Monday, March 28, 2016

Wyoming Amends LLC Act to Make Piercing the Veil at Least More Difficult

Wyoming Amends LLC Act to Make Piercing the Veil at Least More Difficult

       The Wyoming legislature has passed, and it should be assumed that it will go into law, changes to its LLC Act making the equitable remedy of piercing the veil of an LLC at minimum more difficult and except in highly unusual circumstances perhaps impossible. Act No. 45, 60-3rd legislature of the State of Wyoming, amending Wyoming Statute § 17-29-304. Based upon a legislative fact sheet, these changes are in response to the Green Hunter decision of last year. Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014). HERE is a link to my prior review of the Green Hunter decision.

      Section 17-29-304 addresses the limited liability enjoyed by the members and managers of a Wyoming LLC. The Statute has been amended to add new subsections (c) and (d), they providing:
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:
(i)         Fraud;
(ii)        Inadequate capitalization;
(iii)       Failure to observe company formalities as required by law; and
(iv)       Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them.
(d)  In any analysis conducted under subsection (c) of this section, a court shall not consider factors intrinsic to the character and operation of a limited liability company, whether a single or multiple member limited liability company.  Factors intrinsic to the character and operation of a limited liability company include but are not limited to:
(i)         The ability to elect treatment as a disregarded or pass-through entity for tax purposes;
(ii)        Flexible operation or organization including the failure to observe any particular formality relating to the exercise of the company’s powers or management of its activities;
(iii)       The exercise of ownership, influence and governance by a member or manager;
(iv)       The protection of members’ and managers’ personal assets from the obligations and acts of the limited liability company.

      With respect to the four factors set forth in (c), it is noteworthy that there must be a combination of any of factors (ii) through (iv); in effect, none of them, standing alone, will be sufficient to justify piercing the veil. Yes, while any of the factors (ii) through (iv) could be combined with (i), that being “fraud,” to justify piercing, that step will presumably never be reached in that, upon a finding of fraud, presumably piercing will take place.
      The statute goes on to provide that a nonexclusive list of “factors intrinsic to the character and operation of an LLC” will not support a conclusion to pierce. New Section 17-29-304(d)(iii) is particularly interesting as it could be interpreted to the effect that traditional “alter ego” analysis is inapplicable as either a justification for piercing or as a contributing factor towards piercing.
      There is also been deleted from the Act Section 17-209-304(b), a provision which previously indicated a failure to observe formalities as to the operation and management of an LLC, nor an election be treated as a disregarded entity for federal income tax purposes, was sufficient to justify setting aside the otherwise applicable rule of limited liability.
      Thanks to Bob Keatinge for the lead.

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