Source: https://www.lonestarlandlaw.com/piercing-the-veil.html
Timestamp: 2019-04-24 12:45:58+00:00

Document:
This article addresses "piercing the veil," which refers to the limited circumstances under which the liability shield of a registered legal entity (an LLC or corporation) may be pierced and the individuals behind that entity held personally accountable. Knowing when this might or not occur is an important factor in asset protection since a piercing event defeats the central purpose of forming an entity in the first place.
Piercing the veil is an equitable remedy the applicability of which depends on the specific facts at hand; nonetheless, the liability barrier of a registered entity may be pierced only in exceptional circumstances. See Wilson v. Davis, 305 S.W.3d 57, 59, 69 (Tex. App.—Houston [1st Dist.] 2009, no pet.).
Actual fraud committed primarily for the direct personal benefit of the corporate shareholder or LLC member is thus required, at least for contract-type claims. This is Texas' actual fraud rule. Further, to "determine if the [members of an LLC] are liable under the asserted veil-piercing theories, the Court must analyze both the question of whether the facts satisfy any of the asserted veil-piercing strands and the question of whether any of the [members] caused [the LLC] to be used for the purpose of perpetrating and did perpetrate an actual fraud on [the plaintiff] primarily for the direct personal benefit of the considered defendant." In re JNC Aviation, LLC, 376 B.R. 500, 527 (Bankr. N.D. Tex. 2007), aff'd, 418 B.R. 898 (Bankr. N.D. Tex. 2009). "[The] veil of an LLC may be pierced with respect to the entity's contractual liability only upon proof that [a member or manager] used the LLC to perpetrate actual fraud for the defendant's direct personal benefit. Shook v. Walden, 368 S.W.3d 604, 607 (Tex.App.—Austin 2012, pet. denied). Mere allegations of "alter ego" or "sham company" are insufficient. Metroplex Mailing Servs. v. RR Donnelley & Sons Co., 410 S.W.3d 889 (Tex.App.—Dallas 2013, no pet.).
Accordingly, allegations by the plaintiff that the defendant company is a sham without substance or is operated as the alter ego of its owners—both of which appear regularly in Texas pleadings—are insufficient as a matter of law to achieve a piercing. Texas courts recognize the "strict restrictions on a contract claimant's ability to pierce the corporate veil." Ocram, Inc. v. Bartosh, No. 01-11-00793-CV2012, WL 4740859, at *2-3 (Tex. App.—Houston [1st Dist.] 2012, no pet.). Because these sorts of allegations are common, in spite of express and oft-stated case law to the contrary, business lawyers defending LLCs and corporations are regularly called upon to expend resources responding to them. From an investor's point of view, it is far better to take simple steps to document and regularly maintain the company (having annual meetings and so forth) so that these sorts of allegations will have no basis in the first place. A worthwhile ounce of prevention, so to speak.
The reader may note that the foregoing statute refers specifically to corporations. What about LLCs? Business Organizations section 101.002 provides the answer by importing the piercing provisions of section 21.223 into the realm of LLCs. In other words, the same standards apply to both corporations and LLCs even though provisions of the statute may refer to a corporation rather than an LLC and to shareholders rather than members. Accordingly, LLC members can expect to receive the same treatment as shareholders of a corporation, no more, no less. See Penhollow Custom Homes, LLC v. Kim, 320 S.W.3d 366 (Tex. App.—El Paso 2010, no pet.).
whether the allocation of profits and losses between the entities is unclear.
Any and all of the above should be considered red flags in a piercing case. From an asset protection perspective, all can be avoided by sound planning and documentation.
The signature by a corporate officer or LLC manager does not, by itself, make that individual personally liable for company obligations, even if the signature line fails to specify that the signer is acting solely in his or her capacity as an officer or authorized representative. Neel v. Tenet HealthSys. Hosps. Dallas, Inc., 378 S.W.3d 597, 604-04 (Tex. App.—Dallas 2012, pet. denied). This rule tracks a central tenet of agency law: an agent is not liable on contracts made on behalf of a principal whose identity has been disclosed. Nonetheless, it is always the better practice to make sure that the signer on a contract fully discloses the capacity and authority to act on behalf of the entity for which he or she signs.
Directors and officers face full personal exposure, however, if the entity fails to pay its taxes. Tex. Tax Code § 171.255. If a registered entity's status is forfeited for nonpayment of taxes, then each director, officer, or manager may be held liable for debts of the entity from the date on which the tax was due up to the time the entity is reinstated. In re Trammel, 246 S.W.3d 821 (Tex. App.—Dallas 2008, no pet.).
