Source: https://lawprofessors.typepad.com/business_law/2019/01/wv-proposal-to-eliminate-llc-veil-piercing-reasonable-concept-poor-execution.html
Timestamp: 2019-04-20 12:55:08+00:00

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In 2014, I discussed a case West Virginia case in a post here at Business Law Prof Blog, More LLC Veil Piercing Forced into State Statutes. In that post, I was critical of a West Virginia Supreme Court of Appeals decision reading veil piercing into the state's LLC statute. My main issue with that case, Kubican v. The Tavern, LLC, 232 W.Va. 268, 752 S.E. 2d 299 (2013), was that" Virginia’s veil-piercing test stated more clearly than other states . . . that corporate formalities are the main issue for the unity of interest test" for veil piercing an LLC. This is problematic because, of course, LLCs don't have many formalities, and none of them are "corporate" (because LLCs are not corporations).
To be fair, the opinion wisely directed that, for LLC veil piercing, courts “disregard of formalities requirement.” But the overlay of corporate formalities and corporate traditions remain in the numerous other factors courts are to consider, and thus analysis of the factors are likely to occur with through a decidedly corporate filter. That's not reasonable or fair for LLCs.
ARTICLE 3. RELATIONS OF MEMBERS AND MANAGERS TO PERSONS DEALING WITH LIMITED LIABILITY COMPANY.
§31B-3-303. Liability of members and managers.
(a) Except as otherwise provided in §31B-3-303(c) of this code, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. It is the intent and policy of the Legislature that for any claim against a limited liability company arising after the effective date of the reenactment of this section during the regular session of the Legislature, 2019, common law corporate “veil piercing” claims may not be used to impose personal liability on a member or manager of a limited liability company, and that the West Virginia Supreme Court of Appeals decision in Joseph Kubican v. The Tavern, LLC, 232 W.Va. 268, 752 S.E. 2d 299 (2013) be nullified.
(b) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.
As noted above, I have supported legislative action to allow or disallow LLC veil piercing. Where LLC veil piercing is to be allowed, I have advocated for a clearly stated LLC-specific test. And were veil piercing to be eliminated, I have advocated for legislation making that clear, too. This proposal has this last option right.
That said, I have a couple significant objections to the proposed statute, as written. First, and most significant, the statute could be read to eliminate the possibility of personal liability for any company debt for any member of an LLC. The proposed legislation seeks to modify the following: "A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager." By dropping "solely," this proposal appears to limit other potential sources of liability (that are not veil piercing), which are traditionally considered liability related to the actions or a member. By analogy, the Model Business Corporation Act provides, "(b) A shareholder of a corporation is not personally liable for any liabilities of the corporation (including liabilities arising from acts of the corporation) except (i) to the extent provided in a provision of the articles of incorporation permitted by section 2.02(b)(2)(v), and (ii) that a shareholder may become personally liable by reason of the shareholder’s own acts or conduct." § 6.22 Liability of Shareholders (emphasis added).
Where an individual LLC member acts in a way that should lead to liability (promises to pay individually, seek to deceive, etc.), the possibility for direct liability to the member is proper and is generally recognized by even the most ardent advocates of abolishing veil piercing. For example, the most prominent scholar on this front, Prof. Bainbridge, in his article, Abolishing LLC Veil Piercing, "advocates a regime of direct liability: Did the defendant-members do anything for which they are appropriately held personally liable?" I concur.
It is the intent and policy of the Legislature that for any claim against a limited liability company arising after the effective date of the reenactment of this section during the regular session of the Legislature, 2019, common law corporate “veil piercing” claims may not be used to impose personal liability on a member or manager of a limited liability company, and that the West Virginia Supreme Court of Appeals decision in Joseph Kubican v. The Tavern, LLC, 232 W.Va. 268, 752 S.E. 2d 299 (2013) be nullified.
The court cites potential abuse of LLC laws if they were to adopt such a rule that motivates companies to ask for guarantees. instead adopting a rule that could incentivize companies like Western actively avoid ask ingfor guarantees. Why? Because if you ask for a guarantee and are refused, it could be used against you later. But if you don’t ask, you may get to piece the veil and seek a windfall recovery by getting a post hoc guarantee that was not available via negotiation.
This West Virginia proposed legislation would likely lead more parties to seek guarantees, which I see as a good thing. But this is a significant change to the legal landscape, and it seems to me the whole thing should be prospective. Thus, new interactions, new contracts or renewals, etc., should be under the new law, but that there should be at least some look-back period. One could argue that a "claim against a limited liability company arising after the effective date" related to a 2014 contract is a claim that "arose" before the effective date because a "claim" is different from a "lawsuit." For me, I would probably amend it to say something like, for events leading to a lawsuit against a limited liability company arising after the effective date . . . .." This would have the added benefit of preserving claims for events preceding the effective date that were not filed or discovered but are still within the statute of limitations. This seems more equitable to me.
