4 Rapp Final

RAPP FINAL -SMF.DOC 9/14/2006 4:08:21 PM

Preserving LLC Veil Piercing: A Response to Bainbridge

Geoffrey Christopher Rapp

ABSTRACT ............................................................................................................. 1063 I. INTRODUCTION ...................................................................................................... 1064 II. A SHORT EMPIRICAL HISTORY OF THE LLC AND PIERCING THE COMPANY VEIL .. 1068 III. RESPONDING TO THE CASE AGAINST LLC VEIL PIERCING .................................... 1077 A. Statutory Critique ............................................................................................. 1077 B. Policy Concerns................................................................................................ 1080 1. Indeterminacys Last Stand? ....................................................................... 1080 a. Indeterminacys Limited Costs in the LLC Context ................................. 1081 2. Reversing Tort Reform................................................................................. 1085 IV. THE EFFICIENCY CASE FOR LLC VEIL PIERCING ................................................... 1087 A. Safety Valve Efficiency ..................................................................................... 1088 B. Settlement-Forcing Effects................................................................................ 1090 C. Limited Liabilitys Few Advantages in an LLC Context................................... 1093 V. CONCLUSION ......................................................................................................... 1095

ABSTRACT

Veil piercing is the most litigated area of American corporate law. Corporate laws most dramatic revolution of the last quarter-century has been the emergence of the Limited Liability Company (LLC) as the dominant business form for small businesses. Veil piercing has now been widely recognized in the LLC context, but has recently come under attack from prominent business law scholars. This Article offers the first thorough theoretical and policy defense of veil piercing in the LLC context. First, the Article attempts to provide a short quantitative analysis of the actual record of courts regarding LLC veil piercing litigation. The record so far indicates that courts are not applying veil piercing in the LLC context in a substantially different way than they apply it in the

Assistant Professor, University of Toledo College of Law; A.B. (Economics), Harvard College; J.D,

Yale Law School. Excellent comments were provided by John Tehranian, Associate Professor at the University of Utahs S.J. Quinney School of Law and Howard Friedman and Bill Richman, Distinguished University Professors at the University of Toledo College of Law. I am also indebted to three reviewers who evaluated this piece as part of the renewal process at the University of Toledo: Larry Ribstein, Richard W. and Marie L. Corman Professor of Law at the University of Illinois at Urbana-Champaign; George Dent, Schott-van den Eynden Professor of Business Organizations Law at Case Western Reserve University School of Law; and Gordon Smith, Professor of Law at the University of Wisconsin. These readers provided invaluable criticism on an early draft of this Article.


1064 The Journal of Corporation Law [Summer

corporate context. Second, the Article takes up the arguments of LLC veil piercing critics. While many LLC statutes are indeed silent regarding whether the corporate veil piercing doctrine applies in the LLC context, evidence from the foreign antecedents of the LLC, on which some LLC statutes were explicitly based, provides a hint of legislative intent on the matter. Moreover, while veil piercing no doubt introduces some indeterminacies to the small business environment, abolishing the well-established doctrine in the LLC context would have the perverse effect of creating even greater indeterminacies. Finally, the Article provides two novel efficiency justifications for LLC veil piercing. LLC veil piercing helps avoid exposing litigants to unjust laws and thus reduces their likelihood to flout other legal and regulatory regimes. LLC veil piercing also helps align properly settlement incentives for at-times recalcitrant defendants.

I. INTRODUCTION

Scholars and business law practitioners are now widely familiar with the most important organizational form revolution of the post-World War II era: the Limited Liability Company.2 Limited Liability Companies (LLCs) sprang into existence twenty-five years ago but leapt to the forefront of small business law in America only in the last fifteen, with the resolution of their tax status. While adoption of the new form in the practitioner community has been widespread,3 numerous questions remain about the legal ramifications of this organizational form.4 Questions persist about the dissolution of LLCs, the scope of fiduciary duties owed by LLC members and managers, the status of LLCs under the federal securities laws, and the transferability of member interests.5 Scholars have often neglected LLC issues;6 courts have not shown the same sort of studied lack of inquiry, but because of the nature of the litigation process, have been slow to answer all of the questions LLCs pose.7

2. See Robert B. Thompson, The Taming of Limited Liability Companies, 66 U. COLO. L. REV. 921, 921 (1995) (Limited liability company statutes have swept the country . . . . Given this rapid spread of statutes and the large number of business enterprises that are using this form of business in some states, commentators have predicted the end of close corporations, S corporations, partnerships, or other forms of closely held business entities.). 3. See MELVIN ARON EISENBERG, AN INTRODUCTION TO AGENCY, PARTNERSHIPS, AND LLCS 162 (2005); Howard M. Friedman, The Silent LLC RevolutionThe Social Cost of Academic Neglect, 38 CREIGHTON L. REV. 35, 35 (2004) (stating that over 45% of new businesses are LLCs). 4. EISENBERG, supra note 3, at 157-62 (summarizing legal issues in emerging LLC case law). 5. Id. at 160-61. See also David L. Cohen, Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company?, 51 OKLA. L. REV. 427, 453 (1998). 6. See Friedman, supra note 3, at 35.

