,
the Court of Appeals observed that:
As in Inter-Tel, Lexhold Partners caused Lexhold Premiere to be obligated
to pay Angelucci for work performed on the subject property and then rendered
it unable to pay. Lexhold Partners limited the value of the sole asset of
Lexhold Premiere and caused it to bear the brunt of the failure to pay
subcontractors while Lexhold Premiere derive the benefit of the improvements to
real property by its lease agreement with the landowner and agreement with HP.
Similarly, it appears that the
second scenario identified in Inter-Tel
applies as all assets that could or should have been part of Lexhold Premiere
were moved beyond the reach of legitimate creditors and have been retained
largely by Lexhold Partners. Roscoe concedes that Premiere was formed for the
sole purpose of trying to escape the hassles and liabilities associated with
being a general contractor[,] and he and Oliver wanted to keep the money “in
house.” Premiere had no assets other than the $5,247,000 contract with Lexhold Partners
and was in Roscoe’s terms a “pass-through.” Moreover, Partners has reaped all
of the benefits from this construction project and currently receives revenue
from its lease with the sole tenant of the building, Hewlitt-Packard. That was
the purpose of its original lease with “Commonwealth of Kentucky for the use
and benefit of the University of Kentucky acting by and through the Board of
Trustees of the University of Kentucky.” To allow Partners and Roscoe to escape
liability under these circumstances would, in fact, sanction fraud and promote
injustice against Angelucci and the other subcontractors.
What steps were undertaken by
Roscoe in order to render Lexhold Premier unable to satisfy its obligations,
thereby effectuating a fraud, was not detailed by the Court of Appeals. In the
underlying opinion and order issued by the Fayette Circuit Court (Judge Goodwine),
it had been found that:
[B]oth Lexhold Premier and Lexhold
Partners worked on the same project and had no other business. Lexhold Premier’s
sole asset was its contract with Lexhold Partners. The two companies have the
same member-managers and nearly identical operating agreements. Minutes were
not kept for company meetings. Bill Boshong performed work for both entities
but Lexhold Partners paid the entire amount of his bill. Derek Roscoe only
performed work for Lexhold Partners but was paid by Lexhold Premier as well.
Lexhold Partners paid cost attributable to Lexhold Premier, and vice versa.
Slip op. at 8.
Then, after reciting a number
of other circumstances in which the companys’ assets were apparently
intermingled, it was observed that:
It is clear to this Court that Lexhold
Partners and/or Roscoe exercise complete dominion and control over Lexhold
Premier. Roscoe and/or Oliver provided for or guaranteed 100% of the startup
costs to fund Lexhold Premier. They set the contract amount of $5,247,000 that
they would pay Lexhold Partners, i.e themselves.
There is no evidence that Lexhold Premier followed any corporate formalities;
Roscoe and/or Oliver used the companies’ that funds interchangeably and funds
from one paid the expenses of the other. Whether premier was paid the $5,247,000
due under its contract with Partners was solely within the discretion of
Partners. Roscoe conceded that Premier paid him certain “expenses which
connected to his work" on the project. He also conceded that he directed Premier
to pay his son sums that he believed were due him. Slip op. at 10.
The court would go on to find
that the assets of Lexhold Premier, the general contractor, had been “moved
beyond the reach of legitimate creditors and have been retained largely by Lexhold
Partners,” with the result that “Partners has reaped all of the benefits of
this construction project and currently receives revenue from its lease with
the sole tenant of the building, Hewlett-Packard. … to allow Partners and
Roscoe to escape liability under these circumstances would, in fact, sanctions
fraud and promote injustice against Angelucci and the other subcontractors.”
Slip op. at 11-12. Again, how the assets were moved so as to be unavailable to
Angelucci and other creditors is not detailed.
From that same order it becomes
clear that the question of the name of the property owner relates to a
challenge to Angelucci’s mechanics lien.
From the perspective of the law
of piercing, this decision is in several respects disturbing. First, while on
the facts piercing may have been justified, the Court of Appeal’s affirmance
without a detailed recitation of those facts leaves the reader wondering what
truly happened. Second, the continued reference to the “corporate” veil in the
context of an LLC is simply incorrect and as well glosses over the problem that
the courts have not identified whether and to what extent the Inter-Tel Technologies test for piercing
will be different for LLCs versus corporations. Third, justifying, at least in
part, the piercing of an LLC based upon the failure to satisfy “corporate
formalities” is at best confusing. While corporations are obligated to have
meetings and keep minutes, the LLC Act does not require either meetings or
minutes. If, in this particular case, the operating agreement dictated that
meetings would be held and minutes kept, then there may have been a failure to
follow a contractually assumed obligation. If that was the case, it was not
detailed by either the Court of Appeals or the trial court. Conversely, if
there was no such contractual obligation, supporting a ruling on piercing based
upon the failure to do what is not required is nonsensical.
More broadly, the courts’
language with respect to related special-purpose business organizations is very
troubling. Blanket statements to the effect that the companies were related and
had the same members/management structure, and on that basis piercing was justified,
dangerously simplifies proper piercing analysis. It has long been the law that
the organization of various business ventures for the purpose of limiting
liability (i.e., partitioning various asset pools into different ventures with
the intent and objective of exposing each to only a certain class of creditor
claims) is an accepted business practice. There is no question that the
utilization of these structures in an abusive manner should not be allowed and
that piercing should be a possible remedy for that abuse. The structures
themselves are not, however, ab initio
abusive or improper, and flippant language to the effect that related ventures
should, for that reason, be pierced is unjustified. Rather, while related,
special-purpose entities may be particularly at risk for violating the rules as
to when piercing is justified, there should not be any implication that
piercing is justified because of relatedness.
