Limited liability companies (LLCs), which have only been around since 1982, gained popularity in Florida after the 1999 repeal of the Florida corporation income tax on an LLC’s income and later repeal of the Florida intangible tax on an LLC’s interests. Limited liability limited partnerships (LLLPs) arose when the legislature amended the LLLP statute to provide for limited liability protection for all partners, including general partners rather than partial limited liability formerly available. A Connecticut court held under the appropriate circumstances it could pierce the corporate veil of an LLC and hold members personally liable to third parties. In Stone v. Frederick Hobby Associates II, LLC, No. CV 000181620S, 2001 WL 861822 at *10 (Conn. Super. Ct. July 10, 2001), the court found, based on the facts, the “instrumentality and identity rules” allowed the court to pierce the veil of an LLC and hold individual members personally liable.
When one considers the big picture of piercing the veil of a corporation, LLC, or LLLP, a secondary question arises: How does a court pierce the veil of a subsidiary? A recent Florida case held that to pierce the veil of a subsidiary, a plaintiff must prove the subsidiary is a mere instrumentality of the parent company, and the parent company organized and used its subsidiary to mislead or perpetrate a fraud on creditors.
The court in Litchfield Asset Management Corp. v. Howell, 799 A.2d 298 (Conn. App. Ct. 2001), allowed “reverse veil piercing” or piercing the veil against a subsidiary. The court in Litchfield determined a judgment creditor could access an LLC’s assets against the LLC’s sole member. After the court entered judgment against the debtor in her individual capacity, she set up two LLCs and contributed cash to both. The Litchfield court noted the LLCs never operated a business, made distributions, or paid salaries. Moreover, the debtor used the LLC’s assets to pay personal expenses and make interest-free loans to family members. The court held that the debtor used control over the LLCs to perpetrate a wrongdoing against creditors, disregarded corporate formalities, and exceeded her management authority (via loans to family members). The court ordered reverse piercing of the LLCs.
Litchfield demonstrates certain flaws inherent in use of a single-member LLC as an asset protection vehicle. For example, in situations like Litchfield, a creditor’s attorney may file a complaint alleging fraud and invoke the veil-piercing remedy, allowing the judgment creditor to circumvent normal judgment collection procedures codified in the LLC act. One such procedure is charging of the member’s interest in the LLC.