The [LLC] has become the dominant form for newly-created small businesses in a clear majority of states . . . . Yet reading the legal literature, one would never suspect this . . . . Law schools, law professors, law publishers, bar examiners and others usually responsible for disseminating cutting edge developments have been surprisingly absent from the playing field much of the time.

Id. But see Leigh A. Bacon, Note, Freedom of or Freedom From? The Enforceability of Contracts and the Integrity of the LLC, 50 DUKE L.J. 1087, 1087 (2001) (The sudden growth of limited liability company (LLC) legislation in the past ten years has been accompanied by a [direct] corresponding amount of scholarship dedicated to the logistics, concerns, and implications of the limited liability company.). 7. See Chad Brigham, Comment, Just How Limited is the Illinois Limited Liability Company?, 26 S. ILL.


2006] Preserving LLC Veil Piercing 1065

One of the apparently answered questions8 is the degree to which LLCs will be subject to the traditional corporate law doctrine of veil piercing.9 Some business entitiesin particular, the corporation, the LLC,10 and, to a lesser degree, the Limited Partnership11provide that investors will only be liable to the extent of their investment for the debts of the business entity.12 That is to say, the liability of such investors is limited. However, a plaintiff creditor may ask that the veil of such an entity be lifted to permit the owners separate assets to be used to satisfy a judgment against the entity. Courts were initially forced to determine whether veil piercing would be permitted in the LLC context. That answer, given unanimously by the courts addressing this question, appears to be yes.13

Veil piercing has been one of the most hotly debated concepts in business law.14 Unlike many concepts in American corporate law, there are strong, even moralistic arguments on both sides of the veil piercing debate, and thus it has become a lightning rod for academic dispute.

Influential UCLA business law scholar Stephen Bainbridge15 recently returned16 to the veil piercing debate in the pages of the University of Illinois Law Review, this time

U. L.J. 53, 63 (2001); Fredric J. Bendremer, Delaware LLCs and Veil Piercing: Limited Liability Has its Limitations, 10 FORDHAM J. CORP. & FIN. L. 385, 395-97 (2005). 8. Initially, commentators were forced to speculate about the likelihood of veil piercing based on statutory interpretation and analogy. See, e.g., Brigham, supra note 7, at 63; see also Thompson, supra note 2, at 939-40 (LLCs do extend limited liability, but it is unlikely that this insulation will reach beyond what is available in the corporate form.); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 GEO. WASH. L. REV. 1143, 1144 (1994) (It is widely assumed that the common law doctrine of piercing the corporate veil is applicable to LLCs, but this is not a certainty. No court has pierced the veil of a domestic LLC.); Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company, From Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd., 22 J. CORP. L. 131 (1996). 9. Veil piercing is the most litigated issue of corporate law. See Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1036 (1991). 10. LARRY E. RIBSTEIN & ROBERT R. KEATINGE, 2 RIBSTEIN & KEATINGE ON LIMITED LIABILITY COMPANIES 12:1 (2004) (All the LLC statutes explicitly provide that neither the members nor managers of an LLC are liable for debts, obligations, or other liabilities of the LLC.); Gelinas v. Fuss, Civ. A. No. CV030070629, 2004 WL 728536, at *3 (Conn. Super. Ct. Mar. 19, 2004) ([A]n hallmark of the limited liability company is its corporate-styled liability shield.). 11. See RIBSTEIN & KEATINGE, supra note 10, 12:6. 12. See Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 89-90 (1985). 13. See Filo Am. v. Olhoss Trading Co., LLC, 321 F. Supp. 2d 1266, 1269 (M.D. Ala. 2004) (collecting cases). Some courts, however, have avoided explicitly ruling that veil piercing is available in the LLC context even as they discussed and ruled on arguments regarding veil piercing. See, e.g., Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663, 670 n.10 (La. Ct. App. 2003) (In so ruling, we render no opinion as to whether veil piercing is available in the case of limited liability companies as it is in the case of corporations.). While no court has denied that veil piercing is available in the LLC context, that is not to say that courts have always found the factual predicate upon which to pierce a particular LLCs veil. See infra Part II. 14. See Bendremer, supra note 7, at 385 (The doctrine of veil piercing has been the subject of numerous judicial decisions and scholarly commentary.). 15. Bainbridges influence extends beyond his actual scholarly work on the issue of LLC veil piercing. He is the author of one of the leading books on unincorporated associations, see STEPHEN M. BAINBRIDGE, AGENCY, PARTNERSHIP & LIMITED LIABILITY COMPANIES (2004), as well as a web log dealing with law, business and economics, Catholicism, politics and current events, http://www.professorbainbridge.com. 16. Bainbridge originally directed his criticism towards veil piercing in the corporations context in the pages of this journal. See Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479 (2001).



