resources a british corporation and atlantis l l c a montana limited liability company the matter was litigated for some time and atlantis the l c file for bankruptcy protection about half way through a lot of litigation proceeded to an adversary proceeding in front of judge hershon montana and that's why we're here today so it's not a typical bankruptcy case but it's a it's a privilege for me to be able to come from a little town montana to be here in front of you all today so thank you getting right into it the the standard that we are asking in this panel to apply is a mix standard of review and based on the in r store case which was a bankruptcy case ruled on by judge ruff kirshner in two thousand and seven in montana and it it melds the concept of corporate veil piercing in turkey on an l l c the issue in this case is piercing the protections of an l l c and in montana at least that's a relatively new concept in the sense that there is not a lot of case law not a lot of common law for us to rely on with respect to piercing the l l c converse lee there are decades of cases and opinions on the issue of piercing the corporate veil when presented with that issue in two thousand and seven in the in re store case judge perisher melded the two together and found that the best course of action was to look at corporate veil standards in determining whether or not the l l c protections should be pierced and that there's a lot of briefing back and forth on what should apply what standards apply and that's the standard we're going to comment on the paper saying st of all whenever a lawyer tells me he's from a small town in montana i instinctively check my wallet that there is no reason your honor and i don't have an explanation i think that counsel for the up early would agree that this happened very quickly in the court simply ruled i didn't ask for it and neither did the defendants and perhaps we should have but it was never discussed three practice you asked for oral argument or and or you don't get it is the practice of montana yes ok so no request was made no request was made and that's a recent development  real fifty six months i see and you say that the case law that that has been developed with reference to corporations should be treated differently than l c s is i correct because they're different is that either standard and that's a good question your honor and in montana you do not and this is why and i'll come right out and say it this is why it's so important for this case for my oath for my clients to more support of our position is this to this case called the paschal family trust and the twenty's cases are two montana supreme court cases that say you don't have to read reach that level of fraud in order to pierce the corporate veil that bad faith alone i sufficient well what's the bad faith here you know that faith is entering into a contract that you don't have the assets to pay and that i wouldn't that that ends up with a very broad result right i mean there's a great many companies that make contracts expecting to obtain financing you know you sign a real estate purchase contract on the expectation of get a mortgage or allow you to pay the pay the debt is that fraud i don't it's fraud but under this circumstance i believe it is bad faith because we're not talking about those involved small corporations and individuals in this case we're talking about i feel which is a publicly traded company worth millions and millions of dollars that absolutely had the ability then and today to pay this lease they go out and set up an c don't fund it even though they could don't create employees even though they could don't even create a bank account even all these things they could have done which they didn't do i believe constitutes bad faith it's not a proper course your client could also have bargained for a guarantee from vienna and for whatever reason didn't is aren't you basically asking to get the equivalent of a guarantee which you didn't bargain for your client i mean they certainly could have argued for that yes your honor and converse lee i feel an atlantis could have bargained for an condition in the lease that says if we don't get approval from the department of national resources in conversation conservation montana where out and that was bargained for and discussed and was not part of the consideration exchange so i do agree with you but it does go both ways going back to your point wouldn't your point mean that whenever a parent company is essentially always going to be liable for the debts of its subsidiary of his subsidiary becomes insolvent you seem to be arguing that the parent if it can always has an obligation to put enough money into the sub to prevent the subject carry out its debts is that really the law i don't think that's the lawyer but in this situation we're looking at the totality of this situation when they could have done these things and then and enter into a seven figure lease with i think when you look at those factors your honor they had the opportunity to do this the right way and didn't do it what do you mean the right way the right way your honor is to find the fun they all say on the all see and and create an entity for hire employees do all the things that create an identity for this l l c this l l c had nothing has nothing every every person my clients dealt with my client's former counsel draft of the the documents i can't say whether or not these folks were represented by counsel and i just don't know so that leads me into my next into the next part of this argument which is this concept of under capitalization