Opinion ID: 1395914
Heading Depth: 3
Heading Rank: 3

Heading: Failure to Follow Corporate Formalities

Text: The defendants argue the district court erred by instructing the jury that TSF's corporate form could be disregarded if TSF failed to follow corporate formalities. [8] The Iowa Limited Liability Company Act of 1992, Iowa Code §§ 490A.100-490A.1601, limits the extent of the personal liability of members of limited liability companies to the personal liability of shareholders of corporations, except that the failure to hold meetings . . . or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that the members have personal liability for any debt, obligation, or liability of the limited liability company. Iowa Code § 490A.603(2). Compared to the factors that support piercing the veil of a corporation, section 490A.603(2) eliminated the failure to hold meetings as a factor that could support piercing the veil of a limited liability company. See Estate of Countryman, 679 N.W.2d at 602-03. The elimination of the failure to hold meetings factor for limited liability companies is rational because the managers or members of limited liability companies may exercise corporate power without making decisions by voting at formal meetings. See Iowa Code § 490A.702(1), 490A.705(1); see also Steven C. Bahls, Application of Corporate Common Law Doctrines to Limited Liability Companies, 55 Mont. L.Rev. 43, 63 n. 116 (1994); cf. Iowa Code § 490A.701(2), (3) (requiring a majority vote of the limited liability company members only to dissolve and wind up, to sell or pledge all or substantially all of the assets, or to merge, and, unless agreed otherwise, a unanimous vote to amend the articles of organization or operating agreement). In contrast, a corporation's board of directors exercise corporate power by voting on decisions at formal meetings. See id. § 490.801(2), 490.820-.824. Because, in contrast to a corporation, a limited liability company can be managed without holding formal meetings, the failure to hold meetings is not an extraordinary occurrence that supports disregarding its corporate form. This distinction is important, because the question here is whether nonprofit corporations should be treated as limited liability companies or as corporations for purposes of piercing the corporate veil based on a failure to hold meetings. We hold, again anticipating Iowa law, the corporate form of nonprofit corporations can be disregarded based on a failure to hold meetings for two reasons. First, the Iowa legislature understood how to modify the common-law factors that support piercing the corporate veil, as the Iowa legislature did in the Iowa Limited Liability Company Act modifying these common-law factors for limited liability companies. See Iowa Code § 490A.603(2). Because the Iowa legislature modified the common-law factors that support piercing the veil of a limited liability company (yet the legislature did not do so for nonprofit corporations) to give effect to the legislature's decision not to modify the common-law factors that support piercing the veil of a nonprofit corporation, we conclude the factors that support piercing the veil of a corporation also support piercing the veil of a nonprofit corporation. See generally 2B Norman J. Singer, Statutes and Statutory Construction § 53.03 (6th ed. 2000) (By referring to other similar legislation, a court is able to learn the purpose and course of legislation in general, and by transposing the clear intent expressed in one or several statutes to a similar statute of doubtful meaning, the court not only is able to give effect to the probable intent of the legislature, but also to establish a more uniform and harmonious system of law.). Second, this holding is consistent with the notion that nonprofit corporations operate in a manner similar to corporations. For example, the nonprofit corporation's board of directors exercises corporate power by making decisions at formal meetings. See Iowa Code § 504A.17, 504A.20, 504A.22 (2003). Treating a nonprofit corporation as a corporation for purposes of piercing the veil based on the failure to hold meetings is consistent with the Code of Iowa. See generally Fleur de Lis Motor Inns, Inc. v. Bair, 301 N.W.2d 685, 689 (Iowa 1981) (The objective of statutory construction is to give effect to the intention of the General Assembly.). The district court did not err in instructing the jury on these issues.