directing his attention to the use (and in his view, abuse) of veil piercing in the LLC context. In a scathing attack, Bainbridge argues that veil piercing has no place in the developing case law of the LLC.17

While courts have universally embraced veil piercing in the LLC context,18 no recent scholarship has offered a convincing theoretical justification for preserving the doctrine as applied to LLCs.19 This Article attempts to fill that gap in the literature. The primary thrust of my argument is that veil piercing is not only appropriate in the LLC context, but also that company veil piercing is, when compared to corporate veil piercing, perhaps even more efficiency enhancing. This conclusion arises from a consideration of the particular role that LLCs have come to play in the modern American economy.

An LLC is frequently described as a hybrid entity meant to achieve the limited liability advantages of a corporation with the management flexibility and favorable tax treatment of a partnership.20 If the LLC is a hybrid in any meaningful sense, it would seem logical that its legal treatment would fall somewhere in between the partnership and the corporation21closer to whichever forbearer is more relevant on a particular issue. On the issue of limited liability, the LLC would be expected to fall between a corporation and a partnership, closer to the corporation, since the LLC draws its limited liability characteristic from the corporation.22 Calls to abolish LLC veil piercing would up-end the common sense location of LLCs on the spectrum between corporations and partnerships.23 LLCs would lose their hybrid nature (at least with respect to this issue) and become a form of super-limited liability entity. That odd result cannot be what the framers of LLC statutes intended, and it would not be good policy.24

17. Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. ILL. L. REV. 77 (2005). Bainbridges critique was anticipated nearly a decade ago by Robert B. Thompson: It will not be long before lawyers argue that the LLC should give greater liability protection to active participants than is available to officers and directors within the corporate form. Thompson, supra note 2, at 941. 18. Of course, some jurisdictions have yet to address LLC veil piercing. Bendremer, supra note 7, at 396-97. 19. Bainbridge, supra note 17, at 93 (It is surprisingly difficult to find coherent explanations of the policy justifications for piercing the LLC veil, as opposed to mere assertions by fiat that such reasons exist.); see also Fox, supra note 8, at 1167 ([N]o thorough analysis of the applicability of the veil piercing doctrine to LLCs exists.). 20. See, e.g., Robinson v. Glynn, 349 F.3d 166, 174 (4th Cir. 2003) ([LLCs] are hybrid business entities that combine features of corporations, general partnerships, and limited partnerships.); Bendremer, supra note 7, at 386 (LLCs represent a hybrid between corporations and partnerships.); Friedman, supra note 3, at 47 (The LLC is a hybrid, embodying some elements of the partnership form and other elements that are normally aspects of the corporation.); Charles W. Murdock, Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 LOY. U. CHI. L.J. 551, 558 (2005) ([A]n LLC is a hybrid form of organization, having both partnership and corporate characteristics.); Jeffrey K. Vandervoort, Piercing the Veil of Limited Liability Companies: The Need for a Better Standard, 3 DEPAUL BUS. & COM. L.J. 51, 51 (2004) ([T]he LLC is essentially a hybrid, combining characteristics of both partnerships and corporations.). 21. See Thompson, supra note 2, at 922 ([T]he originality of the LLC form is not as great as it first might seem. Courts are going to be confronted with business entity problems within their common experience from deciding other business association issues.). 22. See Bendremer, supra note 7, at 405 ([G]eneral partnership law has little bearing on LLC veil piercing because there is no veil or shield in the first instance.). 23. Even critics of veil piercing in the LLC context acknowledge its intuitive logic. Bainbridge, supra note 17, at 90. 24. Interestingly, the Massachusetts Business Trust, or modern business trust, is a possible super-limited



Central to the argument advanced in this Article is the fact that LLCs are used largely in small business settings.25 While LLCs can be publicly held,26 and therefore could come to replace corporations as the organizational form of choice for large businesses, they have not done so, and there is no indication that they will.27 LLCs are most attractive for small businesses because of the informality and flexibility which they offer.28