Anyway, I am intrigued by the concept of eliminating LLC veil piercing, but I think this needs more thought.
“Conflicted exchange” means a transfer of money or other property from a limited liability company to a member of the limited liability company (or to any other organization in which the member has a material financial interest) in exchange for services, goods, or other tangible or intangible property of less than reasonable equivalent value.
“Insolvency distribution” means a transfer of money or other property from a limited liability company to a member of that limited liability company (or to any other organization in which the member has a material financial interest), in respect of the member’s ownership interest, that renders the limited liability company insolvent.
“Insolvent” means, with respect to a limited liability company, that the limited liability company is unable to pay its debts in the ordinary course of business. Claims that are unusual in nature or amount, including tort claims in claims for consequential damages, are not to be considered claims in the ordinary course of business for the purposes of this section.
That's all for now. This is a pretty big proposal, and it won't surprise me if it passes. If they are committed to it, I sure hope they take the time to get it right.
Thanks for the thoughtful comment, Doug. I have to disagree that there is “no principled reason why piercing would not apply in the LLC context.” First, if one thinks the whole veil piercing concept is fundamentally flawed, removing veil piercing from LLCs is a good start. I think one can be principled in seeking to abolish veil piercing in LLCs. To remain principled, one need not say, “all or nothing.” Furthermore, I think there is at least arguably value in seeing how people, the market, etc., respond to LLCs if veil piercing is abolished. Let the entity types be even more different and see what happens. (States as “laboratories of democracy,” and the like.) Are people less willing to do business with LLCs san veil piercing? Insurers?
I agree that an explanation for why is necessary, though I also think courts need to do more explaining than lawmakers (they will end up explaining to voters, one way or another). That is, as I have noted about Flahive previously, the court there simply read in veil piercing even though the statute was silent. I find the simple, “well, corporations have it” to be lacking.
Finally, as to an explanation, I think the LLCs are different from corporations because they lack significant formalities, which was part of the plan. Veil piercing was designed around the idea of a highly formalized entity with a lot of requirements. LLCs were designed to eliminate many of those and thus should be seen through a different lens.
I find veil piercing unsatisfying because it potentially puts at risk for personal liability other members/shareholders who were not wrongdoers. Rarely will a court go down that path, fortunately, but because they won’t, I would prefer to rethink, and perhaps expand, concepts of direct liability. Most cases where the veil is pierced could be decided on fraud grounds, or perhaps even a creative use of agency law (more on that later). Ultimately, I share the concern that some people are using entities to commit bad acts. I am just not at all convinced that veil piercing is having a significant effect in policing those bad actors.
I keep recommending the Texas approach, which is veil piercing only when the entity (of whatever type) is used to commit actual (not constructive) fraud for the personal gain of the shareholder/member. I don’t see any reason why small business owners (who do things like mixing up business and personal) should have any liabilities that public shareholders don’t unless they are engaged in fraud.
o	the bargaining power necessary to cause a party to consider (let alone provide) a personal guarantee.
ULLCA (901)(a) The law of the jurisdiction of formation of a foreign limited liability company governs: … (2) the liability of a member as member and a manager as manager for a debt, obligation, or other liability of the company; ….
(2) the claim is to establish or enforce a liability arising under law of this state other than this [act] or from an act or omission in this state.
I think those judges tend to get the right result and recognize fraud and Greenhunter-like "intentional undercapitalization" when they see it. I, however, think that in lieu of veil piercing, we should be using expanded concepts of fraud and misappropriation of funds that attach to the wrongdoer directly.
That said, as to the West Virginia proposal, I agree that it very much ignores the nonconsensual creditor. But the law generally doesn’t tend to worry too much about nonconsensual creditors who are harmed by judgment proof tortfeasors or those with limited resources, so this really starts to call into question how serious we are about the concept of limited liability as opposed to protecting the injured. Instead of veil piercing, again, I am drawn to a broader sense (and availability) of direct liability that attaches to wrongdoers.
As to the idea of letting the market respond, I meant that in the largest sense and to include the market for entity law (as Roberta Romano might call it), which would include the possibility that states would start disregarding state of formation veil piercing law and using (for example) that of the forum state. I very much agree that is a risk. I think those behind the WV have not thought it through very well, and instead think they can compete in the entity law market and become the new Delaware (or Nevada). The motivation does appear, at least, to be something of a race to the bottom. I, nonetheless, think veil piercing could be reasonably be re-thought because of its amorphous and seemingly random applications.
Ultimately, I share the concern that involuntary creditors and others are often not getting what they are due, but I am not very convinced that veil piercing has done a lot to protect most of them. I tend to think we can do better both as to fairness and to doctrine. But then again, perhaps I am being overly optimistic on both fronts.
I very much appreciate the thoughtful comments and insight.

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