Case Title: KAYCEE LAND AND LIVESTOCK v. FLAHIVE

Citation: 

Docket Number: 00-328

State: wyoming

Court: Wyoming Supreme Court

Date: 2002-05-15T00:00:00Z

Document:
KAYCEE LAND AND LIVESTOCK v. FLAHIVE2002 WY 7346 P.3d 323Case Number: 00-328Decided: 05/15/2002

APRIL TERM, A.D. 2002

                                                                                               

KAYCEE 
LAND AND LIVESTOCK,

a 
Wyoming partnership, 

Appellant(Plaintiff),

v.

ROGER 
FLAHIVE, 

Appellee(Defendant).

Representing 
Appellant:

            
Rick L. Koehmstedt of Schwartz, Bon, Walker & Studer, Casper, 
Wyoming

Representing 
Appellee:

            
B.J. Baker of Brown, Drew & Massey, LLP, Casper, Wyoming 

Before 
LEHMAN, C.J., and GOLDEN, HILL, KITE, and VOIGT, 
JJ.

 

            
KITE, Justice. 

[¶1]      This matter comes 
before this court as a question certified to us by the district court for 
resolution under W.R.A.P. 11.  The 
certified question seeks resolution of whether, in the absence of fraud, the 
entity veil of a limited liability company (LLC) can be pierced in the same 
manner as that of a corporation.  We 
answer the certified question in the affirmative.

CERTIFIED 
QUESTION

            

[¶2]      The question we 
have agreed to answer is phrased as follows:

            
In the absence of fraud, is a claim to pierce the Limited Liability 
entity veil or disregard the Limited Liability Company entity in the same manner 
as a court would pierce a corporate veil or disregard a corporate shield, an 
available remedy against a Wyoming Limited Liability Company under Wyoming's 
Limited Liability Company Act, Wyo. Stat. §[§] 17-15-101 through 17-15-144 
(2000)[?]

FACTS

[¶3]      In a W.R.A.P. 11 
certification of a question of law, we rely entirely upon the factual 
determinations made in the trial court. Allhusen v. State By and Through Wyoming 
Mental Health Professions Licensing Board, 898 P.2d 878, 881 (Wyo. 
1995).  The district court submitted the 
following statement of facts in its order certifying the question of 
law:

1.  Flahive 
Oil & Gas is a Wyoming Limited Liability Company with no assets at this 
time.

2.  [Kaycee Land and Livestock] entered into 
a contract with Flahive Oil & Gas LLC allowing Flahive Oil & Gas to use 
the surface of its real property.

3.  Roger 
Flahive is and was the managing member of Flahive Oil & Gas at all relevant 
times.

4.  [Kaycee 
Land and Livestock] alleges that Flahive Oil & Gas caused environmental 
contamination to its real property located in Johnson County, 
Wyoming.

5.  [Kaycee 
Land and Livestock] seeks to pierce the LLC veil and disregard the L[L]C entity 
of Flahive Oil & Gas Limited Liability Company and hold Roger Flahive 
individually liable for the contamination.

6.  There 
is no allegation of fraud.

[¶4]      The question 
presented is limited to whether, in the absence of fraud, the remedy of piercing 
the veil is available against a company formed under the Wyoming Limited 
Liability Company Act (Wyo. Stat. Ann. §§ 17-15-101 to -144 (LexisNexis 
2001)).  To answer this question, we 
must first examine the development of the doctrine within Wyoming's corporate 
context.  As a general rule, a 
corporation is a separate entity distinct from the individuals comprising 
it.  Opal Mercantile v. Tamblyn, 616 P.2d 776, 778 (Wyo. 1980).  Wyoming 
statutes governing corporations do not address the circumstances under which the 
veil can be pierced.  However, since 
1932, this court has espoused the concept that a corporation's legal entity will 
be disregarded whenever the recognition thereof in a particular case will lead 
to injustice.  See Caldwell v. Roach, 44 Wyo. 319, 12 P.2d 376, 380 (1932).  In Miles v. CEC Homes, Inc., 753 P.2d 1021, 
1023 (Wyo. 1988) (quoting Amfac 
Mechanical Supply Co. v. Federer, 645 P.2d 73, 77 (Wyo. 1982)), this court 
summarized the circumstances under which the corporate veil would be pierced 
pursuant to Wyoming law:

