Redguard, LLC v. ArenoRedguard, LLC v. Areno
- Reporters:
- ,
- Before:
- John W. Kolwe
Redguard, LLC filed this adversary proceeding seeking a determination that a debt owed to it by Industrial Safety Modules, LLC (“ISM”), a single-member limited liability company owned by Defendant-Debtor, Micah Keith Areno, is nondischargeable as to Areno personally. Given the lack of any contractual basis to hold Areno liable, Redguard alleges traditional veil piercing doctrines to establish Areno‘s liability for this debt. Before the Court is Areno‘s Motion for Summary Judgment, which presents the following question of Louisiana law for decision:
Are the doctrines of “alter ego” and “piercing the corporate veil,” which are jurisprudentially created exceptions to the general rule of nonliability of shareholders for corporate debt, equally applicable to limited liability companies to hold their owners liable for company debts?
Areno says “no.” His argument is based on
Since the Louisiana Supreme Court has not squarely addressed this question, the Court must make an “Erie guess” to determine what the Louisiana Supreme Court would decide if faced with this question. Based on the parties’ pleadings and the Court‘s survey of the law, this Court predicts that the Louisiana Supreme Court would also answer “yes,” finding that the same policy considerations in piercing the veil of a corporation apply to an LLC. Accordingly, the Court will deny Areno‘s Motion.
BACKGROUND
Redguard is in the business of manufacturing blast resistant buildings for sale or lease to individual users. Areno originally was a salaried account manager for
In 2013, ISM and Redguard executed two written dealership agreements. The first authorized ISM to sell custom “SafetySuite” blast resistant buildings for a 10% commission on the sales price. The second authorized ISM to lease non-SafetySuite blast resistant buildings from Redguard for the purpose of subleasing those buildings to third persons, with ISM agreeing to pay Redguard 70% of the sublease rental amount. Areno executed these agreements on behalf of ISM.
In September 2016, ISM ceased doing business, owing Redguard $351,257.25, which represents unpaid rentals under the second dealership agreement (the “Debt”). In August 2018, Areno filed for relief under Chapter 7 of the bankruptcy code.
Redguard filed this adversary proceeding seeking to hold Areno personally liable for the Debt, and further asserting that the Debt should be determined to be nondischargeable under
In opposition, Redguard argues that veil piercing doctrines remain applicable to LLCs even after Ogea and Nunez, pointing to dicta in Ogea that addresses veil piercing with respect to LLCs, as well as decisions by Louisiana courts of appeal rendered both before and after Ogea and Nunez applying veil piercing doctrines to LLCs.
During the hearing on Areno‘s Motion, the parties conceded that if the Court finds that veil piercing doctrines apply to LLCs, then genuine disputes of material fact exist which preclude summary judgment. Thus, the sole question presented for decision is whether Redguard has asserted any viable grounds under Louisiana law to hold Areno personally liable for the Debt.
ERIE GUESS
While the Bankruptcy Code will govern the determination of whether the Debt is nondischargeable, the threshold question of whether Areno can be held personally liable for the Debt will be determined by the substantive law of Louisiana. When a state‘s law governs a case heard by a federal court, that federal court must follow not
(1) decisions of the [Louisiana] Supreme Court in analogous cases, (2) the rationales and analyses underlying [Louisiana] Supreme Court decisions on related issues, (3) dicta by the [Louisiana] Supreme Court, (4) lower state court decisions, (5) the general rule on the question, (6) the rulings of courts of other states to which [Louisiana] courts look when formulating substantive law and (7) other available sources, such as treatises and legal commentaries.
Centennial Ins. Co. v. Ryder Truck Rental, Inc., 149 F.3d 378, 381 (5th Cir. 1998); see also Aspen Specialty Ins. Co., 514 F. Supp. 2d at 981.
Regardless of how a federal court analyzes the state statutes and the above factors, it “may not ‘adopt innovative theories of state law,’ but must ‘apply that law as it currently exists.’” Aspen Specialty Ins., 514 F. Supp. 2d at 982 (quoting Galindo v. Precision American Corp., 754 F.2d 1212, 1217 (5th Cir. 1985)). If a state‘s law is to be changed, “it is up to the Supreme Court of [that state] and not [a federal] court to change . . . substantive law.” Cargill, Inc. v. Offshore Logistics, Inc. 615 F.2d 212, 215 (5th Cir. 1980); Aspen Specialty Ins. Co., 514 F. Supp. 2d at 982.
