In the March 2010 decision of Naples v. Keystone Bldg. & Dev. Corp., 295 Conn. 214, the Connecticut Supreme Court ruled that courts will not pierce the corporate veil of an LLC without a showing of fraud or other injustice. Connecticut courts use the mere instrumentality test and the identity test in determining when to disregard the separate legal entity and impose personal liability. In Naples, there was much evidence the owner controlled the financial affairs of the homebuilding business under the mere instrumentality test, and a unity of interest under the identity test, but both tests also require a showing of fraud or injustice. Though the homebuilders were negligent in their construction, there was no showing of fraud such that piercing the LLC veil and holding the owner personally liable was appropriate. The court applied the same test for an LLC as it had previously applied for corporations. This is similar to what the Iowa Supreme Court did in Cemen Tech, Inc. v. Three D Industries, L.L.C., 753 N.W.2d 1 (2008) when it applied the test for piercing the corporate veil to an LLC.
The factors for piercing the LLC veil in Iowa are (1) undercapitalization of the LLC, (2) lack of separate books, (3) commingling of finances, and (4) using an LLC to promote fraud or illegal activity. (See Cemen Tech for the original factors, and also Iowa Code § 489.304(2) eliminating the fifth factor and the May 11, 2008 posting concluding the sixth factor is not a separate element.) The Naples case from Connecticut reaffirms that veil piercing is an exceptional remedy used only when recognition of the separate entity would “defeat justice” and “perpetrate a fraud or other injustice.” In Iowa, this is recognized by the fourth factor.
Although fraud or some other injustice is required to successfully pierce the veil and impose personal liability, cases like Naples highlight that the other factors are equally important. To avoid litigation costs, clients should be reminded to properly capitalize the LLC, keep separate books, and keep accurate records of the assets of the LLC.
-Jana Luttenegger
Summer Associate
Comments