An ill-fated wind turbine project in Southeast Wyoming sets the unlikely stage for a court’s encyclopedic corporate liability history lesson. In Greenhunter Energy, Inc. v. Western Ecosystems Technology, Inc., 2014 WY 144, 337 P.3d 454 (Wyo. 2014), the Wyoming Supreme Court traces the evolution of the corporate form (and later, the equitable piercing the corporate veil remedy), from its pre-Biblical origins through the modern day where the limited liability company is the business vehicle of choice for start-ups and entrepreneurs across the country.
The plaintiff got about a $44K judgment against an LLC defendant for consulting work the plaintiff did as part of a wind turbine development. In post-judgment discovery, the plaintiff learned that the LLC was controlled in every way by its parent company – a publicly-traded entity – who decided what LLC creditors would and wouldn’t be paid.
The plaintiff then added the corporate parent as a defendant and the lower court pierced the LLC’s veil of protection and found the parent company responsible for the judgment. Affirming the piercing judgment, the Wyoming Supreme Court held:
– the cardinal features of an LLC are limited liability and flexibility. LLC’s have the personal liability protections of a corporation with the taxation benefits of a partnership (no “double taxation” at entity and personal levels, e.g.);
– Wyoming’s LLC Act provides that a failure of an LLC to observe corporate formalities isn’t enough to impose liability on LLC members or managers for LLC obligations (Wyo. Stat. Ann. s. 17-29-304).
– although Wyoming’s LLC Act provides that LLC members aren’t responsible for an LLC’s debts, an LLC’s veil of limited liability can be pierced where there is a unity of interest between the LLC and a dominating person or entity, and where recognizing corporate existence will lead to injustice or sanction a fraud;
– A Wyoming LLC can be pierced not only where there is actual fraud (misrepresentation of fact, scienter, reliance, damages, e.g.) but also where there is constructive fraud – conduct that doesn’t rise to the level of (intentional) fraud but is treated the same because of its similar harmful consequences;
– Two key factors involved in the piercing equation include undercapitalization and commingling: the degree to which a business is intermixed with the affairs of its member;
– No single factor is determinative on its own and the court’s piercing calculus is fact-driven.
The defendant and the LLC were separate entities and had separate bank accounts. Still the court upheld the lower court’s piercing of the LLC’s corporate veil to bind the defendant.
The undercapitalization factor weighed heaviest in the court’s analysis. There is no magic capital infusion number that equals adequate capitalization. The court noted that over a several-month period during the time plaintiff was submitting bills to the LLC, that it (the LLC) had a zero bank balance and that the defendant dictated what bills the LLC would and wouldn’t pay.
Since the LLC was continually unfunded by choice instead of by external market forces, the LLC was inadequately capitalized. (¶¶ 40-43).
The court also found that the LLC and its corporate parent intermingled their business and finances. Key facts cited by the court included: (i) the same accountants managed both the LLC’s and the defendant’s finances; (ii) the LLC didn’t have any employees. Instead, defendant’s employees negotiated and inked contracts for the LLC; (iii) the LLC had no revenue separate from the defendant and the defendant used the LLC to “pass through” funds for bill payment; and (iv) the defendant claimed tax deductions for the LLC’s business without assuming responsibility for any of the LLC’s debts.
In short, the defendant enjoyed all the benefits of an LLC without also shouldering the responsibility for its operation. (¶¶ 44-45).
Q: But Shouldn’t the Plaintiff Have Gotten A Guaranty?
The defendant’s last argument was that the plaintiff should have protected itself by insisting on a guaranty from the corporate defendant. The court rejected this, noting that the “reality of the marketplace” is that companies like the plaintiff are often in a competitively vulnerable position compared to large corporations like the defendant and lack the leverage to require a guaranty from the corporation.
Taken together, these factors led the to find the conditions ripe for piercing and held the defendant responsible for the judgment.
A significant opinion for its exhaustive analysis of piercing litigation with a special focus on piercing an LLC.;
Piercing was allowed here even though there was no finding of actual or constructive fraud and where Wyoming’s LLC Act specifically provides that LLC members are not liable for LLC debts;
Time will tell whether this case and others like it will embody a major change in corporate liability law making it easier to pierce the veil of limited liability where a dominant entity controls a weaker, affiliated one.
A special thanks to Robert Ansell of Silverman Acampora (Jericho, NY) for alerting me to this