Opinion ID: 2538918
Heading Depth: 1
Heading Rank: 6

Heading: Piercing the LLC Veil

Text: [¶ 9] Limited Liability Companies are creatures of statute. §§ 17-15-101 through XX-XX-XXX. It is evident from the district court's decision letter that its judgment was guided by our decision in Kaycee Land and Livestock v. Flahive, 2002 WY 73, 46 P.3d 323 (Wyo.2002) and the authorities cited therein. Also see Rivermeadows, Inc. v. Zwaanshoek Holding, 761 P.2d 662, 666-67 (Wyo.1988); Phillip L. Jelsma and Pamela Everett Nollkamper (Phillip P. Whynott), The Limited Liability Company, §§ 11-130 and 11-140 (2009) (noting that every state that has enacted LLC piercing legislation has chosen to follow corporate law standards and not develop a separate LLC standard); David M. Hastings, Annotation, Construction and Application of Limited Liability Company Acts, 79 A.L.R. 5th 689, § 5 (limited liability company acts interpreted as analogous to business corporation law) (2000 and Supp. 2008). We also take note here that the Whynott treatise notes that, The LLC veil piercing factors used from the corporate arena can be reduced to four categories: 1. Fraud; 2. Inadequate capitalization; 3. Failure to observe company formalities; and 4. Intermingling the business and finances of the company and the member to such an extent that there is no distinction between them[.] Id., at § 11:130. We are satisfied from the discussion we have set out above, as well as from a very similar discussion set down in the district court's decision letter, that the district court faithfully applied the correct law to the factual disputes that arose in this case. Gasstop contends that the district court failed to consider factors relevant in the LLC context, and also considered factors from the corporate context that are not relevant to an LLC. Our review of the more persuasive authorities counsels us to reject this contention. [¶ 10] The district court made detailed findings of fact as to the damages claimed by Gasstop. However, we will not set them out in detail because the amount of the damages is not contested by Seatwo or Small. It suffices to note that Gasstop asserted the damages owed by Seatwo and/or Small totaled $236,672.12. It also suffices to note that the district court found that Seatwo breached the lease/contract and that Gasstop was damaged in the amount set out above. The real issue was who was to pay any such damages, Seatwo or the Smalls. [¶ 11] Having ascertained the damages at issue, the district court proceeded to address the issue of piercing the LLC veil  i.e., whether or not to hold the Smalls liable for the damages rather than the defunct Seatwo, LLC. The district court set out the law applicable to that issue, and it was in all respects consistent with the law we have summarized above. After having done so, the district court reached these conclusions about the factors that go into a consideration of whether the piercing of the LLC veil is permissible: a. Undercapitalization  Evidence was presented that the Smalls had operated other Burger King business ventures successfully. The failure of [the instant] business was not due to the undercapitalization, but was rather due to the poor location, lack of customers and poor traffic count. The testimony showed that the issue of capitalization was not the reason for the loss of money for both parties in the business, but rather the lack of the success of the business. At no time did the testimony purport to show that the lack of capital was a reason for the failure of the business or the inability to pay rent. Rather, the business operated for approximately two years at a loss and was still, although struggling, making the rental payments. Regardless, undercapitalization by itself is not grounds to pierce an LLC veil. Where all corporate formalities were followed, undercapitalization was not the only pertinent factor to be considered in piercing the corporate veil. Amfac Mechanical Supply Co. v. Federer, 645 P.2d 73, 82 (Wyo.1982) (citing Fisser v. International Bank, 282 F.2d 231, 240 (2nd Cir.1960) (footnote omitted)). b. The Smalls as the Holders of the Franchise  As the testimony indicated, Burger King required individuals to hold the franchise in their own names; the LLC could not hold the franchise. The Smalls used the franchise consistent with the needs and organization of SEATWO, and received no benefit when they lost the franchise. The Smalls never received any compensation when Burger King withdrew the franchise because the business was no longer able to operate. The franchise was fixed to the location. Therefore, the argument that the franchise was an asset that should have been in SEATWO for the benefit of creditors is unpersuasive. There was no evidence presented at trial that the Smalls, in any way, were commingling funds or misusing the franchise, but rather it was for the sole purpose of the operation of the restaurant by SEATWO. The Court finds the evidence of holding the franchise in their own names was not sufficient to show a lack of conformity to the formalities of operating an LLC. Although there was question about the terms in the lease stating the tenants needed to hold the franchise, this language is not a persuasive argument when it was impossible for SEATWO to actually hold the franchise. c. Furniture Fixtures and Equipment  All testimony regarding these items showed that First Interstate Bank had a prior lien on any equipment, and the Court finds that SEATWO made good faith efforts in liquidating the equipment, but were unable to do so. SEATWO was forced to donate the equipment for a tax credit for SEATWO. The testimony indicated the bank knew that Mr. and Mrs. Small were trying to sell the equipment on behalf of SEATWO in an effort to liquidate damages, but were unsuccessful. These actions were approved by the bank, and were within the capacity of the members of SEATWO in trying to satisfy the first priority creditor. d. The Company was used as an Alter Ego and to Defraud  There is no indication that the company, SEATWO, was used to defraud anyone, or that it was simply being used as an alter ego for the personal business ventures of Mr. and Mrs. Small. The Wyoming Supreme Court has addressed the piercing of a corporate veil under the alter ego or the non-existence of an actual separate entity issue. This Court will follow their [holding]. When 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 then the veil may be pierced. Jackson Hole Traders, Inc. v. Joseph, 931 P.2d 244, 251 (Wyo. 1997) (citing Minifie v. Rowley, 187 Cal. 481, 202 P. 673, 676 (1921) (other citations omitted)). The evidence did not support an assertion that SEATWO was an alter ego for the Smalls. Quite the contrary, the Smalls had used a legal business entity as a liability shield. SEATWO entered into a contract with GASSTOP to further a business objective of operating a Burger King on property owned by GASSTOP. The testimony showed that the same owners of these two entities had done business together before in substantially the same manner, and it had been profitable. The Smalls used SEATWO as an operating and accounting business for the Burger King restaurant. They followed the formalities required and were not attempting to sanction a fraud or promote injustice. To the contrary, both entities were entering into a business agreement in an effort to [perpetuate] a profitable business to benefit both parties. Testimony indicated that SEATWO kept separate accounting statements, filed all proper paperwork with the Secretary of State, filed separate tax returns, only made small contributions to the Smalls on two occasions as employees of the business entity SEATWO, and followed all relevant formalities under the law. The Smalls operated SEATWO in substantial conformity with the rules set forth to operate an LLC. They kept all personal and business assets separate. They filed the appropriate paperwork with the Secretary of State, and operated as a prudent LLC. This Court finds no evidence to pierce the LLC veil.