Hector v. Mo-Dad Envtl. Serv., LLC, 2013-1184 (La. App. 3 Cir. 3/5/14)
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
Court of Appeal of Louisiana, Third Circuit.
Shermane Hector v. Mo–Dad Environmental Serv., LLC, et al.
March 5, 2014.
Appeal from the Sixteenth Judicial District Court, Parish of Iberia, No. 109111, Honorable James Ray McClelland, District Judge.
Attorneys and Law Firms
Charles A. Schutte, Jr., Guglielmo, Marks, Schutte, Terhoeve & Love, Baton Rouge, LA, for Defendants/Appellants, William A. Stegall, Jr. and William A. Stegall, Sr.
Scott Weber, Weber and Associates, Lafayette, LA, for Plaintiff/Appellee, Shermane Hector.
Court composed of JIMMIE C. PETERS, BILLY HOWARD EZELL, and SHANNON J. GREMILLION, Judges.
*1 William A. Stegall, Sr. and William A. Stegall, Jr. appeal a judgment piercing the company veil of Mo–Dad Global Environmental Systems, LLC (Global) and finding them personally liable to Shermane Hector. Shermane was injured while working for Global and entered into a settlement for her injuries which was reduced to judgment. Global did not purchase workers’ compensation insurance, and it never paid the judgment. For the following reasons, we affirm the judgment of the trial court.
On August 5, 2005, Shermane was employed by Global as a secretary when she fell through a rotten area of flooring in the trailer where she worked. The trailer was owned by William A. Stegall, Sr. and used by Global at its business office located at the Port of New Iberia. Shermane filed a workers’ compensation claim against Global. On the morning of trial, Global agreed to a settlement in the amount of $35,000.00. Pursuant to the agreement, judgment was entered against Global on October 20, 2006, by the Office of Workers’ Compensation. Payment was not timely made, and another judgment was entered against Global for penalties and attorney fees. Once again, payment was never made.
Shermane also filed a workers’ compensation claim against her joint employer, General Staffing Resources, seeking the same relief. Again, when payment was not made, penalties and attorney fees were assessed.
Shermane filed suit on February 7, 2007, against Global to make the judgment rendered against it executory. Shermane amended her suit to include claims: (1) asserting a claim for damages pursuant to La.R.S. 23:1032.1 for failure to secure workers’ compensation insurance; (2) piercing the company veil of Global to both Mr. William Stegall, Sr. (hereinafter Bill as he refers to himself in brief) and Mr. William Stegall, Jr. (hereinafter William as he refers to himself in brief); and (3) adding a tort claim pursuant to La.Civ.Code art. 2322 against Bill, as owner of the trailer.
Trial was held on May 7, June 25, and July 2, 2012. Regarding Shermane’s claim for damages for failure to secure workers’ compensation insurance, the trial court determined that La.R.S. 23:1032.1 did not apply to the present action because it took effect on August 15, 2005, and applied prospectively only. The trial court also determined that the claim in tort against Bill had prescribed.
The trial court then rendered judgment piercing the company veil to both William and Bill. It held them liable in solido with Global for the $35,000.00 judgment in addition to the $8,400.00 in penalties and $1,000.00 in attorney fees. The trial court also awarded an additional $10,000.00 in attorney fees. The Stegalls then filed the present appeal.
MEMBERSHIP OF WILLIAM STEGALL, JR. IN LLC
The defendants first argue that the trial court erred in finding that William was a member of Global. They argue that Global is a limited liability company established under LLC law and owned by Bill and his wife, each with a 50% share. They argue that William never made a capital contribution, never received a K–1 for income tax purposes, and never received any distributions of profits or losses from Global. It is the defendants’ position that William was only the manager of Global.
*2 The determination of whether someone is a member of a limited liability company is a finding of fact subject to the manifest error standard of review. Destiny Servs., L.L.C. v. Cost Containment Servs., L.L.C., 10–1895 (La.App. 1 Cir. 9/20/11), 2011 WL 4375318. Under the manifest error/clearly wrong standard of review, findings by the trial court based on the credibility of witnesses are entitled to great deference, because only the fact finder can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener’s understanding and belief in what is said. Rosell v. ESCO, 549 So.2d 840 (La.1989).
