Liability exposure

Question 1

Inside and outside liabilities

Answer 1

inside: owner liability for business obligations

outside: company liability for owner or member liabilities

Question 1

Veil Piercing

Answer 1

Equitable doctrine, Imposes liability on owner for debts of entity

Factors
(1) Alter ego

(2) Entity used to commit fraud

(3) Failure to observe formalities

(4) Company inadequately capitalized

(5) Owner comingled personal and business assets

**Clear and convincing*

Question 2

Greenhunter Energy - veil piercing case

Answer 2

Background
- Greenhunter parent of wind energy LLC
- LLC hired Western for consulting, then did not pay
- Western sued for breach of contract, but LLC had no assets
- Asked court to pierce the veil

Key facts that led court to allow piercing the veil
- Inadequate capitalization, took all of the money out of the bank account
- Alter ego

Question 3

If owner has a personal debt and creditor pursued corporation owned by the debtor

Answer 3

Creditor gets writ of execution to seize shares

Sells shares for money

Question 4

If owner has a personal debt and creditor pursued LLC owned by the debtor

Answer 4

Creditor gets a charging order, a lien on the debtor’s ownership interest

• Only right to receive distributions, no ownership rights
• No other rights or remedies

Question 5

what happens if a creditor gets a charging order against a member’s LLC interest and the distributions are inadequate to pay the debt?

Answer 5

Creditor can seek judicial foreclosure, forcing the sale of the ownership interest

• member loses entire interest
• member dissociated

Question 6

If an LLC has one member, and that member files for personal bankruptcy, will the LLC be subject to the personal debts?

Answer 6

Yes. A court can disregard the charging order protection for a single member LLC

• Here, there are no “innocent members” of the LLC to protect. The LLC has one owner.
• The court may even invalidate any “peppercorn” allocations of ownership interest to family or friends for the sake of avoiding this rule

Question 7

Reverse veil piercing

Answer 7

The court pierces the veil of the entity (which has assets) to hold the entity liable on debts of the owner (who has no assets)

Question 8

Factors for reverse veil piercing

Answer 8

(1) The potentially liable shareholder used the corporation to
- Avoid personal obligations,
- Commit fraud,
- Commit a crime, or
- Commit an injustice.

(2) alter ego

Also consider:
(3) The potential impact on innocent investors as well as creditors, and

(4) The availability of other remedies a creditor may pursue

“clear and convincing” evidence