Piercing the LLC Veil
Generally, owners of a Missouri limited liability company (called members) are not personally liable for the debts of the LLC. However, this liability protection is limited. Occasionally, creditors of an LLC are able to hold a member liable for the debt of the LLC by piercing the LLC veil. Under Missouri law, piercing the LLC veil requires the plaintiff to show three things. First, that the member had complete control of the LLC’s finances and business practices. Second, that such control was used by the member to commit a fraud, to violate a legal duty, or to commit a wrong against the plaintiff. Third, that such control and wrongful conduct caused plaintiff’s loss.
Piercing the LLC Veil by A Member
Clearly a creditor of an LLC has standing to pierce an LLC veil. But can a member of an LLC pierce the veil of the member’s own LLC? According to the Missouri Court of Appeals in Hibbs v. Berger: yes. Why would a member want to pierce the veil of the member’s own LLC? In Hibbs, plaintiff, Steve Hibbs, was both a minority member (5%) and an employee of Tavern Creek Door Company, LLC (Tavern Creek).
Tavern Creek went out of business and failed to pay Hibbs salary, commissions, IRA contributions, severance pay and distributions. Hibbs believed that the other members used their control of Tavern Creek to defraud him of the money owed to him by Tavern Creek. As such, Hibbs filed suit against Tavern Creek and the other members. He sought to pierce the LLC veil in order to make the other members liable for the money owed to him by the LLC.
The trial court said that a member of an LLC cannot pierce the veil of the member’s own LLC. Hibbs appealed. The court of appeals held that “under ‘appropriate circumstance’ a minority member may pierce the veil of an LLC. The court then turned to whether the veil should be pierced.
Plaintiff alleged that the other members fraudulently transferred assets of Tavern Creek so as to avoid paying him. The court of appeals found that Hibbs produced insufficient evidence to support his claim and denied his appeal. Nonetheless, Hibbs v. Berger, opens the door for minority members of Missouri LLCs to pierce their own LLC’s veil. If successful, majority members would be personally liable for the debts of the LLC owed to its minority members.
Reverse Piercing
In a reverse piercing, an outside creditor with a claim against a member can pierce the LLC veil in order to seize the assets of the LLC to satisfy the claim against the member. Additionally, a controlling member can pierce the LLC veil in order to assert on behalf of himself the claims of the LLC against an outside party. Unlike a reverse piercing, Hibbs’ underlying claims were against Tavern Creek, not the other members or a third party outsider. He simply wanted to pierce the LLC veil of Tavern Creek in order to reach the individual assets of the other members to satisfy the compensation owed to him by the LLC.
The Take-Away
What’s the take away from Hibbs? Minority members can now pierce the LLC veil in Missouri. This should give pause to majority members of an LLC, especially when the LLC is experiencing financial duress. In such circumstances, piercing the LLC veil might be available to minority members. Majority members should make sure each transaction has a legitimate business purpose.
The information provided in this article is for educational and informational purposes only, and it t is not intended as legal advice. You should consult an attorney experienced in this area of law about how the information in this article might apply to your own specific circumstances.
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© 2016 Michael Sewell
Contact: Michael Sewell, JD, MBA (314) 942-3232 | michael@SewellLaw.net.