A “member” is “a person with a membership interest in a limited liability company with the rights and obligations specified under this Chapter.” La.R.S. 12:1301(A)(13). “Membership interest” is further defined as “a member’s rights in a limited liability company, collectively, including the member’s share of the profits and losses of the limited liability company, the right to receive distributions of the limited liability company’s assets, and any right to vote or participate in management.” La.R.S. 12:1301(A)(14).
Louisiana Revised Statutes 12:1305 provides for the filing of the initial report of the limited liability company, known as the Articles of Organization. Pursuant to this law, Global filed its Articles of Organization, signed on November 28, 2001, with the Louisiana Secretary of State. These articles specifically provided that Global would be member-managed by William A. Stegall, Jr. William was additionally listed as the first and only member. Furthermore, all subsequent annual reports filed with the secretary of state indicated that William A. Stegall, Jr. was a member. No additional members were shown on the reports.
Louisiana Revised Statutes 12:1319(D) specifically provides in pertinent part:
Except as otherwise provided in the articles of organization or an operating agreement, a limited liability company and its members, managers, and agents may recognize and treat a person registered on its records as a member, as such for all purposes, and as the person exclusively entitled to have and to exercise all rights and privileges incident to the ownership of such membership interests.
Clearly, the members, managers, and agents can rely on the articles of organization to determine who are members of a limited liability company.
William testified that initially Global was going to be a company that he owned and ran. However, he testified that changed after his father loaned Global a lot of money. Bill took back the company as a payback for the loan of the money. William testified that membership was changed to his father and mother at some point, but he testified that he could not remember if it was formally changed.
A review of the evidence indicates that membership was never formally changed. The law provides that a certificate of correction can be filed with the secretary of state correcting any errors in the paperwork. La.R.S. 12:1310. This was not done.
*3 It is clear that the records of limited liability companies are important in identifying the members of the company. Global’s records over the years have continuously indicated that William was the only member of Global. Clearly, third parties are entitled to rely on the company records as evidence of membership status.
The evidence and testimony further indicated that the losses Bill and his wife listed on their own income taxes was more for practical purposes than for their own needs. William testified that the CPA indicated that his father could use the losses generated by Global. William stated he did not need the losses.
We also find that William did make a capital contribution to Global. Pursuant to La.R.S. 12:1301(A)(3), a “capital contribution” is “anything of value that a person contributes to the limited liability company as a prerequisite for, or in connection with, membership, including … services rendered….” By his own testimony, William could not remember if he had been paid a salary as manager of Global but did not think he had been paid a salary. Evidence and testimony indicated that Global paid William a commission on two occasions; this is the only money he received from Global. We find that William’s actions in managing Global without a salary were “services rendered” as a capital contribution to Global.
In making its decision that William was a member of Global, the trial court specifically found that William was not a credible witness, observing that he was very nervous in his demeanor and very evasive in his answers. We find no manifest error in the trial court’s conclusion that William Stegall, Jr. was a member of Global.
PIERCING THE CORPORATE VEIL
The defendants argue that the trial court erred in piercing the corporate veil of Global and holding William and Bill liable for Global’s debt to Shermane. They argue that it is only under extreme circumstances that the court should pierce the company veil of Global to make a member liable for the debts of the limited liability company.
The supreme court recently explored the concept of piercing the company veil of a limited liability company and observed that a limited liability company and its members are wholly separate persons. Ogea v. Merritt, 13–1085 (La.12/10/13), ––– So.3d ––––. The supreme court, citing Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 11–2254 (La.App. 1 Cir. 7/10/12), 97 So.3d 595, recognized that piercing the company veil results in personal liability of the owner of the LLC, explaining that:
in narrowly defined circumstances, when individual member(s) of a juridical entity such as an LLC mismanage the entity or otherwise thwart the public policies justifying treating the entity as a separate juridical person, the individual member(s) have been subjected to personal liability for obligations for which the LLC would otherwise be solely liable. When individual member(s) are held liable under such circumstances, it is said that the court is “piercing the corporate veil.”
