A three-judge panel of the Court of Appeals of Mississippi confirmed on March 6 what many practitioners probably already assumed – the three-prong test for piercing the veil of corporations applies to efforts to pierce the veil of limited liability companies under Mississippi law. But the Court’s opinion, Restaurant of Hattiesburg, LLC v. Hotel & Restaurant Supply, Inc., — So.3d —, 2012 WL 695438 (Miss. Ct. App. March 6, 2012), is more than just a rubber-stamping of the traditional test for piercing the corporate veil, established in Gray v. Edgewater Landing, Inc., 541 So.2d 1044, 1047 (Miss. 1989). It also provides an excellent example of how the application of the test differs when the entity is an LLC as opposed to a corporation.
Let’s get the obvious part out of the way. Was there ever really any doubt that a different limited liability veil piercing test should apply to LLCs? After all, there is no difference between a corporation and an LLC when it comes to limited liability. LLCs borrowed that feature from corporations from the beginning. In reaching its conclusion, the Court in Restaurant of Hattiesburg, LLC noted that “[l]ike a corporation, an LLC is purely a creature of statute. And the Mississippi Limited Liability Company Act is clear that an LLC member cannot be individually liable for an LLC’s debt ‘by reason of being a member.’” The Court was further persuaded by the fact that most commentators have assumed that the veil piercing doctrine applies to LLCs. Thus, while the Court’s holding is helpful, it was the only logical conclusion it could have reached. Given the opportunity, the holding will likely be endorsed by the Mississippi Supreme Court, which just last year found Delaware’s extension of the veil piercing test to LLCs to be “persuasive.” See Grand Legacy, LLP v. Gant, 66 So.3d 137, 147 (Miss. 2011).
Now, to the difference in the application of the test that I mentioned above. To pierce the veil of limited liability of an LLC, the complaining party must prove LLC membership and (a) some frustration of contractual expectations, (b) flagrant disregard of LLC formalities by the LLC members, and (c) fraud or misfeasance by the LLC member. The Court in Restaurant of Hattiesburg, LLC noted that the application of the test to LLCs will likely often differ from its application to corporations with respect to element (b), which requires a showing of flagrant disregard of LLC formalities. This is because an LLC imposes much less formalities on its members than a corporation, so the traditional lack of formalities of an LLC will not necessarily signal LLC abuse. It is an important distinction to remember, not only if you are defending an attack on the limited liability of an LLC, but also if you are trying to build a case for mounting such an attack.
In the end, the extension of the corporate veil piercing doctrine to LLCs may actually surprise some practitioners; because, as noted above, I suspect many probably just assumed that the doctrine already applied corporations and LLCs alike. But to the extent there was any confusion – and I feel certain that industrious attorneys attacking the limited liability of LLCs have argued before that there is a difference – the Restaurant of Hattiesburg, LLC opinion clears things up. In addition, the opinion demonstrates where the application of the test to LLCs diverges from its application to corporations. It is this latter guidance that may be the most helpful part of the opinion, at least in a practical sense.