"Before 
a corporation's acts and obligations can be legally recognized as those of a 
particular person, and vice versa, it must be made to appear that the 
corporation is not only influenced and governed by that person, but that there 
is such a unity of interest and ownership that the individuality, or 
separateness, of such person and corporation has ceased, and that the facts are 
such that an adherence to the fiction of the separate existence of the 
corporation would, under the particular circumstances, sanction a fraud or 
promote injustice.'  Quoting 
Arnold v. Browne, 27 Cal. App. 3d 386, 103 Cal. Rptr. 775 (1972) 
(overruled on other grounds)."

We 
provided the following factors to be considered in determining whether a 
corporate entity may be disregarded:

"Among 
the possible factors pertinent to the trial court's determination are: 
commingling of funds and other assets, failure to segregate funds of the 
separate entities, and the unauthorized diversion of corporate funds or assets 
to other than corporate uses; the treatment by an individual of the assets of 
the corporation as his own; the failure to obtain authority to issue or 
subscribe to stock; the holding out by an individual that he is personally 
liable for the debts of the corporation; the failure to maintain minutes or 
adequate corporate records and the confusion of the records of the separate 
entities; the identical equitable ownership in the two entities; the 
identification of the equitable owners thereof with the domination and control 
of the two entities; identification of the directors and officers of the two 
entities in the responsible supervision and management; the failure to 
adequately capitalize a corporation; the absence of corporate assets, and 
undercapitalization; the use of a corporation as a mere shell, instrumentality 
or conduit for a single venture or the business of an individual or another 
corporation; the concealment and misrepresentation of the identity of the 
responsible ownership, management and financial interest or concealment of 
personal business activities; the disregard of legal formalities and the failure 
to maintain arm's length relationships among related entities; the use of the 
corporate entity to procure labor, services or merchandise for another person or 
entity; the diversion of assets from a corporation by or to a stockholder or 
other person or entity, to the detriment of creditors, or the manipulation of 
assets and liabilities between entities so as to concentrate the assets in one 
and the liabilities in another; the contracting with another with intent to 
avoid performance by use of a corporation as a subterfuge of illegal 
transactions; and the formation and use of a corporation to transfer to it the 
existing liability of another person or entity [citation].'"  645 P.2d  at 77-78 (quoting Arnold v. 
Browne, supra, 103 Cal. Rptr. at 781-82).

Miles, 
753 P.2d  at 
1023-24.

[¶5]      Wyoming courts, 
as well as courts across the country, have typically utilized a fact driven 
inquiry to determine whether circumstances justify a decision to pierce a 
corporate veil.  Opal Mercantile, 616 P.2d  at 778.  This case comes to us as a certified 
question in the abstract with little factual context, and we are asked to 
broadly pronounce that there are no circumstances under which this court will 
look through a failed attempt to create a separate LLC entity and prevent 
injustice.  We simply cannot reach 
that conclusion and believe it is improvident for this court to prohibit this 
remedy from applying to any unforeseen circumstance that may exist in the 
future.

