Monday, December 22, 2014

Failure to Pay Rent Not Sufficient to Pierce LLC Veil

Failure 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 be assessed.


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 $532 500 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 both Wilmington 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 and therefore unenforceable as a penalty. On appeal, RLR challenged the determination 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 Horsemen so that it committed an illegal act or similarly unlawful act. Instead, the evidence established that Wilmington Horseman simply failed to make timely rent payments since December 2005 and owes RLR $302,594 in unpaid rent. Breach of contract without more is insufficient conduct 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 ambiguous and therefore unenforceable. The guarantees themselves contained at expiration date (i.e., they did not run the same term as did the underlying lease). Finding no ambiguity, the Court of Appeals enforced the guarantees 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 incurred prior 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 incurred by reason of the failure to timely satisfy the obligations under the lease.

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