Part II offers a short empirical history of LLCs and veil piercing jurisprudence in that context. In Part III, I take up Bainbridges critique of LLC veil piercing and respond to each of the criticisms made. I begin with the statutory critique, and point out that even if LLC statutes leave the fate of veil piercing unresolved, useful insights can be gained from analyzing the role of veil piercing in the foreign antecedents of the LLC. I also address Bainbridges primary criticism of LLC veil piercing, namely its potential to increase transaction costs for small businesses by introducing indeterminate legal rules into the LLC environment. I suggest that abolishing veil piercing would perversely introduce the same sort of indeterminacies. Part IV offers several substantial efficiency justifications for veil piercing in the LLC context. This Part attempts to frame, for the first time, certain long-standing justifications for veil piercing in terms of their economic efficiency. In addition, I offer a never-before analyzed justification for veil piercing as a settlement-forcing device to counteract informational asymmetries between plaintiffs and defendants and the strategic inefficiencies they produce. Part IV also explores how the primary justifications for limited liability, ease of ownership transfer and capital accumulation, are largely irrelevant in the real-world LLC environment. Finally, in Part V, I suggest avenues for policy reform and further research.

One might wonder why this Article targets LLC veil piercing for defense, rather than the broader concept of limited liability entity veil piercing. Many of the arguments articulated in this Article could be applied, with equal force, to a defense of corporate veil piercing. The reason for my focus on LLCs, rather than corporations and LLCs, is straightforward. While corporate veil piercing is well-established in the common law, and is unlikely to face abolition in the near future, LLC veil piercing is not. The courts

liability form. While there is very little case law on the issue, courts appear to be reluctant to pierce the veil of these trusts in spite of their similarity to corporate entities. See, e.g., Inside Scoop, Inc. v. Curry, 755 F. Supp. 426, 430 (D.D.C. 1989) (After extensive research, the Court was unable to locate caselaw that would support [veil piercing] against a business trust. While it is arguable that the characteristics of a business trust may lend themselves to a similar analysis, the Court is unwilling to extend the doctrine in this manner.). However, the holders of trust certificates may be liable when they instruct a trustee to commit a tortious act. See Piff v. Berresheim, 92 N.E.2d 113 (Ill. 1950) (noting same). This is a form of individual liability, not of veil piercing. 25. Statistics on LLC incorporation indicate that the average LLC had four members as of 2002, suggesting LLCs are not used in the formation of large, diversified companies but predominantly for closely held entities. See EISENBERG, supra note 3, at 162. The fact that LLCs are largely small business entities is further substantiated by the fact that the net income of general partnerships and limited partnership exceeds the net income of LLCs. Id.; see also Bainbridge, supra note 17, at 102. 26. Bainbridge, supra note 17, at 99. 27. Id. 28. Friedman, supra note 3, at 54. The LLC offers small businesses the management flexibility and favorable tax treatment of a partnership along with the limited liability characteristics of a corporation. See generally id. Because LLCs can be organized along whatever lines their founders choose, cumbersome requirements from corporate law, such as the need for shareholder voting for corporate boards and the need for regular meetings, can be avoided.



currently confronting the issue of whether to allow veil piercing in LLCs, or whether to pierce the veil in a particular LLC case, are often addressing a matter of first impression. Opponents of veil piercing are far more likely to have success in the LLC area than in the corporate law area in convincing courts to walk away from veil piercing as an option. Therefore, this Article concentrates on building an affirmative defense of LLC veil piercing in particular. This Article responds to Bainbridges piece precisely because that piece is so well argued and could prove influential.

II. A SHORT EMPIRICAL HISTORY OF THE LLC AND PIERCING THE COMPANY VEIL

While it is safe to assume that most readers are generally familiar with the emergence of the LLC and that history has been largely explored elsewhere,29 a short background discussion of the organizational form and early veil piercing cases in this context may nevertheless be helpful to the uninitiated. Indeed, only recently has the true extent of the silent LLC revolution become clear.30

Wyoming enacted the first LLC statute in 1977,31 but it was not until 1988 that LLCs received considerable attention following an IRS ruling clarifying that they could be taxed like partnerships in spite of their limited liability status.32 After that, LLC statutes quickly spread. As of 2002, 946,000 LLCs had been formed under these new laws.33 During the period 1996-2002, the number of LLCs increased by more than 400% (there were only 221,000 in 1996).34 During the same period, the number of general partnerships fell by 25%.35 By 2002, there were more LLCs than general partnerships;36 while there remain more corporations than LLCs, LLCs dominate new filings in a number of states.37 Nationwide, 45% of new business filings are LLCs.38

The first reported case in which a plaintiff sought to pierce the veil of an American39 Limited Liability Company was the 1997 case Ditty v. CheckRite, Ltd., Inc.40 Between that date and August 5, 2005, there have been sixty-one additional rulings on substantive LLC veil piercing.41