[¶6]      We have long 
recognized that piercing the corporate veil is an equitable doctrine.  State ex rel. Christensen v. Nugget Coal 
Co., 60 Wyo. 51, 144 P.2d 944, 952 (1944).  The concept of piercing the corporate 
veil is a judicially created remedy for situations where corporations have not 
been operated as separate entities as contemplated by statute and, therefore, 
are not entitled to be treated as such.  
The determination of whether the doctrine applies centers on whether 
there is an element of injustice, fundamental unfairness, or inequity.  The concept developed through common law 
and is absent from the statutes governing corporate organization.  See Wyo. Stat. Ann. §§ 17-16-101 to 
-1803 (LexisNexis 2001).  Appellee 
Roger Flahive suggests that, by the adoption of § 17-16-622(b)a provision from 
the revised Model Business Corporation Actthe Wyoming legislature intended to 
explicitly authorize piercing in the corporate context and, by inference, 
prevent its application in the LLC context.  A careful review of the statutory 
language and legislative history leads to a different conclusion.  Section 17-16-622(b) reads:  "Unless otherwise provided in the 
articles of incorporation, a shareholder of a corporation is not personally 
liable for the acts or debts of the corporation except that he may become 
personally liable by reason of his own acts or conduct." Mr. Flahive contrasts 
that language with the LLC statute which simply states the underlying principle 
of limited liability for individual members and managers. Wyo. Stat. Ann. § 
17-15-113 (LexisNexis 2001).  
Section 17-15-113 provides:

Neither 
the members of a limited liability company nor the managers of a limited 
liability company managed by a manager or managers are liable under a judgment, 
decree or order of a court, or in any other manner, for a debt, obligation or 
liability of the limited liability company. 

However, 
we agree with Commentator Gelb that:  
"It is difficult to read statutory § 17-15-113 as intended to preclude 
courts from deciding to disregard the veil of an improperly used LLC."  Harvey Gelb, Liabilities of Members and Managers of 
Wyoming Limited Liability Companies, 31 Land & Water L. Rev. 133 at 142 
(1996).

[¶7]      Section 
17-16-622the statute relied upon by Mr. Flahive as indicating legislative 
intent to allow piercing of the corporate veilwhen considered in the context of 
its legislative history, provides no support for the conclusion that the 
legislature intended in any way to limit application of the common-law doctrine 
to LLCs.  As previously explained, § 
17-16-622 was adopted from the revised Model Business Corporation Act, and the 
comments therein clarify that subsection (b) "sets forth the basic rule of 
nonliability of shareholders for corporate acts or debts that underlies modern 
corporation law" and "recognizes that such liability may be assumed voluntarily 
or by other conduct." 1 Model Bus. Corp. Act Ann.  § 6.22 at 6-94 to 6-95 (Supp. 
1997).  This provision was added in 
1984 and was not intended to "treat exhaustively the statutory bases for 
imposing liability on shareholders."  
Id. at 6-96.  The official comments in the revised 
Model Business Corporation Act specifically recognize the separate existence of 
the common law by stating:  
"Shareholders may also become liable for corporate obligations by their 
voluntary actions or by other conduct under the common law doctrine of piercing 
the corporate veil.'" Id.  

[¶8]      We note that 
Wyoming was the first state to enact LLC statutes.  Many years passed before the Internal 
Revenue Service's approval of taxation of LLCs as partnerships led to other 
states adopting LLC legislation and the broad usage of this form for business 
organizations. William D. Bagley, The 
History of the LLC in the USA, Limited Liability Company Reporter 94-302 
(May/June 1994); see also Karin 
Schwindt, Limited Liability Companies: 
Issues in Member Liability, 44 UCLA L. Rev. 1541, 1543 (1997).  Wyoming's statute is very short and 
establishes only minimal requirements for creating and operating LLCs.  It seems highly unlikely that the 
Wyoming legislature gave any consideration to whether the common-law doctrine of 
piercing the veil should apply to the liability limitation granted by that 
fledgling statute.  It is true that 
some other states have adopted specific legislation extending the doctrine to 
LLCs while Wyoming has not.  
However, that situation seems more attributable to the fact that Wyoming 
was a pioneer in the LLC arena and states which adopted LLC statutes much later 
had the benefit of years of practical experience during which this issue was 
likely raised.  

