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). ”
Under the Florida Limited Liability Company Act (F.S. § 608.701), in any case in which a party seeks to hold the members of a LLC personally responsible for the liabilities or alleged improper actions of the LLC, the court is to apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under the laws of this state. It may be significant that a similar statute was not enacted with RE-FRULPA, effective January 1, 2006, given the other changes made to the Florida LLC Act at the time.
The implications of the Olmstead decision on all LLCs remain to be determined and consumers and practitioners are well advised to monitor Legislative and/or court reaction to the decision.
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