29. See, e.g., Friedman, supra note 3, at 44-49. See generally Carol R. Goforth, The Rise of the Limited Liability Company: Evidence of a Race Between the States, But Heading Where?, 45 SYRACUSE L. REV. 1193 (1995). 30. See generally Friedman, supra note 3. 31. See infra notes 108-109 and accompanying text. 32. See Carol R. Goforth, Continuing Obstacles to Freedom of Choice for Management Structure in LLCs, 1 J. SMALL & EMERGING BUS. L. 165, 171 (1997). 33. See EISENBERG, supra note 3, at 162. 34. Id. 35. Id. 36. Id. 37. See generally Friedman, supra note 3. 38. Id. at 35. 39. There are prior cases involving efforts to pierce foreign LLC veils. See, e.g., Hestern Intl Corp. v. Fed. Republic of Nig., 879 F.2d 170 (5th Cir. 1989) (Nigerian LLC); Abu-Nassar v. Elders Futures, Inc., No. 88 Civ. 7906, 1991 WL 45062 (S.D.N.Y. Mar. 28, 1991) (Lebanese LLC). 40. 973 F. Supp. 1320 (D. Utah 1997) (denying plaintiffs motion for directed verdict on LLC veil piercing claim). 41. Hollowell v. Orleans Regl Hosp. LLC, 217 F.3d 379 (5th Cir. 2000); Hudson United Bank v. Pena, No. Civ.A 03-0158, 2005 WL 736603 (E.D. Pa. Mar. 30, 2005); Morgan v. Powe Timber Co., 367 F. Supp. 2d 1032 (S.D. Miss. 2005); United States v. Mountzoures, No. C.A. 03-12188-JLT, 2005 WL 1405502 (D. Mass.



The first state supreme court to address whether an LLCs veil could be pierced was, fittingly, Wyomings, which ruled in 2002 in the Kaycee Livestock case that an LLCs