[¶9]      Mr. Flahive 
insists that, if the legislature intended for liability to be asserted against 
the members of an LLC, it could have added similar language to the LLC chapter 
at the same time it adopted provisions of the revised Model Business Corporation 
Act.  However, adoption of those 
amendments in 1989, twelve years after the enactment of the LLC statutes, while 
remaining silent on the issue of piercing the veil in the LLC statutes, is far 
too attenuated to indicate a clear legislative intent to restrict application of 
the common law to LLCs.  It stands 
to reason that, because it is an equitable doctrine, "[t]he paucity of statutory 
authority for LCC piercing should not be considered a barrier to its 
application." Schwindt, supra at 
1552.  Lack of explicit statutory 
language should not be considered an indication of the legislature's desire to 
make LLC members impermeable.  Id. at 1555; Robert B. Thompson, The Limits of Liability in the New Limited 
Liability Entities, 32 Wake Forest L. Rev. 1, 19 (1997).  Moreover, 

"It is 
not to be presumed that the legislature intended to abrogate or modify a rule of 
the common law by the enactment of a statute upon the same subject; it is rather 
to be presumed that no change in the common law was intended unless the language 
employed clearly indicates such an intention. . . . The 
rules of common law are not to be changed by doubtful implication, nor 
overturned except by clear and unambiguous language.'"  McKinney v. McKinney, [59 Wyo. 204,] 135 
P.2d [940,] 942 [(1943)], quoting from 25 R.C.L. 1054, § 
280.

Allstate 
Insurance Company v. Wyoming Insurance Department, 672 P.2d 810, 824 (Wyo. 1983).  

[¶10]   With the dearth of legislative 
consideration on this issue in Wyoming, we are left to determine whether 
applying the well established common law to LLCs somehow runs counter to what 
the legislature would have intended had it considered the issue.  In that regard, it is instructive 
that:  "Every state that has enacted 
LLC piercing legislation has chosen to follow corporate law standards and not 
develop a separate LLC standard."  
Philip P. Whynott, The Limited Liability Company § 11:140 at 11-5 (3d ed. 
1999).  Statutes which create 
corporations and LLCs have the same basic purposeto limit the liability of 
individual investors with a corresponding benefit to economic development.  Eric Fox, Piercing the Veil of Limited Liability 
Companies, 62 Geo. Wash. L. Rev. 1143, 1145-46 (1994).  Statutes created the legal fiction of 
the corporation being a completely separate entity which could act independently 
from individual persons.  If the 
corporation were created and operated in conformance with the statutory 
requirements, the law would treat it as a separate entity and shelter the 
individual shareholders from any liability caused by corporate action, thereby 
encouraging investment.  However, 
courts throughout the country have consistently recognized certain unjust 
circumstances can arise if immunity from liability shelters those who have 
failed to operate a corporation as a separate entity.  Consequently, when corporations fail to 
follow the statutorily mandated formalities, co-mingle funds, or ignore the 
restrictions in their articles of incorporation regarding separate treatment of 
corporate property, the courts deem it appropriate to disregard the separate 
identity and do not permit shareholders to be sheltered from liability to third 
parties for damages caused by the corporations' acts.  

[¶11]   We can discern no reason, in either 
law or policy, to treat LLCs differently than we treat corporations.  If the members and officers of an LLC 
fail to treat it as a separate entity as contemplated by statute, they should 
not enjoy immunity from individual liability for the LLC's acts that cause 
damage to third parties.  Most, if 
not all, of the expert LLC commentators have concluded the doctrine of piercing 
the veil should apply to LLCs.  See generally Fox, supra; Gelb, supra; Robert G. Lang, Note, Utah's Limited Liability Company Act:  Viable Alternative or Trap for the 
Unwary?, 1993 Utah L. Rev. 941, 966 (1993) (Part 2); Stephen B. Presser, 
Piercing the Corporate Veil § 4.01[2] (2002); Ann M. Seward & Laura 
Stubberud, The Limits of Limited 
Liability-Part Two, Limited Liability Company Reporter 94-109 
(January/February 1994); Schwindt, supra.  It also appears that most courts faced 
with a similar situationLLC statutes which are silent and facts which suggest 
the LLC veil should be piercedhave had little trouble concluding the common law 
should be applied and the factors weighed accordingly.  See, e.g., Hollowell v. Orleans Regional Hospital, 
No. Civ. A. 95-4029, 1998 WL 283298 (E.D. La. May 29, 1998); Ditty v. Checkrite, Ltd., Inc., 973 F. Supp. 1320 (D. Utah 1997); Tom Thumb Food 
Markets, Inc. v. TLH Properties, LLC, No. C9-98-1277, 1999 WL 31168 (Minn. 
Ct. App. Jan. 26, 1999).

