Veil Piercing

Missouri Court Holds Minority Member can Pierce LLC’s Veil

Recently, in Hibbs v. Berger, the Missouri Court of Appeals ruled that a 5% minority member can pierce the veil of the LLC.  This case shows how extensive the court’s power is in determining these types of cases.  All LLCs should be knowledgeable about veil piercing, and also what can be one to prevent it.

In Hibbs v. Berger, the plaintiff (Hibbs) was an ex-employee of Tavern Creek, an LLC.  The plaintiff had no voting or management rights in this LLC, which were split on a 50-50 basis between Tavern Creek and Wood Nuts, another LLC.  Tavern Creek and Wood Nuts appointed Taylor and Berger, respectively, as co-managers of Tavern Creek.  Though Hibbs had no voting rights or management rights, he did acquire 5% of economic interests when his employment agreement was revised (once Wood Nuts became 50% owner).

Soon after the new employment agreement in 2007, Tavern Creek experienced financial troubles.  Wood Nuts would assist Tavern Creek during these times by loaning Tavern Creek money.  Despite this, Tavern Creek was unable to recover, and defaulted on these loans.  Wood Nuts exercised its rights under the agreement of these loans, and  obtained all collateral as satisfaction in 2009.  During this time, Hibbs was working for Tavern Nuts.  He was not fully paid for his commission earned in 2007, and never paid for the commission in 2008.  In late August of 2008, Hibbs was terminated and then re-hired as an employee-at-will.  Hibbs then left Tavern Creek two months later.

In January 2010, Hibbs filed a claim against Berger and Taylor, in an attempt to pierce the corporate veil.  The defendants motioned for summary judgment, which was granted, but Hibbs appealed.  The Missouri Court of Appeals began by acknowledging that members of an LLC usually are not responsible for debts of the LLC.  Then, however, the court acknowledged a three-prong test that determines if the court will piece the business entity’s veil.  The parts of this test include:

“(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”

After establishing the rule for veil piercing, the Missouri Court of Appeals specifically discussed if an LLC’s minority member can pierce the entity’s veil.  The court mentioned that this was a case of first impression, meaning that the Court of Appeals has not dealt with this type of case.  Because of this, the court looked to a case in which the District of Columbia Court of Appeals held that a minority shareholder is not prohibited from piercing the veil of the business entity.  The Missouri Court also stated that precluding a minority member from piercing the corporate veil would be unfair to those members.  For these reasons, the Missouri Court of Appeals held that the minority member of an LLC can pierce the entity’s veil, if the plaintiff meets the requirements set by the three-prong test.

Although it was eventually determined that this plaintiff did not meet the requirements to overcome summary judgment, the case provides an important lesson.  LLCs and other business entities should not assume that a member is unable to pierce their entity’s veil.  These managers must know the veil-piercing standard of their formation state, and take steps to ensure that a disgruntled member cannot hold the majority member(s) personally liable.

 

 

By | 2016-12-13T21:20:14+00:00 February 25th, 2015|Categories: Lawsuits, Members, Operating LLCs, Veil Piercing|0 Comments