RELEVANT LAW
Areno‘s motion puts
Louisiana R.S. § 12:1320 establishes both the general rule of limited liability for LLC members and the exceptions to the general rule. Relevant here are subparts (A), (B), and (D) of the statute.8 Subpart (A) sets forth the exclusivity rule—i.e., that the liability of a member of an LLC is to be determined solely and exclusively by the provisions of the LLC statutes9:
The liability of members, managers, employees, or agents, as such, of a limited liability company organized and existing under this Chapter shall at all times be determined solely and exclusively by the provisions of this Chapter.
Subpart (B) provides the general rule of nonliability of LLC members and managers:
Except as otherwise specifically set forth in this Chapter, no member, manager, employee, or agent of a limited liability company is liable in
such capacity for a debt, obligation, or liability of the limited liability company.
Finally, subpart (D) identifies “fraud,” “breach of professional duty” and “other negligent or wrongful act” as the exceptions to the general rule of nonliability of members and managers of LLCs:
Nothing in this Chapter shall be construed as being in derogation of any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person, or in derogation of any right which the limited liability company may have against any such person because of any fraud practiced upon it by him.
Ogea, provided the Louisiana Supreme Court with its first opportunity to examine
Therefore, to accord the terms “negligent” act and “wrongful act” their commonly understood meaning while also respecting the general limitation of liability, we find the following four factors assist our inquiry: 1) whether a member‘s conduct could be fairly characterized as a traditionally recognized tort; 2) whether a member‘s conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member‘s capacity as a member.
Id. at 900-01. The court concluded its analysis with the following “observations” and holding:
An LLC is a business entity separate from its members and the liability of members “as such” is governed “solely and exclusively” by the law of LLCs. See
La. R.S. 12:1320(A) . . . . However, as is readily apparent inLa. R.S. 12:1320(B) and(D) , the legislature did not allow an infinite shield against personal liability for individuals choosing to conduct their business through an LLC.Instead, in
La. R.S. 12:1320(B) , the legislature stated a general rule of limited liability. This general rule effectively operates as a presumption that the members are not personally responsible for the liabilities of the LLC beyond the member‘s capital contributions to the LLC. However, inLa. R.S. 12:1320(D) , the legislature has established the criteria for rebutting the presumption that members are not personally liable. Ms. Ogea failed to carry her burden at trial to rebut the presumption that Mr. Merritt is protected by a limitation of liability and is not personally liable in connection with home construction defects.
Under the Louisiana Supreme Court‘s reasoning in Ogea,
In Nunez, the Louisiana Supreme Court applied the Ogea framework to answer the question left open in Ogea—whether the owner of a single member LLC, who was a licensed contractor, is a “professional” within the meaning of that term under
Shifting to the legal standards referenced in Redguard‘s opposition, veil piercing doctrines were originally developed as jurisprudential exceptions to the limited liability of shareholders in the corporate context. See Riggins v. Dixie Shoring Co., Inc., 590 So. 2d 1164 (La. 1991) (finding that the corporate veil may be pierced when: (1) the corporation acts as an “alter ego” of the shareholders and the shareholders have used the corporation to defraud a third party, and/or (2) the shareholders have failed to observe corporate formalities to the extent the corporation ceases to be distinguishable from its shareholders). One of the primary policies
It [alter ego/veil piercing] usually involves situations where fraud or deceit has been practiced by the shareholder acting through the corporation.
LSA–R.S. 12:95 ; Dillman v. Nobles, 351 So. 2d 210 (La.App. 4th Cir.1977); Bossier Millwork & Supply Co. v. D. & R. Const. Co., Inc., 245 So. 2d 414 (La.App. 2d Cir.1971).* * * * *
Louisiana courts are reluctant to hold a shareholder, officer, or director of a corporation personally liable for corporate obligations, in the absence of fraud, malfeasance, or criminal wrongdoing.
