Last week, probably without realizing it was doing so, the Iowa Supreme Court applied its piercing the corporate veil factors to a limited liability company for the first time. In Cemen Tech, Inc. v. Three D Industries, L.L.C., 2008 Iowa Sup. LEXIS 63 (May 2, 2008), the Court reaffirmed its 6-factor piercing test and applied the factors with respect to two Iowa LLCs.
The six factors are (1) undercapitalization of the LLC, (2) lack of separate books, (3) commingling its finances with individuals or paying obligations or debts owed by individuals, (4) using an LLC to promote fraud or illegal activity, (5) not following LLC formalities, and, the catch-all, (6) the LLC is a sham.
The Court failed to acknowledge that the fifth factor is inapplicable to Iowa LLCs because neither current law, Iowa Code Section 490A.603(2), or the new law, Iowa Code Section 489.304(2), permits a court to impose liability on the members of an LLC for failure to observe such formalities as holding periodic meetings.
The Court also needs to clarify whether the undercapitalization test is applied at the time the business is organized or at the time of the events giving rise to the litigation. As I will be writing about in a future blog, courts around the country view this issue differently.
-Marc Ward
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