Kaycee Land and Livestock v. Flahive

Brief Fact Summary.

Kaycee Land and Livestock (Plaintiff) contracted with Flahive Oil & Gas LLC allowing the company to use the surface of Plaintiff’s real property.  Roger Flahive (Defendant) was the managing member of the LC.  When environmental contamination occurred, Plaintiff sued Defendant individually, seeking to pierce the LLC veil and disregard the LLC entity.

Synopsis of Rule of Law.

Under the Limited Liability Company Act, the equitable remedy of piercing the veil is an available remedy.

Facts.

Flahive Oil & Gas (Flahive) was a Wyoming limited liability company (LLC) with no assets when the suit took place.  Kaycee Land and Livestock (Plaintiff) entered into a contract with Flahive allowing the company to use the surface of Plaintiff’s real property.  Roger Flahive (Defendant) was the managing member of Flahive Oil & Gas at all relevant times.  Plaintiff brought suit against Defendant in the district court claiming that Defendant caused environmental contamination to its real property.  Plaintiff sought to pierce the LLC veil, disregard the LLC entity of Flahive Oil & Gas LLC, and hold Defendant individually liable for the contamination.  There was no allegation of fraud.  The district court certified to the Wyoming Supreme Court the question whether, in the absence of fraud, the entity veil of a limited liability company can be pierced in the same way as that of a corporation.

Issue.

Under the Limited Liability Company Act, is the equitable remedy of piercing the veil an available remedy?

Held.

(Kite, J.)  Yes.  Under the Limited Liability Company Act, the equitable remedy of piercing the veil is an available remedy.  Though it is a general rule that a corporation is a separate entity distinct from the individuals it is comprised of, a corporation’s legal entity will be disregarded whenever the recognition of corporate status will lead to injustice.  There is no reason in law or equity for treating an LLC differently from a corporation when considering whether to disregard the legal entity.  The LLC statute simply states the underlying principle of limited liability for individual members and managers by including that neither the members of an LLC nor the managers of an LLC managed by a manager are liable for liabilities of the limited liability company.  It is different to interpret this statutory provision as barring courts from disregarding the veil of an improperly used LLC. Though the legislature left out explicit statutory language, this should not be interpreted as a desire to protect members.  Every state that has enacted LLC piercing legislation has chosen to follow corporate law standards and not develop a separate LLC standard.  Statutes that create corporations and LLCs have basically the same purpose of limiting individual investor liability while benefiting economic development.  According to statute, the legal fiction of the corporation is a separate entity independent from individuals.  If the corporation’s creation and operation were in accord with statutory requirements, the law would treat it as a separate entity and shelter the individual shareholders from any liability caused by corporate action and, so, encourage investment.  However, courts have consistently recognized that unjust circumstances come up if immunity from liability shelters those who have failed to operate a corporation as a separate entity.  And so, when corporations fail to follow formalities mandated by statute, co-mingle funds, or ignore the restrictions in their articles of incorporation regarding separate treatment of corporate property, the courts disregard the separate entity and do not allow shareholders to be sheltered from liability to third parties for damages caused by acts of the corporation.  No reason in law or policy exists to treat LCCs differently, although the factors that justify piercing a corporate veil would not be the same as those in the corporate situation as many organizational formalities that apply to corporations do not apply to LLCs.  Remanded to district court to complete a fact intensive inquiry and exercise equitable powers to determine whether piercing the LLC veil is appropriate under the circumstances this case presents.

Discussion.

In Kaycee, the court noted that among the possible factors to be considered in determining whether the interests of justice require piercing the corporate veil are the following: the commingling of funds and other assets, failure to separate funds of the distinct entities, and unauthorized diversion of corporate funds or assets to other than corporate uses; when an individual treats assets of the corporation as his or her own; failure to get authority to issue or subscribe to stock; the holding out by a person that he or she is personally liable for the debts of the corporation; failure to maintain minutes or sufficient corporate records and the mixing of the records of the separate entities; identical equitable ownership in the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; failure to adequately capitalize a corporation; absence of corporate assets and undercapitalization; use of a corporation as just a shell, instrument or channel for a single venture or the business of an individual or another corporation; concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest or concealment of personal business activities; disregard of legal formalities and the failure to maintain arm’s-length relationships among related entities; use of the corporation to obtain labor, services, or merchandise for another person or entity; diversion of assets from a corporation by or to a stockholder or other person or entity, thereby damaging creditors, or the manipulation of assets and liabilities between entities in order to concentrate the assets in one and the liabilities in another; contracting with another with intent to avoid performance by use of a corporation as a scheme of illegal transactions; and formation and use of a corporation to transfer to it the existing liability of another person or entity.