When you are the plaintiff in a commercial litigation matter, obtaining a judgment against a company that did you or your business wrong can bring a sense of vindication and justice. What it won’t necessarily bring you are the dollars and damages you were awarded in that judgment. Often a judgment against a corporation or limited liability company (LLC) aren’t worth the paper they are printed on because the entity has insufficient assets to satisfy the judgment.
But, to quote a famously vanquished politician, “corporations are people, my friend.” In the context of obtaining a judgment and recovering damages against an insolvent entity, it is the people behind the entity where you want to focus your efforts. Yet the very reason that business owners form corporations or LLCs is to ensure that their personal assets will not be vulnerable in the event that lawsuits or other liabilities confront their business.
In the case of LLCs, many small business owners often choose to form these entities because of the perception that there are fewer corporate “formalities” then there are for corporations. While that is largely true, taking that informality too far or engaging in other improper activities can expose those LLC owners to the very personal liability for company obligations that led them to form the entity in the first place.
“Piercing the Corporate Veil”
Known as “piercing the corporate veil,” though the concept applies to LLCs as well, imposing personal liability for corporate obligations or malfeasance was described by the Connecticut Supreme Court as follows:
“Courts will … disregard the fiction of a separate legal entity to pierce the shield of immunity afforded by the corporate structure in a situation in which the corporate entity has been so controlled and dominated that justice requires liability to be imposed on the real actor…. We have affirmed judgments disregarding the corporate entity and imposing individual stockholder liability when a corporation is a mere instrumentality or agent of another corporation or individual owning all or most of its stock….“
Naples v. Keystone Development Corp., 990 A.2d 326 (2010)
Connecticut courts use one of two tests to determine whether an LLCs veil will be pierced: the “identity test” and the “instrumentality test.” The “identity test,” requires proof of such a unity of interest and ownership between the owner and the entity that the entity had in effect ceased (or had never begun) to adhere to a separate legal identity.
To pierce the veil under the instrumentality test, a plaintiff must show that (1) the defendant completely dominated the LLC’s finances, policies, and business practices, (2) the defendant used that control to commit fraud, waste or a dishonest or unjust act, or to violate a legal duty, and (3) the defendant’s conduct caused the injury or loss complained of.
Factors Considered in Determining “Domination” and “Control”
There are many factors courts consider in determining whether a member has so “dominated” and “controlled” the LLC that the LLC form should be disregarded including:
- the absence of corporate formalities;
- inadequate capitalization;
- whether funds are put in and taken out of the corporation for personal rather than corporate purposes;
- overlapping ownership, officers, directors, personnel;
- common office space, address, phones;
- the amount of business discretion by the allegedly dominated corporation;
- payment or guarantee of debts of the dominated corporation;
- whether the corporation in question had property that was used by other of the corporations as if it were its own
Especially in LLCs with very few members, owners are often tempted to disregard certain formalities in the name of convenience, even if there is no intent to defraud or otherwise engage in any impropriety.
Aggrieved plaintiffs in commercial matters should discuss with their attorney the possibility of pursuing LLC owners personally in any business dispute with an LLC, especially one that has little or no assets available to satisfy any judgment that you could spend lots of time and money to obtain.