2005); Tony Jones Apparel, Inc. v. Indigo USA LLC, No. 03 C 0280, 2005 WL 1667789 (N.D. Ill. July 11, 2005); Manos v. Geissler, No. 02 Civ. 9760, 2005 WL 1676740 (S.D.N.Y. July 18, 2005); Hunter v. Youthstream Media Networks, Inc., 241 F. Supp. 2d 52 (D. Mass. 2002); Essex Real E Group v. River Works, LLC, No. 01 C 5285, 2002 WL 1822913 (N.D. Ill. Aug. 7, 2002); Zeke N' Zoe Corp. v. Zeke N' Zoe LLC, No. 01 Civ. 4780, 2002 WL 72947 (S.D.N.Y. Jan. 18, 2002); Andrews v. Kerr McGee Corp., No. 1:00CV158-D-A, 2001 WL 1704144 (N.D. Miss. Dec. 5, 2001); Lincoln Diversified Sys., Inc. v. Mas Plus, Inc., No. 98 Civ. 5593, 2000 WL 1880338 (S.D.N.Y. Dec. 27, 2000); Bunch v. Centeon, LLC, No. 99 C 3511, 2000 WL 1741905 (N.D. Ill. Nov. 24, 2000); In re Crowe Rope Indus., LLC, 307 B.R. 1 (Bankr. D. Me. 2004); Indus. Controls of Okla., Inc. v. Am. Renewable Res., LLC, No. 03-00655R, 2004 WL 2952664 (Bankr. N.D. Okla. 2004); In re Giampiertro, 317 B.R. 841 (Bankr. D. Nev. 2004); In re BHB Enters., LLC, No. C/A 97-01975-W, 1998 WL 2016846 (Bankr. D.S.C. Sept. 30, 1998); In re Sanner, 218 B.R. 941 (Bankr. D. Ariz. 1998); In re Multimedia Commcns Group Wireless Assn of Liberty County, Georgia, L.C., 212 B.R. 1006 (Bankr. M.D. Fla. 1997); Marina, LLC v. Burton, No. CA 97-1013, 1998 WL 240364 (Ark. Ct. App. May 6, 1998); Triple "R" Serv. v. Watson, No. G033798, 2005 WL 1023236 (Cal. Ct. App. May 3, 2005); City & County of San Francisco v. Boyd Hotel LLC, No. A105625, 2005 WL 958222 (Cal. Ct. App. Apr. 26, 2005); Sunscript Pharm. Corp. v. Cassidy, No. A105483, 2005 WL 605709 (Cal. Ct. App. Mar. 16, 2005); Stinky Love, Inc. v. Lacy, No. B163377, 2004 WL 1803273 (Cal. Ct. App. Aug. 13, 2004); Allison v. Danilovic, No. B163363, 2004 WL 2797988 (Cal. Ct. App. Dec. 7, 2004); Kalashian v. Krebs, No. G032397, 2004 WL 2700618 (Cal. Ct. App. Nov. 29, 2004); Peinado v. Barnett, No. A093923, 2001 WL 1380441 (Cal. Ct. App. Nov. 6, 2001); Great Neck Plaza, L.P. v. Le Peep Rests., LLC, 37 P.3d 485 (Colo. Ct. App. 2001); Morris v. Cee Dee, LLC, No. 25279, 2005 WL 1691496 (Conn. App. Ct. July 26, 2005); KLM Indus. v. Tylutki, 815 A.2d 688 (Conn. App. Ct. 2003); Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298 (Conn. App. Ct. 2002); McKeon v. Rinaldi, No. CV044001110S, 2005 WL 1331641 (Conn. Super. Ct. May 11, 2005); Pompilli v. Pro-Line Painting, No. CV044001774, 2005 WL 1433185 (Conn. Super. Ct. May 13, 2005); Bowen v. 707 on Main, No. CV020282643S, 2004 WL 424501 (Conn. Super. Ct. Feb. 24, 2004); Strouch v. 72 Degrees Heating & Air Cond., LLC, No. 568119, 2004 WL 2397279 (Conn. Super. Ct. Sept. 24, 2004); Law Offices of Gary Oberst, PC v. Omerta, LLC, No. CV030197379, 2004 WL 2757633 (Conn. Super. Ct. Nov. 4, 2004); Ackerman v. Sobol Family Pship, LLP, No. CV030826123, 2004 WL 1194067 (Conn. Super. Ct. May 12, 2004); McGovern Capital, LLC v. Ed Papic, No. CV020190931S, 2003 WL 21267436 (Conn. Super. Ct. May 21, 2003); Handy v. Home Funding Res., LLC, No. X01CV020172219S, 2003 WL 22905137 (Conn. Super. Ct. Nov. 21, 2003); Dornfried v. Granquist, No. CV000502628, 2003 WL 1996024 (Conn. Super. Ct. Mar. 27, 2003); Jackson v. Carlos Supermkt., LLC, No. CV000599734, 2002 WL 378317 (Conn. Super. Ct. Feb. 14, 2002); Harold Cohn & Co., Inc. v. Harco Intl, LLC, No. CV990089169, 2001 WL 523540 (Conn. Super. Ct. May 2, 2001); Stone v. Frederick Hobby Assocs. II, No. CV000181620S, 2001 WL 861822 (Conn. Super. Ct. July 10, 2001); Tyree v. Wellfleet Nat. Mortg., LLC, No. CV 950147103, 1998 WL 422134 (Conn. Super. Ct. July 10, 1998); Trs. of Vill. of Arden v. Unity Constr. Co., No. C.A. 15025, 2000 WL 130627 (Del. Ch. Jan. 26, 2000); S. Land Title, Inc. v. N. Georgia Title, Inc., 606 S.E.2d 43 (Ga. Ct. App. 2004); Bonner v. Brunson, 585 S.E.2d 917 (Ga. Ct. App. 2003); Estate of Countryman v. Farmers Co-op. Ass'n, 679 N.W.2d 598 (Iowa 2004); Imperial Trading Co., Inc. v. Uter, 837 So.2d 663 (La. Ct. App. 2003); F.G. Bruschweiler (Antiques) Ltd. v. GBA Great British Antiques, LLC, 860 So.2d 644 (La. Ct. App. 2003); Hamilton v. AAI Ventures, LLC, 768 So.2d 298 (La. Ct. App. 2000); Mowles v. Predictive Control Sys., Inc., No. Civ.A. CV-02-355, 2003 WL 23109994 (Me. Super. Ct. Dec. 4, 2003); Lily Transp. Corp. v. Royal Institutl Servs., Inc., No. 03-P-1263, 2005 WL 1836905 (Mass. App. Ct. Aug. 5, 2005); Shoaff v. Baldwin, No. 248606, 2005 WL 267796 (Mich. Ct. App. Feb. 3, 2005); Tom Thumb Food Mkts., Inc. v. TLH Props., LLC, No. C9-98-1277, 1999 WL 31168 (Minn. Ct. App. Jan. 26, 1999); Milistar (NY) Inc. v. Natasha Diamond Jewelry Mfrg., LLC, 18 A.D.3d 402 (N.Y. App. Div. 2005); Retropolis, Inc. v. 14th St. Dev. LLC, 17 A.D.3d 209 (N.Y. App. Div. 2005); Chalk & Vermillion, LLC v. Thomas F. McKnight, LLC, 303 A.D.2d 225 (N.Y. App. Div. 2003); Vidal, Reylds & Mora, Inc. v. Mountain Springs Co., LLC, 248 A.D.2d 247 (N.Y. App. Div. 1998); Advanced Tel. Sys., Inc. v. Com-Net Profl Mobile Radio, LLC, 846 A.2d 1264 (Pa. Super. Ct. 2004); Chopra v. U.S. Profls LLC, No. W2004-01189-COA-R3-CV, 2005 WL 280346 (Tenn. Ct. App. Feb. 2, 2005); Pinebrook Props., Ltd. v. Brookhaven Lake Prop. Owners Assn, 77 S.W.3d 487 (Tex. Ct. App. 2002).