LSA–R.S. 12:93(B) ,12:95 ; Deroche v. P & L Const. Materials, Inc., 554 So. 2d 717 (La.App. 5th Cir.1989); Hemphill–Kunstler–Buhler, Auctioneers and Appraisers v. Davis Wholesale Elec., 516 So. 2d 402 (La.App. 1st Cir.1987); Lone Star Industries, Inc. v. American Chemical, Inc., 461 So. 2d 1063 (La.App. 4th Cir.1984), writ denied, 465 So. 2d 738 (La.1985), aff‘d, 480 So. 2d 730 (La.1986), aff‘d on rehearing, 491 So. 2d 1333 (La.1986). . . .When a party seeks to pierce the corporate veil, the totality of the circumstances is determinative. Harris v. Best of America, Inc., 466 So. 2d 1309 (La.App. 1st Cir.1985); Liberto v. Villard, 386 So. 2d 930 (La.App. 3d Cir.1980); Smith–Hearron v. Frazier, Inc., supra. In order properly to disregard the corporate entity, one of the primary components which justifies piercing the veil is often present: to prevent the use of the corporate form in the defrauding of creditors. . . .
Id., at 1168-69 (emphasis added).
The Louisiana Supreme Court cited
Louisiana courts of appeal have historically applied veil piercing doctrines to LLCs. See An Erny Girl LLC v. BCNO 4 LLC, 257 So. 3d 212 (La. App. 4 Cir. 2018); Hector v. Mo-Dad Envtl. Serv., LLC, 134 So. 3d 133 (La. App. 3 Cir. 2014); Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 97 So. 3d 595 (La. App. 1st Cir. 2012); Bottom Line Equipment, L.L.C. v. BZ Equipment, L.L.C., 60 So. 3d 632 (La. App. 5 Cir. 2011); ORX Resources, Inc. v. MBW Exploration, L.L.C., 32 So. 3d 931 (La. App. 4 Cir. 2010); F.G. Bruschweiler (Antiques) Ltd. v. GBA Great British Antiques, L.L.C., 860 So. 2d 644 (La. App. 5 Cir. 2003); Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663 (La. App. 2 Cir. 2002); Hamilton v. AAI Ventures, L.L.C., 768 So. 2d 298 (La. App. 1 Cir. 2000).
Charming Charlie succinctly sets forth the veil piercing doctrine as it has been applied by Louisiana courts of appeal to LLCs. It starts by setting out the general rule that “a Louisiana limited liability company is a separate legal entity from its members,” and “members of a limited liability company generally may not be assessed with personal liability for the debts and obligations of their limited liability
However, there are certain limited exceptions to the rule of non-liability of shareholders for the debts of a corporation, whereby the court may ignore the corporate fiction and hold the individual shareholders liable. Riggins v. Dixie Shoring Company, Inc., 590 So. 2d 1164, 1168 (La. 1991). Moreover, the same policy considerations relevant to a determination of piercing the veil of a corporation also apply to a limited liability company. [Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663, 669 n.7 (La. App. 2002), writ denied, 840 So. 2d 578 (La. 2003)].
Louisiana courts have allowed a piercing of the corporate veil under only two exceptional circumstances, namely, where the corporation is an alter ego of the shareholders and the shareholders have used the corporation to defraud a third party (the “alter ego” doctrine) and where the shareholders have failed to conduct a business on a “corporate footing” to such an extent that the corporation ceases to be distinguishable from its shareholders. Riggins, 590 So. 2d at 1168; Imperial Trading Co., 837 So. 2d at 669–70. . . .
Furthermore, Louisiana courts are reluctant to hold a shareholder, officer, or director of a corporation personally liable for corporate obligations, in the absence of fraud, malfeasance, or criminal wrongdoing. Riggins, 590 So. 2d at 1168; Imperial Trading Co., 837 So. 2d at 670.
97 So. 3d at 598–99 (emphasis added).
Thus, while both the LLC and corporation statutes establish the general rule that a company‘s owners are shielded from personal liability, Louisiana courts have historically pierced the veil when the owners of a corporation or LLC treat the business essentially as an alter ego of themselves, notwithstanding, with respect to LLCs, the lack of any reference to the alter ego theory in
ANALYSIS
As shown in the survey of Louisiana law above, Louisiana courts of appeal have historically applied veil piercing doctrines to LLCs and their members. Areno‘s Motion requires the Court to determine whether the Louisiana Supreme Court‘s interpretation of
The Court disagrees. First, neither Ogea nor Nunez directly or impliedly reject the application of veil piercing doctrines to LLCs. Moreover, in briefly discussing veil piercing doctrines in Ogea, the Louisiana Supreme Court favorably referred to Louisiana courts of appeals decisions applying those doctrines to LLCs, noting that the policy underlying the application of the doctrines to corporations is the same for LLCs. Second, Louisiana courts of appeal have continued to apply veil piercing doctrines to LLCs post-Ogea and Nunez. Third, Louisiana treatises also recognize that the same policy considerations in piercing the veil of a corporation apply to LLCs. For these reasons, the Court will deny Areno‘s motion.
