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“Piercing the Veil” of an LLC

by Norris Law Group on December 15, 2014

A recent article in Forbes magazine tells the story of Western Echosystems Technology, Inc. (Western) provided consulting services to GreenHunter Wind Energy (“the LLC”), which operates a wind farm in the state of Wyoming. But the LLC did not pay Western for its services, and Western decided to sue GreenHunter for breach of contract.  Western won a judgment of $43,646 plus attorney’s fees ($2,161). When Western tried to collect the award, however, they discovered that the LLC actually had no assets and could not pay the judgment. Western tried to collect by bringing an action against GreenHunter Energy, Inc. (“GreenHunter”), a Texas corporation and the sole member of the LLC. Western also requested that a judge “pierce the veil” of the LLC and transfer liability for the judgment to GreenHunter.

GreenHunter was indeed found to be the sole member and manager of the LLC at trial. The court proceedings also revealed that the LLC never had a capital balance sufficient to cover any debts, and in fact usually had a zero capital balance. GreenHunter would advance funds to the LLC as needed, but it did not provide any funds to pay the judgment won by Western.

The Court found in favor of Western and entered a judgment against GreenHunter for $45,808. GreenHunter appealed to the Wyoming Supreme Court, which found that “corporations and LLCs are entities which are legally distinct from their owners, so long as that protection does not result in an injustice.” While the Court has the authority to “pierce the veil” of a limited liability company, it does so rarely and only in extraordinary circumstances.

A 2010 update to Wyoming LLC law mandated that the limited liability shield of an LLC could potentially be pierced in one or more of these circumstances:

“(a) The debts, obligations or other liabilities of a limited liability company, whether arising in contract, tort or otherwise:

(i) Are solely the debts, obligations or other liabilities of the company; and

(ii) Do not become the debts, obligations or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.

(b) The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations or other liabilities of the company.”

The Wyoming Supreme Court found that the LLC and its parent company GreenHunter had used the LLC improperly and in violation of the law. An experienced business law attorney skilled in Wyoming LLCs can help companies not only draft LLCs but also explain how a Wyoming LLC should operate properly.

Attorney Graham Norris and his associates at the Norris Law Group serve the residents of Utah County, UT and throughout Utah, Wyoming, Idaho, and California. Contact them today at 801-932-1238 or online for a free consultation.

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