veil could be pierced.42 Plaintiff Kaycee Livestock had leased land it owed to the now defunct Flahive Oil and Gas Co., an LLC registered in Wyoming.43 The plaintiff sought to recover from the now-defunct LLCs sole owner, Roger Flahive.44 Flahive argued that the legislature intended to abolish veil piercing for LLCs.45 The court rejected this contention.46 It reasoned that the legislature would have made that clear if abrogating a well-established legal doctrine was its aspiration.47 There was simply no reason in either law or policy, to treat LLCs differently than we treat corporations.48 The Kaycee case did not actually order the veil pierced, since the matter came to the supreme court as a certified question from the district court.49 However, the opinion has been widely cited50 and has freed other courts to pierce the veil of LLCs in appropriate circumstances.

To date, no scholar has attempted to analyze the actual results of veil piercing litigation in the LLC context from a quantitative perspective along the lines of Robert Thompsons exceptional study of veil piercing in the corporate context.51 While any such quantitative effort suffers from both the general selection bias confronting analysis of published legal decisions52 and the small sample size problem posed by the relatively recent emergence of LLCs,53 making abstract suppositions that LLCs will face the same treatment as corporations in veil piercing litigation is not particularly helpful.54 Nor is analyzing the text of judicial opinions in selected LLC veil piercing cases particularly useful, since veil piercing is inherently fact-specific and what a court says about a particular case has little influence on what courts will do in other cases. Only by some effort at tracing patterns and trends can veil piercing in the LLC context be understood properly. Therefore, mindful of the severe limitations on interpreting the results, this Part attempts to replicate Thompsons study of corporate law veil piercing in the context of LLC veil piercing.

To construct a data set, Thompsons Westlaw search methodology was followed using terms such as pierc! w/s veil and LLC.55 Only cases in which the veil piercing issue was resolved were included (thus excluding published decisions where a plaintiff survived a motion for summary judgment or dismissal but did not finally win the

42. Kaycee Land & Livestock v. Flahive, 46 P.3d 323 (Wyo. 2002). 43. Id. at 324. 44. Id. 45. Id. 46. Id. 47. Kaycee Land & Livestock, 46 P.3d at 324. 48. Id. at 327-28. 49. Id. at 324. 50. See, e.g., Nelson v. Morris, No. 03 C 7174, 2004 WL 868398, at *3 (N.D. Ill. Apr. 22, 2004). 51. See Thompson, supra note 9. 52. Id. at 1045-47. 53. Prior to 1998, there were only eight cases dealing with the extent liability of members or managers in an LLC, and only one of those cases arrived at a definitive ruling. Brigham, supra note 7, at 63-64. 54. See Bainbridge, supra note 17, at 96 (Assuming comparable results for LLCs [to Thompsons study], the members of a LLC have a far greater chance of being struck by lightning than being held personally liable for their firms debts and other obligations.). 55. The actual search string used was: ("llc" "limited liability company" "l.l.c.") & ((veil /s pierc!) (disregard /s entity)). This effort produced 1041 cases, which were reviewed to compile the data set discussed in this part.



claim).56 Thompson found with respect to corporate veil piercing cases that courts pierce less

often in tort than in contract contexts (contrary to the predictions of other scholars),57 and pierce more frequently as the number of corporate shareholders decreases (in accordance with scholarly predictions).58

The data generated in this effort is detailed in Figures One and Two and Tables One through Seven. The first possibly surprising thing is how many LLC veil piercing cases there were during the period of observation. Thompsons study produced slightly fewer than 1600 corporate veil piercing cases based on a time frame that spanned many decades;59 in less than one decade, there were 61 LLC veil piercing cases.60 Figure 1 shows the frequency of LLC veil piercing cases in each of the years for which there were cases. While it may be too early to attempt to divine a trend, the number of LLC veil piercing cases does seem to be increasingthe largest number appearing in just the first seven months of 2005.

