Piercing the veil of limited liability companies (LLCs) allows a court to disregard the separate corporate personality of the company and its member(s) to reach the assets of the members and hold them liable for all or part of the LLC’s debts under Pennsylvania law.
In the September 3, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “Piercing the Corporate Veil of LLCs Under Pennsylvania Law.”
Piercing the veil of limited liability companies (LLCs) allows a court to disregard the separate corporate personality of the company and its member(s) to reach the assets of the members and hold them liable for all or part of the LLC’s debts under Pennsylvania law. Previously, I’ve written on the general substantive and procedural requirements of piercing the corporate veil of an entity and alter ego jurisdiction over corporate groups. This column addresses the Pennsylvania law on the doctrine of piercing the corporate veil as applied to LLCs.
The availability of piercing the veil of LLCs has not been deeply analyzed, as the limited liability company form is still considered relatively “new” (in the legal world where it adapts to the real world at a glacial pace) and there have only been a few state and federal cases on the piercing of LLCs in Pennsylvania. The Pennsylvania Superior Court’s analysis of the status of the case law on piercing the veil of LLCs in Advanced Telephone Systems v. Com-Net Professional Mobile Radio, 846 A.2d 1264 (Pa. Super. 2004) at the time is informative about its development. The Superior Court notably stated that the plaintiff “conceded that there are no federal or state decisions under Pennsylvania law that permitted the piercing of the corporate veil of a limited liability company.” Nevertheless, the court agreed with the plaintiff that “the Limited Liability Company Law of 1994 contemplated ‘that in the appropriate case the doctrine of piercing the corporate veil will be applied to a limited liability company.’” (quoting the committee comment on 15 Pa.C.S.A. Section 8904, fully repealed as of April 2017.) The court affirmed the trial court’s refusal of piercing the veil of the LLC defendant, citing the specific facts of the case, rather than the lack of legal basis to support piercing the veil of the LLC.
Since the decision in Advanced Telephone Systems, the committee comment on the 1994 Limited Liability Company Law became the only source that the courts have relied on to hold that piercing the veil of LLCs is available. In a more recent (nonprecedential) decision, the Superior Court cited the 1994 committee comment again to support the argument that piercing the corporate veil is available in LLCs. See Power Line Packaging v. Hermes Calgon/THG Acquisition, (Pa. Super. Ct. Jan. 10, 2017). Federal courts applying the Pennsylvania law have also relied on the 1994 committee comment to apply the doctrine of piercing the corporate veil to LLCs. See In re LMcD, 405 B.R. 555, 560 (Bankr. M.D. Pa. 2009) (noting that the LLC defendant “was created under the Pennsylvania Limited Liability Company Law of 1994. Under that law, much like corporate stockholders, members are not typically liable for the obligations of the company. Nevertheless, the committee comment to 15 Pa.C.S.A. Section 8904(b) makes clear that the equitable remedy of ‘piercing’ is available regarding an LLC.) and Partners Coffee v. Oceana Services & Products, 700 F. Supp. 2d 720, 736 (W.D. Pa. 2010) (addressing the counterclaim of piercing the corporate veil against the plaintiff and noting that “although the plaintiff is a limited liability company rather than a corporation, Pennsylvania courts have found that the veil of an LLC may be pierced to the same degree as that of a corporation.”) (citing the citing of the committee comment by the courts in Advanced Telephone Systems and In re LMcD). Despite this general understanding that piercing the veil of LLCs is available in Pennsylvania, the Pennsylvania Uniform Limited Liability Company Act of 2016 and its comments did not address piercing the veil of LLCs.
The courts have adopted similar factors and theories of the doctrine of piercing the corporate veil in their analysis of piercing the veil of LLCs. The courts’ analysis starts with the acknowledgment that “there is a strong presumption against piercing the corporate veil in Pennsylvania” (Lumax Industries v. Aultman, 669 A.2d 893, 895 (Pa. 1995)). Mortimer v. McCool, (Pa. Super., 2019) (Colins, J.) (nonprecedential). The courts further consider the same factors as in corporations, which include undercapitalization, failure to adhere to corporate formalities, substantial intermingling of corporate and personal affairs, and use of the corporate form to perpetrate a fraud in their decision to pierce the corporate veil (Lumax, 669 A.2d 893, 895). Further, similar to corporations, only the “alter ego” theory of the doctrine of piercing the corporate veil is available to apply to LLCs. Alter ego theory, in which control is the main factor and controlling members will be held liable for the entity’s debts, “is quite distinct from [the enterprise entity theory or the single entity theory] where two or more corporations share common ownership and are, in reality, operating as a corporate combine.” See Miners v. Alpine Equipment, 722 A.2d 691, 695 (Pa. Super. 1998). The single entity theory is not adopted in Pennsylvania. Thus, any litigant engaging in piercing the veil of LLCs will need to refer to the general substantive and procedural requirements of piercing the corporate veil and its alter ego theory.
Applying the same factors and theories to LLCs and corporations may raise some policy and practical concerns. For instance, the intermingling of personal assets with the company’s assets can be useful for the sole owner in a single member LLC. If the member were to pay for personal expenses with the business account (not the other way around), however, the courts could see this as reason to believe the member is an alter ego of the business and allow the piercing of the corporate veil. But, in piercing the veil of corporations, generally unless this activity is egregious, continuous, or there is undercapitalization as well, it is unlikely that a court will allow the veil to be pierced based on the activity alone. Another difference between a corporation and an LLC that may warrant different treatment is that LLCs are not required to follow the corporate formalities to the same degree as corporations are. Corporations are required to keep annual minutes, but, because LLCs do not need to have annual elections for its members, in which these minutes would be recorded, LLCs often do not have them. Although, in theory, the same factors apply to pierce LLCs, the courts may be wary of piercing the veil of an LLC for the fundamental differences in the requirements in their governance. See Advanced Tel. Systems, 846 A.2d at 1272 (Pa. Super. 2004) (finding that “the LLC adhered to the appropriate formalities for a limited liability company, which are few. Given the nature of limited liability companies generally and its start-up status, the LLC shared office space, equipment and personnel with other entities in the initial stages of its formation. The LLC never had any financial statements, statements of assets, or bank accounts, and it never filed any tax returns, because the LLC never got that far. The LLC never had any employees. It never had office space separate from [the other commonly owned entity]. The LLC never reached the point where it needed to be capitalized.”)
In the absence of any guidance from the Pennsylvania Supreme Court and any statute delineating the limits and scope of piercing the veil of LLCs, as a consequence of the unique features of LLCs, as the case law develops, Pennsylvania courts may limit piercing the veil of LLCs. This approach has precedent in some state statutes and scholarly works. See Stephen B. Presser, “Section 4:2. The Limited Liability Company—Piercing the Veil of Limited Liability Companies, in Piercing the Corporate Veil” (last updated July 2018).
Piercing the veil of LLCs is more difficult than that of corporations under Pennsylvania law. Despite the lack of statues and considering an in-depth analysis by the courts on veil-piercing as it pertains to LLCs, however, Pennsylvania case law indicates that members of LLCs can lose their limited liability protection if the court finds that the factors to pierce the veil of the LLC exist. For practitioners seeking to pierce LLCs, proving that the members of the LLC are alter-egos of the business and proving fraudulent activity by the members of the LLC could lead to the piercing the veil of LLCs. Given the “strong presumption against piercing the corporate veil in Pennsylvania,” coupled with the lesser formality requirement of LLCs, however, practitioners should heed caution before attempting to pierce the veil of an LLC.
Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at email@example.com.
Reprinted with permission from the September 3, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.