*4 Id. at ––––.
However, the supreme court did not further address the piercing the corporate veil doctrine, because it was neither relied upon by the lower courts nor invoked by the plaintiff.
In Charming Charlie, Inc., 97 So.3d at 598–99, the first circuit explained the application of the piercing the corporate veil doctrine as follows:
Louisiana courts have allowed a piercing of the corporate veil under only two exceptional circumstances, namely, where the corporation is an alter ego of the shareholders and the shareholders have used the corporation to defraud a third party (the “alter ego” doctrine) and where the shareholders have failed to conduct a business on a “corporate footing” to such an extent that the corporation ceases to be distinguishable from its shareholders. Riggins, 590 So.2d at 1168; Imperial Trading Co., 837 So.2d at 669–70. Some of the relevant factors considered in determining whether to apply the alter ego doctrine include: commingling of corporate and shareholder funds; failing to follow statutory formalities for incorporating and transacting corporate affairs; undercapitalization; failing to maintain separate bank accounts and bookkeeping records; and failing to hold regular shareholder and director meetings. Riggins, 590 So.2d at 1168; Imperial Trading Co., 837 So.2d at 670.
Furthermore, Louisiana courts are reluctant to hold a shareholder, officer, or director of a corporation personally liable for corporate obligations, in the absence of fraud, malfeasance, or criminal wrongdoing. Riggins, 590 So.2d at 1168; Imperial Trading Co., 837 So.2d at 670. In pleading fraud, the circumstances constituting fraud must be alleged with particularity, although knowledge may be alleged generally. La. C.C.P art. 856. There are three basic elements to an action for fraud against a party to a contract: (1) a misrepresentation, suppression, or omission of true information; (2) the intent to obtain an unjust advantage or to cause damage or inconvenience to another; and (3) the error induced by a fraudulent act must relate to a circumstance substantially influencing the victim’s consent to (a cause of) the contract. See La. C.C. art.1953; Shelton v. Standard/700 Associates, 01–0587 (La.10/16/01), 798 So.2d 60, 64. Thus, fraudulent intent, or the intent to deceive, is a necessary and inherent element of fraud. Fraud cannot be predicated upon mistake or negligence, no matter how gross. Terrebonne Concrete LLC v. CEC Enterprises, LLC, 11–0072 (La.App. 1st Cir.8/17/11), 76 So.3d 502, 509, writ denied, 11–2021 (La.11/18/11), 75 So.3d 464.
Louisiana Revised Statutes 12:1320(D) provides for piercing the company veil and imposes liability on a member as justification to prevent the use of a limited liability company in defrauding creditors. ORX Resources, Inc. v. MBW Exploration, L.L.C., 09–662 (La.App. 4 Cir. 1/10/10), 32 So.3d 931, writ denied, 10–530 (La.5/7/10), 34 So.3d 862.
*5 Whether a limited liability company is an alter ego of its members is a finding of fact subject to the manifest-error standard of review. Dishon v. Ponthie, 05–659 (La.App. 3 Cir. 12/30/05), 918 So.2d 1132, writ denied, 06–599 (La.5/5/06), 927 So.2d 317.
As background to the discussion of piercing the company veil, it is relevant to note that Global was not the only company set up by the Stegalls. William explained that the family started several companies, including Mo–Dad Companies, LLC; Mo–Dad Utilities, LLC; and Pavement Maintenance Unlimited, LLC, all of which were operating at the time of the trial. A previous company included Mo–Dad One, Inc. Another company was General Staffing, which was the predecessor entity to Abraham Payroll. General Staffing was a company organized for the issuance of payroll checks. The workers’ compensation insurance provider was not happy with the name of the company, so General Staffing was shut down and Abraham Payroll was started.
Bill testified that he put his money into these companies so he would not have the liability. He further stated that he owned the assets of the companies, and “