and under cop under capitalization can be i guess defined in a lot of ways it's a very broad concept but here in this case under capitalization is no capitalization and the paschal family trust case says under capitalisation alone is sufficient to breach the corporate veil or to pierce the corporate veil and that's what we're that's our argument today well what exactly is under capitalization i mean if you did put hundreds of thousands of dollars into the project most of which went to your client as that money was needed but it also didn't put in as much money as  all of atlanta's debts those under capitalization mean not enough money to cover all the debts or something else i think that's a two part answer the st is they never capitalized the actual l o c so that's capitalization there and then nd yes that they didn't put enough money to satisfy the debts they had does not in effect make the parent always liable for the subsidiaries debts if the parent always has to put in debts it could your honor and i and i understand where you're going with that and that's not under that that's not the law and i agree with you on that and that's important and i think it's the specific and unique facts of this case which which provide us to with with that under cap was a she argument that this l l c was just a shell it was nothing and it's as a general rule of law you are absolutely right and the the parent cannot be liable for the subsidiary never situation if they don't count so you have about five minutes left you want to reserve that i will reserve thank you thank you  observe the normal formalities political to the operation of a corporation the management of his affairs are not grounds for imposing personal liability on members we have this body of law that's common to most states where you set up son of a sham corporation it doesn't have assets doesn't have employees it's just a shell that that that kind of corporate entity can be pierced why shouldn't that be true of these other that was to be paid over ten years on this lease now the reason that wasn't done was because of lantus out of business plan and that plan was to secure a water permit take water sell it in commercial quantities to the companies that are working in the well and gas fields and generate income and that income would be used to fund its current and future obligations well i don't hear them to say that that that your client is acted in bad faith are fraudulent late what i hear them to say is that as in the law of corporations that had to have an actual existence it had to have a does not effectuate any protection for the parent is that i think that's what they're saying well i think that is what they're saying but what the palace are trying to do is graft the law piercing the veil of corporations onto all cities which are entirely different animal now the st prong under the corporate veil piercing test is the alter ego or agency test and that under montana law has ten or fourteen different factors that courts apply they look at it was this subsidiary truly an entity that existed on its own did it have its own source of funds and management so forth as we explain our  such as it is and that therefore it's trying to apply that st prong of the corporate test to an l l c which is allowed operate informally is like trying to put a put a square c based on the mere failure of the business when there is indisputable you know fraudulent or bad faith conduct at any point during the company's existence and to pierce the veil of let me let me stop you on that because the result in this case gives you exactly the result you would have had if your client had an option to terminate the lease or the option or both if they water permits were denied you didn't get that or didn't and if you bargained for an up it's not of that in the deal but this result gives you that exact same result so why is it equitable to give you a result which you didn't get paid be didn't even bargain for in the contract negotiations well and and  have tried to turn this issue around on us i think and we say well why didn't you bargain for a personal guarantee you represented by counsel you know this was a start up company and that was engaged in a speculative venture they say well you was was on was due to an unforeseen event which is a change in the wall relate to water permits my clients you know they did investigate and do their due diligence on this opportunity the water thought to be a slam dunk that would take a six to twelve month process they hired the best water rights lawyer in the state to shepherd through this process now an objection was filed by a competitor that put the process on different longer track and during that interim period the policy changed that was the cause of the denial of the water permit the option agreement was originally set up to have a one year exercise period the water permit process was expected to take six to twelve months so had that gone to plan atlantis a permit would have been in hand it would have had full project financing so that was you know the failure of the business was unanticipated because the option period was intended to line up with the permit process i don't think my client probably felt there was a need to have an out part of the test under both of those competing doctrines requires that the corporation was use of the corporate test as a subterfuge to defeat public conveyance justify wrong or perpetuate fraud and  void personal liability so both of those tests do require some element of fraud or wrongful conduct now counsel points to cases where they would indicate