[¶12]   Certainly, the various factors 
which would justify piercing an LLC veil would not be identical to the corporate 
situation for the obvious reason that many of the organizational formalities 
applicable to corporations do not apply to LLCs.  The LLC's operation is intended to be 
much more flexible than a corporation's.  
Factors relevant to determining when to pierce the corporate veil have 
developed over time in a multitude of cases.  It would be inadvisable in this case, 
which lacks a complete factual context, to attempt to articulate all the 
possible factors to be applied to LLCs in Wyoming in the future.  For guidance, we direct attention to 
commentators who have opined on the appropriate factors to be applied in the LLC 
context.  Fox, supra; Gelb, supra; Curtis J. Braukmann, Comment, Limited Liability Companies, 39 U. Kan. 
L. Rev. 967 (1991); Presser, supra; 
Seward & Stubberud, supra; Larry 
E. Ribstein & Robert R. Keatinge, Members' Limited Liability, Limited 
Liability Companies § 12.03 (1999); Robert R. Keating et al., The Limited Liability Company: A Study of 
the Emerging Entity, 47 The Business Lawyer 375 (1992).  

[¶13]   The certified question presents an 
interesting internal inconsistency.  
It begins, "In the absence of fraud," thereby presenting the assumption 
that a court may pierce an LLC's veil in a case of fraud.  Thus, the certified question assumes 
that, when fraud is found, the courts are able to disregard the LLC entity 
despite the statutory framework which supposedly precludes such a result.  Either the courts continue to possess 
the equitable power to take such action or they do not.  Certainly, nothing in the statutes 
suggests the legislature gave such careful consideration and delineated the 
specific circumstances under which the courts can act in this arena.  If the assumption is correct, individual 
LLC members can be held personally liable for damages to innocent third parties 
when the LLC has committed fraud.  
Yet, when the LLC has caused damage and has inadequate capitalization, 
co-mingled funds, diverted assets, or used the LLC as a mere shell, individual 
members are immune from liability.  
Legislative silence cannot be stretched to condone such an illogical 
result.

[¶14]   In Amfac Mechanical Supply Co., this court 
clarified that a showing of fraud or an intent to defraud is not necessary to 
disregard a corporate entity.  645 P.2d  at 79.  We clearly stated:  "Fraud is, of course, a matter of 
concern in suits to disregard corporate fictions, but it is not a prerequisite 
to such a result."  Id.  Other courts have echoed this view:  "Liability on the basis of fraud, 
however, does not encompass the entire spectrum of cases in which the veil was 
pierced in the interest of equity."  
Fox, supra at 1169.  Thus, even absent fraud, courts have the 
power to impose liability on corporate shareholders.  Id. at 1170.  This same logic should naturally be 
extended to the LLC context.  We 
have made clear that:  "Each case 
involving the disregard of the separate entity doctrine must be governed by the 
special facts of that case."  Opal Mercantile, 616 P.2d  at 778.  Determinations of fact are within the 
trier of fact's province.  Id.  The district court must complete a fact 
intensive inquiry and exercise its equitable powers to determine whether 
piercing the veil is appropriate under the circumstances presented in this case. 

[¶15]   No reason exists in law or equity 
for treating an LLC differently than a corporation is treated when considering 
whether to disregard the legal entity.  
We conclude the equitable remedy of piercing the veil is an available 
remedy under the Wyoming Limited Liability Company Act.