Early in its analysis in Ogea, the Louisiana Supreme Court noted that the plaintiff had not invoked veil piercing doctrines as a basis to recover from Mr. Merritt, the owner of the LLC, and for that reason it was limiting its analysis to
However, in narrowly defined circumstances, when individual member(s) of a juridical entity such as an LLC mismanage the entity or otherwise thwart the public policies justifying treating the entity as a separate juridical person, the individual member(s) have been subjected to personal liability for obligations for which the LLC would otherwise be solely liable. When individual member(s) are held liable under such circumstances, it is said that the court is “piercing the corporate veil.” See, e.g., Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 11–2254, p. 6 (La. App. 1 Cir. 7/10/12), 97 So. 3d 595, 598.
Piercing the corporate veil is largely a jurisprudential doctrine. See Riggins v. Dixie Shoring Co., Inc., 590 So. 2d 1164, 1167 (La. 1991) (collecting and discussing cases of veil piercing as to corporations). Furthermore, it is a doctrine that has neither been relied upon by the lower courts in the instant case, nor invoked by the plaintiff. . . .
Ogea, 130 So. 3d at 894–95 (footnotes omitted, emphasis added).
In footnote 4 the Ogea court favorably quoted Charming Charlie to explain the basis for veil piercing and then noted: “The [Charming Charlie] court stated: ‘[T]he same policy considerations relevant to a determination of piercing the veil of a corporation also apply to a limited liability company.’ Id. Accordingly, the court granted the plaintiff leave to amend the pleadings to state a cause of action by which the veil of an LLC might be pierced.” Id. at 895 n.4 (quoting Charming Charlie, 97 So. 3d at 599–600) (emphasis added). In footnote 5 of the opinion, the Court stated without any qualification: “Piercing the corporation or company veil results in personal liability of the owner of the corporation or LLC.” Id. at 895 n.5.
Neither does Nunez. In fact, the terms “alter ego” and “piercing the corporate veil” are not mentioned anywhere in the opinion, and the opinion does not mention any facts that would have triggered the application of those doctrines. Rather, Nunez involved only the question of whether contracting is a recognized profession, and whether the defendant LLC member‘s failure to complete a job to the customer‘s satisfaction could result in his personal liability under the “breach of professional duty” or “other negligent or wrongful act” exceptions in
In sum, the Louisiana Supreme Court was not required to consider the question of whether veil piercing doctrines apply in the LLC context in either Ogea or Nunez. There is nothing in these opinions that would lead this Court to conclude that the Louisiana Supreme Court intended to abrogate veil piercing doctrines in the LLC context, either in those decisions or in the future. Indeed, Ogea‘s dicta leads to the opposite conclusion. Accordingly, this Court‘s best Erie guess is that the Louisiana Supreme Court would continue to apply veil piercing theories in the LLC context if faced with the question presented here.
Louisiana courts of appeal continue to apply veil piercing doctrines to LLCs.
Louisiana courts of appeal certainly do not view Ogea and Nunez as foreclosing the application of veil piercing doctrines to LLCs, as they have continued to apply those doctrines in the LLC context, citing Ogea as authority. For example, in An Erny Girl LLC v. BCNO 4 LLC, a Louisiana court of appeal stated:
Holding an L.L.C. member personally liable for obligations of the L.L.C. is referred to as piercing the corporate veil. Ogea v. Merritt, 13-1085, p. 6 (La. 12/10/13), 130 So. 3d 888, 895. “With regard to the jurisprudential doctrine of ‘piercing the corporate veil,’ Louisiana courts have generally allowed this remedy when one of two exceptional circumstances exists.” Hodge v. Strong Built Int‘l, LLC, 14-1086, p. 4 (La. App. 3 Cir. 3/4/15), 159 So. 3d 1159, 1163. Firstly, if “the company is the ‘alter ego’ of the members and has been used to defraud third parties.” Id. Secondly, if “the members have failed to conduct business on a ‘corporate footing’ such that it is not possible to distinguish the corporation from its managers.” Id. The theory of piercing the corporate veil is applicable to limited liability companies as well as corporations. ORX Res., Inc. v. MBW Expl., L.L.C., 09-0662, p. 6 (La. App. 4 Cir. 2/10/10), 32 So. 3d 931, 935.
