Business Disputes

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.

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). Compare, F.S. § 608.433(4)(LLCs).

Evaluating the Latest Developments in the World of Single-Member LLCs

Special regard may need to be given in Florida to single-member LLCs.  In Federal Trade Commission v. Olmstead, 528 F.3d 1310 (11th Cir. 2008), the United States Court of Appeals for the Eleventh Circuit certified a question to the Florida Supreme Court as to whether a court might order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC company to satisfy an outstanding judgment, notwithstanding the language appearing in F.S. § 608.433(4).  The FTC argues that even though the plain text of the LLC Act does not distinguish between a single-member and multiple-member LLCs, the “overall statutory context” suggests that a charging order limitation is “senseless” and cannot be the exclusive remedy, given that the remedy itself originated out of common law concerns to protect nondebtor partners from being forced unwillingly into partnership with a creditor. The court there noted how “both parties rely on well-established canons of statutory construction.” Olmstead claims that where a statute is clear and unambiguous, courts are not to look beyond the statute’s plan language for legislative intent, while the FTC counters that there is a “cardinal rule of statutory construction” which states that a “legislature does not intend to create statutes that lead to an unreasonable or ridiculous result.” 

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, please contact us.