Single Member LLCs and Piercing the Veil

As reported in earlier blogs, it appears that it is becoming easier in some states to pierce the veil of limited liability.  Take the case of Network Enterprises, Inc. v. APBA Offshore Productions, Inc., 264 Fed. Appx. 36,2008 U.S. App. LEXIS 2961 (2nd Cir. February 11, 2008).

In this case the Second Circuit Court of Appeals looked at the veil piercing requirements of the states of New York and Florida.  In New York to pierce the veil it takes (1) a showing of complete domination over  the corporation/LLC with respect to the transaction at issue and (2) such "domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." (underline added)

In Florida, it takes a showing that the corporation/LLC is the mere instrumentality or alter ego of the owner and the owner "engaged in improper conduct."  (underline added)

The Second Circuit concluded that the defendant completely dominated the LLC and was its alter ego (meeting both standards) because (a) he formed the company,  (b) he was the sole member, (c) he conducted all of its business, signed the checks, and signed the contract that was the center of the controversy, and (d) hold on to your hat, "operated the company from the same address where he maintained his law practice."

These characteristics describe the vast majority of single member LLCs in existence (modifying the last one to fit the circumstances).  In other words, according to the Second Circuit all one has to do is prove that a "wrong" has been committed or the defendant engaged in "improper conduct" in order to pierce the veil of a single member LLC.  Whatever happened to piercing being an extraordinary remedy that courts were reluctant to impose?  Whatever happened to fraud being a necessary element to pierce the veil?  Is a single member safe from personal liability only when they do right?  What of the risk-taker, the gambler, the fool?

Fortunately, Iowa looks at piercing a little differently.  Rather than focusing on domination or alter ego tests, the Iowa courts apply a six-factor test: (1) the corporation/LLC is undercapitalized, (2) it lacks separate books, (3) its finances are not kept separate from individual finances or individual obligations are paid by the corporation/LLC, (4) the corporation/LLC is used to promote fraud or illegality, (5) corporate formalities are not followed and (6) the corporation/LLC is a mere sham.

The six-factor test is certainly preferred.  Let us hope Iowa continues to apply it.

-Marc Ward