that the absence of funding that the and if you are providing it with the ability to avoid payment by keeping it empty satisfies that test here you don't find that persuasive i do not your honor and a we've cited in our in our brief other quote on fortunately montana has never delved into the issue of under capitalization per se in this context other courts that have so if under capitalization were were  advancements were were infusions of capital that were obviously the balkans benefited from this those payments went directly baldwins so they cannot i think credibly argue that they were harmed on the fact that the parroted pulled assets out of the subsidiary towards the end and that would be troublesome but it is it really any different to simply not put assets in the st place and to pull them back out later on is there any real to obligations or to incur debt after that there was this antecedent diversion of funds back out of the company that the court i believe found was was landis both use their best efforts to get this business up and running if failed for reasons that were largely outside of their control and in hindsight i think it's easier for the opponents to say well you should've seat the corporation's creditors so i'll briefly address the equity considerations the baldwins can see that they were not cheated or deceived at any point process they've already received four hundred and fifty nine thousand dollars my clients have never turned a shovel on their property and they never will the water depot project failed for reasons that were outside of the la  reject the pellets argument to remake montana walls and and in effect undermine the doctrine of limited liability and instead affirm the bankruptcy court decision thank opposed to never putting the money into the shell in the st place and our position on that under under pressure one tanya says that it is a distinction without a difference that why should they why should the defendants get the benefit of the fact they never put money in there to distinguish from the facts of peshawar and telling us where that money was moved around after the fact and certainly whenever a party is looking at a judgment being entered against them they start moving money around the  smell of fraud and deceit is much stronger on the surface but when you look at this it's really it to me is no different they they never funded it in the st place but isn't that the distinction now at the end of the life of a company the parent or owner says oh my god things are going bad i pad i have to get my many out before the creditors can get through it and that's what the that kind of self dealing is what is being responded to  case and that didn't exist here your client admitted that they had no bad motives they had no bad intent it was the problem was is that the law changed while they were in the process of getting their permits and that was an unforseen you know business circumstance that could not have been avoided in up until that point things were fine so isn't isn't there actually really a difference here and respectfully judge brown i disagree because and let me let me back up by by quoting this language directly from from peshawar which says that st the nd problem for piercing the corporate veil does not require a specific finding a fraudulent intent and my client was asked a question as deposition as to do you think i have seen it was out to defraud and he truthfully said no i think they had the best intentions and that's why i'm relying on these cases to say you still have you you may have the best intentions  under the law of pressure in twenty years the veil can still be peers it's like a strict liability for under capitalization rule to me then you have the best of intentions things went wrong but you still have to you still have to pay like there's a guarantee and i think the lesson learned your honor is that if for a large corporation like i feel if they want to come into montana and enter into contracts with with individual landowners this this case will give a lesson and that lesson is set up a separate l c don't fund it at all and if the project goes bad just declare bankruptcy and you're good to go and that's the result that has occurred here and to me respectfully that is bad faith and falls but there's also a lesson for the montana landowners and that is get that foreign corporation to guarantee the deal certainly do you is there some use we use the word fraud is there some requirement even under your analysis work or some kind of bad conduct for something i mean if this really comes down to the essence of your argument is this is a sham this is a sam entity and because it's a sham entity person that they were told they were being contracted with and they knew that was a separate and it in it was teach stink from the parent how worst worst i guess is are bad conduct here that we were missing and my clients entered into a one million four hundred and fifty thousand dollars deal and got paid four hundred and fifty thousand dollars four hundred and fifty thousand dollars a lot of money and we don't deny that but there still is a breach of contract which they are the victim of and so i think it's i think it's difficult to say that my clients got a huge windfall when you when we could talk for hours about the north dakota montana oil boom and the money people made from that that they lost their opportunity to unfortunately we don't have hours to talk about it now your time is up thank you very much thank you so much thank you councilman thank you for your action arguments today this matter we submitted