Wednesday, July 27, 2016

Alter Ego Applied to “Reverse Pierce,” But We Don’t Know on What Grounds

Alter Ego Applied to “Reverse Pierce,” But We Don’t Know on What Grounds
      A July 15, 2016 decision of the Court of Appeals upheld the treatment of an LLC as being the alter ego of its sole member, in effect reverse piercing the LLC to make its assets available to satisfy a debt of the sole member.  Unfortunately, the decision does not detail the basis for the alter ego determination.  Lee v. Lee, No. 2014-CA-000387-MR, 2016 WL 3886884 (Ky. App. July 15, 2016).
      This dispute had its inception in the Lee’s divorce.  John Lee was held liable for Jill’s attorney fees to the sum of $70,000.  In December, 2011, John’s company, Lee Development Group d/b/a Acceleris, was found to be jointly and severally liable on that $70,000 judgment.  The opinion is silent as to the basis on which that determination was made.  In May, 2012, the Acceleris bank account was garnished.  In May, 2012, John formed a new company, Acceleris LLC.  Learning of it, the Plaintiffs sought to garnish its accounts on the basis that it was John’s alter ego.  That order of garnishment was entered.
      The substance of the decision was upon whether the trial court properly complied with the garnishment statute, KRS § 425.501, and not upon the finding of alter ego. Rather:
On appeal, the Appellants do not challenge any of the court’s factual findings regarding “alter ego” liability; rather, they contend the garnishment order was void ab initio because Appellees did not have a final judgment against Acceleris, LLC, before obtaining the order of garnishment. Slip op. at 3 (footnote omitted).
      Upholding the garnishment against Acceleris, LLC on the basis it was John Lee’s alter ego, the Court of Appeals quoted the trial court’s findings of fact.

Mr. Lee testified that he was the sole member of Acceleris, LLC, and that he alone made all the managerial decisions.
Mr. Lee acknowledged that he used money from Acceleris, LLC, to pay personal debt.  Introduced as an Exhibit is a copy of a check on an Acceleris, LLC, account made payable to the Internal Revenue Service, which he acknowledged was used to pay his personal back taxes.  Mr. Lee also testified that he used Acceleris, LLC, funds to fund his son’s baseball team.  Mr. Lee contended that Acceleris, LLC, funds that were used to pay personal debt was salary.  He further acknowledged that funds from Acceleris, LL, were used to pay his personal providers.
Mr. Lee acknowledged that he opened a checking account with a bank located in Indiana.  When questioned as to whether he opened the account to avoid garnishment, he stated that he did business with his business associates.  As to the Acceleris, LLC, bank account, Mr. Lee testified that he used his personal social security number to identify the account even though Acceleris, LLC, has its own Federal ID number.
      It would be comforting to have more details as to why the finding of alter ego was justified.  For example, being a single member LLC is by statute not a basis for piercing the veil.  See KRS § 275.150(1).  As for paying personal expenses out of the LLC, were the examples given typical or atypical versus all company activities?  Is any use of company funds to pay personal expenses sufficient to support a finding of alter ego, or must there be some higher threshold?  That point was not addressed.  Yes, I know the alter-ego finding was not appealed, but if not appealed why this quotation as to why alter-ego treatment was appropriate?
      This decision is one of only a few that have addressed reverse piercing in Kentucky.  I submit it deserved a more detailed analysis, especially as it is designated “to be published.” 

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