Limited Liability Protection Issues (Piercing of the Veil; Charging Order)
Closely-held business owners often select “limited liability” or corporate entities, out of a desire to achieve liability protection against piercing of the veil claims of individual creditors. The liability shield is often misunderstood, and may better be viewed as involving both an external and internal component. First, one can speak of the liability shield arising so as to protect the individual owners or insiders from claims of creditors seeking to pierce the corporate-like shield and hold the individual owners or insiders liable (i.e., piercing of the veil claims). Second, one can speak of the effort by creditors of owners of an entity seeking to foreclose on the interests of the owners, to potentially get at the assets of the entity (i.e., charging order claims). Unfortunately, breaking the analysis into these two components neglects to cover other legal theories that can arise (e.g., de facto merger, continuation theory, fraud, intentional torts, agency theory, and many more). That being said, owners can take some comfort when it comes to the limited liability protections offered by the LLC. Here in Florida, courts speak of a strict standard applying for those who wish to pierce the corporate veil of a LLC, Rosy Blue, N.V. v. Chad Davis & Davis & Assocs., LLC, 2008 U.S. Dist. LEXIS 42637 (M.D. Fla. 2008):
“[T]he Florida Supreme Court has imposed a strict standard upon those wishing to pierce a corporate veil. Generally, the rule is that the corporate veil will not be pierced absent a showing of improper conduct. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1121 (Fla. 1984) ; accord Steinhardt v. Banks, 511 So. 2d 336 (Fla. 4th DCA 1987). [*8] Under this standard, it must be shown that the corporation was organized or used to mislead creditors or to perpetrate a fraud upon them. See id. Three factors must be proven by a preponderance of the evidence: (1) the shareholder dominated and controlled the corporation to such an extent that the corporation's independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation; (2) the corporate form must have been used fraudulently or for an improper purpose; and (3) the fraudulent or improper use of the corporate form caused injury to the claimant. In re Hillsborough Holdings Corp., 166 B.R. 461, 468 (Bankr. M.D. Fla. 1994) (citing Dania Jai-Alai). Whether there has been improper conduct is a jury question.
Seminole Boatyard v. Christoph, 715 So. 2d 987, 990 (Fla. 4th DCA 1998). ”
On the other side, practitioners often will point to the charging order lien limitations on judicial efforts to foreclose on the interests in entities like Florida limited partnerships and LLLPs. See, e.g., F.S. § 620.1703(3)(modeled after a provision in Alaska, and specifically pointing out that charging order lien limitations set forth in Section 620.1703(1) set forth the “exclusive remedy” which a judgment creditor of a partner or transferee may use to satisfy a judgment out of the judgment debtor’s interest in the limited partnership or transferable interest” and how other remedies, including foreclosure on the partner’s interest in the limited partnership or transferable interest and a court order for directions, accounts, and inquiries that the debtor general or limited partner might have made are not available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited partnership and may not be ordered by a court).
However, when it comes to LLCs, practitioners must now deal with the fact that with the Florida Supreme Court's decision in Olmstead v. FTC, 2010 Fla. LEXIS 990 (June 24, 2010), courts are permitted to order foreclosuer of an interest of a judgment debtor's LLC interest in a single-member LLC, but only if a judgment creditor establishes to the satisfaction of the court that distributions under a charging order will not satisfy the judgment within a reasonable time. The controling section of the Florida Revised LLC Act is now found at F.S. Section 605.0503(4).
If you are an owner of a closely-held business entity and want to know more about piercing of the veil and charging order liens, especially when it comes to the Olmstead decision, please do not hesitate to contact us.
- General Overview
- Direct & Derivative Actions
- Effective Assessing Fidiciary Duties
- Piercing the Veil & Charging Order Issues
- Evaluating Developments in Single-Member LLCs
- Successor Liability & Continuation of Business
- Workouts & Bankruptcy