An Erny Girl LLC v. BCNO 4 LLC, 257 So. 3d 212, 220-21 (La. App. 4 Cir. 2018). See also Danos Tree Service, LLC v. Proride Trailers, LLC, 255 So. 3d 1078, 1084 (La. App. 1 Cir. 2018) (applying veil piercing doctrines to an LLC post-Ogea and Nunez); Fausse Riviere, L.L.C. v. Snyder, 211 So. 3d 1188, 1192 (La. App. 1 Cir. 2017) (“[T]he supreme court acknowledged [in Ogea] that personal liability could be imposed on an LLC member under the jurisprudential doctrine of piercing the corporate veil.”); Hodge v. Strong Built Int‘l, LLC, 159 So. 3d 1159, 1163 (La. App. 3 Cir. 2015) (applying veil piercing doctrines post-Ogea); Hector v. Mo-Dad Envtl. Serv., LLC, 134 So. 3d 133 (La. App. 3 Cir. 2014) (same).
Decisions from a state‘s lower courts provide important guidance to federal courts when faced with making an Erie guess. See Centennial Ins. Co., 149 F.3d at 381. The above decisions reiterate that the policy considerations for piercing the veil of a corporation are the same for LLCs, and they provide further support to this Court‘s conclusion that the Louisiana Supreme Court would apply veil piercing doctrines to LLCs if faced with this case.
Treatise writers and other commentators recognize that veil piercing doctrines are applicable to LLCs and their members under Louisiana law.
Treatises and legal commentaries should also be considered by federal courts when making an Erie guess. See Centennial Ins. Co., 149 F.3d at 381. Louisiana
Given the similarity between corporations and LLCs with respect to limited liability, one treatise has noted that “the same policy considerations in piercing the veil of a corporation apply to an LLC.” Susan Kalinka, Jeffrey W. Koonce, and Philip T. Hackney, Members and Membership Interests—Piercing the Veil of a Limited Liability Company, 9 La. Civ. L. Treatise & Partnership and Bus. & Tax Plan, § 1:32 (4th ed., Nov. 2019 update). As noted above, Louisiana courts, including the Louisiana Supreme Court, have relied upon this statement from the treatise to support their conclusions that veil piercing doctrines apply to LLCs. See Ogea, 130 So. 3d at 895, n.4, quoting Charming Charlie, 97 So. 3d at 599–600 (quoting Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663, 669 n.7 (La. App. 2 Cir. 2002), writ denied, 840 So. 2d 578 (La. 2003), and citing Susan Kalinka, Louisiana Limited Liability Companies and Partnerships, § 1.32, pp. 80–81 in 9 La. Civ. L. Treatise & Partnership and Bus. & Tax Plan (3rd ed. 2001)); see also § 44:6, n.12, Limited Liability and Exceptions, 8 La. Civ. L. Treatise, Business Organizations (June 2019 update) (“The [Ogea court] acknowledged the possibility of ‘piercing the veil’ of the LLC.”).
Finally, the entire premise of the Bourgeois Article is that
CONCLUSION
The Erie guess factors considered by this Court overwhelmingly lead to the conclusion that if the Louisiana Supreme Court were faced with the question presented here, it would continue to apply veil piercing doctrines in the LLC context, just as Louisiana courts of appeal have historically done, both before and after the Ogea and Nunez decisions. There is nothing in Ogea or Nunez even hinting that the Louisiana Supreme Court intended to abrogate these doctrines in the LLC context. Indeed, dicta in Ogea suggests the opposite. The relevant factors so overwhelmingly support the conclusion that veil piercing doctrines apply to LLCs that if this Court were to hold otherwise, it would likely be viewed as attempting to change Louisiana law, which the Fifth Circuit has admonished federal courts not to do when making an Erie guess. See Cargill, Inc., 615 F.2d at 215. For these reasons, Areno‘s Motion for Summary Judgment is denied.
JOHN W. KOLWE
UNITED STATES BANKRUPTCY JUDGE