During the discovery phase of a lawsuit involving a corporation or LLC, a plaintiff's attorney will likely request production of the company book and all relevant company documentation. Purpose? If the company has no company book or documentation other than a Certificate of Filing, the plaintiff's attorney may then amend his pleadings to include an allegation that the LLC is merely the alter ego of the individuals behind it (even though this notion is legally obsolete in Texas), and therefore the liability shield should be pierced to hold members personally responsible for company wrongdoing. But what does "alter ego" mean? "Under the [now-discarded] alter ego theory, courts disregard the corporate entity when there exists such unity between the corporation and individual that the corporation ceases to be separate and when holding only the corporation liable would promote injustice." Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228 (Tex. 1990). In other words, the company had failed in its mission to maintain itself as a legal entity independent of its owner. While Business Organizations Code section 21.223(a)(2) eliminates the alter-ego theory as a basis for veil piercing, it cannot be eliminated as a factor in a case where actual fraud is present, particularly since piercing in Texas has always been linked to values of fairness and justice.
Clients often worry whether or not the LLC liability shield will hold up if there is only one member. This is not a concern in Texas. Since Business Organizations Code section 101.002 makes it clear that rules in this area relating to corporations also apply to LLCs, then (subject to the piercing rules outlined above) an LLC's liability shield remains intact even though there is only one member.
A series LLC (as opposed to a traditional LLC) allows for different compartments or series that are insulated from the assets and liabilities of other series within the company. While not technically separate legal entities, these individual series nonetheless behave as subcompanies capable of doing business independently of the company at large, entering into contracts, and holding title to property. There is not yet published Texas case law on this subject, although extensive precedent exists from other jurisdictions to which a Texas court may look for guidance in the series context. It is our view that even if a particular series is pierced, the other series within the company will remain intact.
Many business persons utilize online services or otherwise engage in no-frill LLC filings involving a one-page COF and the payment of a filing fee—and then believe they are safe from lawsuits. This may not be so if the company fails to follow up with a company agreement, issuance of membership certificates, minutes of meetings, and the like. While section 21.223(a)(3) expressly eliminates the failure to observe corporate formalities as a basis for piercing, such failure may well be subtly considered by a real-world court in determining whether or not an actual fraud was perpetrated. Add an inflamed jury, one that is outraged at a perceived injustice, and the risk that a court will pierce the veil grows more likely. The law is not a machine. One cannot underestimate the human factor. It is more prudent to be safe than sorry when it comes to company documentation and other formalities.
(a) If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. The liability includes liability for any tax or penalty imposed by this chapter on the corporation that becomes due and payable after the date of the forfeiture.
(b) The liability of a director or officer is in the same manner and to the same extent as if the director or officer were a partner and the corporation were a partnership.
(2) without the director's knowledge and that the exercise of reasonable diligence to become acquainted with the affairs of the corporation would not have revealed the intention to create the debt.
(d) If a corporation's charter or certificate of authority and its corporate privileges are forfeited and revived under this chapter, the liability under this section of a director or officer of the corporation is not affected by the revival of the charter or certificate and the corporate privileges.
Trusts—whether created for the purpose of anonymity, facilitating land transactions, or for probate avoidance—can be an important element in an overall asset protection structure. However, trusts are not technically legal entities in the same sense as a corporation or an LLC, although they often act like it in the real world. Trust agreements are not officially filed anywhere and have no state registration or approval requirements. Accordingly, there is no liability barrier and piercing rules do not apply. The participants in a trust—the trustor/grantor, the trustee, and the beneficiaries—are automatically exposed to lawsuits in their personal and individual capacities, which can be a dangerous position in which to find oneself. For this reason, investment trusts are most effectively used in conjunction with an LLC. The exception is a stand-alone living trust for the homestead since the homestead and related assets are already protected by Texas Constitution article XVI, section 50 and Property Code chapters 41 and 42.
A related point worth making is that a judgment lien will not attach to trust property for which the judgment debtor is serving as trustee. Davis v. Gayer, 2004 WL 638140 (Tex.App.—Houston [1st Dist.]. Expect a hassle, however, from the plaintiff's attorney if your "trust" has no trust agreement to back it up, no deeds of property into it, no EIN or bank account, and no records.
The law applicable to piercing continues to evolve at the level of the courts. The safest practice is to establish and maintain an LLC with thorough and ongoing documentation that is contained in a company book. Certificates for membership interests should also be issued. It is sound business practice to periodically document significant activities and events affecting one's company using resolutions, special meetings, and the like, thereby preempting alter-ego type piercing allegations before they arise.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 § 171
 v. 
 v.