Ouch. That's Gonna Sting And Leave A Mark. A LLC Gets Its Veil Pierced.

A New York Federal Court recently found reason to "pierce the veil" of a Delaware Limited Liability Company.  As we all know from Business Law 101, corporations and limited liability companies are formed to shield the assets of their owners from the liabilities of the entity.  When a court finds adequate reason, it can remove the liability protection of such entities and such an action is called "piercing the veil".

In this case, Soroof Trading Development Company signed a distribution agreement with GE Fuel Cells LLC.  This agreement gave Soroff exclusive rights to distribute fuel cells in Saudi Arabia.  The members of the LLC were GE Microgen, Inc. and Plug Power, Inc.  As luck would have it, the LLC failed to deliver the fuel cells for Soroff to distribute.  Soroff was peeved.  Lawsuits ensued.

The LLC was dissolved in 2006 and a certificate of cancellation was filed with the Delaware Secretary of State.  The LLC also (look, this is my shocked face) had no assets at the time it was dissolved.  The individual members were not parties to the distribution agreement so one way to get to them (and their assets) was to attempt to pierce the veil.

Factors that courts consider when deciding to allow such piercing include whether the entity (either corporation or LLC) acted as an alter ego for the shareholder(s) or members.  If it is virtually impossible to distinguish between the operation of the entity and the business of the members, a court will find liability under the alter ego theory.

In this case, the LLC had no assets at the time of dissolution, it had no employees and the individuals working at G E Fuel Cells were employees of the members or GE, it had no office space because it used the space leased by Plug Power and it did not have any signage reflecting its presence.  The Court found this sufficient to grant a partial summary judgment piercing the veil.

Now, this opinion has some hair on it (as we say on the farm) because the court failed to cite any unfairness or inequity, which is generally required to grant a piercing.  It also failed to annul the cancellation of the LLC, which leaves the LLC non-existent and under Delaware law, not susceptible to suit.  If the LLC is not susceptible to suit, there is no liability to flow through to the members.

Maybe this will sorted out on the next appeal.

However, lessons to be learned here are to heed the advice we give to each LLC that we form as to the steps to be taken to minimize the likelihood that this might happen to you.

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