A member or manager of a limited liability company is not fully protected by the veil of his company from suits brought against him. When a plaintiff has a claim against a limited liability company, in most cases he can only bring the claim against the company, not one of its members. A limited liability company shields its members from personal liability based on actions of the company. However, this shield is not a complete bar from a plaintiff bringing a suit against a member of a company. A party is capable of piercing the corporate veil of a company to bring suit against a member when that member is suspected of perpetrating a fraud. A member is susceptible to a suit against him, instead of his company, when his interests become indistinguishable from the interests of the company. In these instances, a member cannot protect himself under the veil of his corporation. It is imperative that business owners keep their own finances and bank accounts separate from those of their company.
The Piercing the Corporate Veil Doctrine prevents culpable individuals from protecting themselves under the cover of their corporation. When a litigant seeks to pierce the veil of a corporate entity, he is seeking to reach the assets of a corporate insider. The court has held in the past that a member of a limited liability company can be held liable when the personalities of the member and the company are no longer separate. In a reverse piercing action, a claimant seeks to reach the assets of a corporation to satisfy claims or a judgment obtained against a corporate insider. A limited liability company cannot be disregarded in piercing the corporate veil unless it is proved that the company is the alter ego, or alias, of the individual sought to be held personally accountable and the company was used as a sham to disguise the fraud of the individual. Piercing the corporate veil is an extreme measure and is only utilized in egregious circumstances.
In A.G. Dillard, Inc., Dillard, the contractor, filed suit against Stonehaus Construction, LLC seeking to collect a judgment that had been levied against Stonehaus by piercing Stonehaus’s corporate veil to reach the assets of Robert Hauser and his wife, and the Related Entity Defendants. The circuit court had granted the defendant’s demurrer, finding Dillard was not specific enough about the targets of its veil piercing. The Supreme Court of Virginia found otherwise and sent the case back. The Court determined Dillard’s claims would survive demurrer.
Managers of limited liability companies should take note that the actions alleged by Dillard are factors that would warrant piercing the corporate veil of a company. Dillard alleged Hauser was the manager of Stonehaus and also had control over the Related Entity Defendants. Further, Dillard alleged that Stonehaus did not have a bank account since February 2013, and when Stonehaus received money, it transferred those funds to Hauser for no valuable consideration. Dillard argued that the primary purpose of this was to delay and defraud Stonehaus’s creditors. Dillard also argued that Hauser owed Stonehaus over $160,000 but Stonehaus made no effort to collect this debt from Hauser.
The Court stated that in order for Dillard to allege a claim to reach the assets of the Related Entity Defendants allegedly controlled by Hauser, Dillard must have alleged (1) a traditional veil piercing claim against Hauser, and (2) a reverse veil piercing claim to reach the Related Entity Defendants through Hauser. The Court determined that Dillard’s complaint stated a claim to reach the assets of the Related Entity Defendants by piercing Stonehaus’s corporate veil to reach Hauser and then reverse piercing the Related Entity Defendants’ corporate veils through Hauser. A plaintiff’s complaint need only allege one “badge of fraud”. The court has held that badges of fraud include retention of an interest in the transferred property by the transferor, lack of or gross inadequacy of consideration for the conveyance, and retention or possession of the property by transferor, and fraudulent incurrence of indebtedness after the conveyance. Based upon the facts Dillard provided, the Court determined that at least one badge of fraud existed.
A.G. Dillard sends the message to business owners that they must be careful not to mix their personal financial interests with their company. Members should also take note of the badges of fraud that may be alleged and avoid actions that can be associated with those badges. These are all indicators that the interests of the individual and the company are no longer separate and distinct from each other. The corporate veil of a member’s company is not an absolute bar to holding that member liable.