Table One reports the number of cases in total and the rate of piercing. This table yields a second surprising result. While Thompson found that corporate veil piercing plaintiffs were successful 40% of the time,61 would-be LLC veil piercers were only

56. In addition, I excluded the following: (1) cases in which a veil piercing claim was rejected on jurisdictional grounds, see, e.g., Nadler v. Grayson Constr. Co., Inc., Civ. A. No. CV020190015S, 2003 WL 1963158 (Conn. Super. Ct. Apr. 15, 2003); (2) cases where a party sought to pierce the veil solely to achieve personal jurisdiction over another party, see, e.g., Waltrip v. Kimberlin, No. C045898, 2005 WL 1230770 (Cal. Ct. App. May 24, 2005), United States ex rel. Hadid v. Johnson Controls, Inc., No. 04-60146, 2005 WL 1630098 (E.D. Mich. July 7, 2005), since the standards for a finding of alter ego for the sake of jurisdiction are more lenient than the standards for substantive veil piercing, see Dorfman v. Marriot Intern. Hotels, Inc., No. 99 CIV 10496, 2002 WL 14363 at *11, n.13 (S.D.N.Y. Jan. 3, 2002) (Different standards apply when evaluating whether or not to pierce the corporate veil for liability purposes.); (3) cases in which veil piercing was sought merely to enforce an arbitration agreement against a non-signatory, see, e.g., IFC Interconsult, AG v. Safeguard Intern. Partners, LLC, 356 F. Supp. 2d 503 (E.D. Pa. 2005), for the same reason; and (4) Gallinger v. N. Star Hosp. Mut. Assurance, Ltd., 64 F.3d 422, 427 (8th Cir. 1995), based on Bainbridges insightful observation that the entity at issue in Gallinger was not an LLC but a Bermudan business form. See Bainbridge, supra note 17, at 81 n.26. 57. Thompson, supra note 9, at 1038. Subsequent work by Stephen Presser suggests that in the years following Thompsons data set, tort creditors indeed became more susceptible to piercing than voluntary creditors. David L. Cohen, Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company, 51 OKLA. L. REV. 427, 440 (1998) (citing STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL 1-37 n.2 (1997)). One possible explanation for the higher rates of veil piercing in contract cases is that it is easier in tort cases to show that a manager/member/owner engaged in conduct for which s/he can be held directly liable. See, e.g., Estate of Countryman v. Farmers Co-op. Assn, 679 N.W.2d 598 (Iowa 2004) (explaining that plaintiff in wrongful death case appealed finding of no direct liability but did not appeal rejection of veil piercing claim). 58. Thompson, supra note 9, at 1038. 59. Id. at 1048. 60. This large number of LLC veil piercing cases may also reflect the relative availability of unpublished dispositions on Westlaw in the time period covered by this Articles searches. Thompsons study covered a time frame in which Westlaw may not have made available as many unpublished dispositions. A large number of the LLC veil piercing cases observed by my study were unpublished cases. 61. Thompson, supra note 9, at tbl.1.



successful 39% of the time. What makes this result particularly surprising is that the LLC is a new business form, and the owners of LLCs would presumably be more likely to make mistakes with regard to respecting company formalities than the owners of corporations, who are familiar with the corporate form and its requirements, would be.

Table One Category All Cases Pierce No Pierce % Piercing

# 61 19 42 31%

One explanation may be that LLC owners are less likely to have their companies veils pierced because they are, on average, represented by more-talented and careful lawyers than the owners of the median close corporation. There is no way to substantiate this hypothesis. The logic behind it is that when the LLC form first emerged, only the brightest of business lawyers saw its advantages for small businesses and pushed this new form on their clients. These lawyers may have continued to represent and counsel LLC owners, and helped them to respect the separation of their individual identities and the companies identities. With time, and the growing acceptance of LLCs, one would expect the rate of LLC veil piercing to trend closer towards the rate of piercing for corporations. As Figure 2 shows, however, there is no discernable time trend concerning the rates of piercing.

02468

10121416

1997 1999 2001 2003 2005

Year

Figure One

LLC Veil piercing cases

Nu

mbe

r of c

ases



Table 2 details the number of cases and rates of piercing based on the identity and number of the owners of the defendant LLC.62 As Table 2 shows, the clear majority of LLC veil piercing cases involved LLCs owned by individuals, rather than entities. The small sample size involved in each category make interpretation of the results very difficult. The number of owners and the identity of the owners do not seem to make a dramatic difference in terms of LLC veil piercing. Notably, none of the LLCs in the sample were publicly held.

Table Two Identity of

Owner Number of

owners

Pierce No Pierce % Piercing

One 8 15 35% Two or Three 6 10 37.5%

Close but more than three

1 1 50%

Individual

Public 0 0 0 Total Individuals

15 26 37%

One 3 4 43% Entity Two or Three 1 4 20%

Total Entity 4 8 33%

Table Three reports differences in piercing based on type of case (contract, tort, or statutory claim).63 Not only are there far more efforts to pierce in contract cases (fully

62. This is roughly parallel to Thompson, id. at tbl.7. 63. It is not always possible to distinguish between contract and tort claims. Some legal theories (constructive fraud, for instance) are mixed notions of contract and tort. However, this table is meant to represent generally whether the claim was a tort or a contract type of case. Mainly, this distinction captures whether the plaintiff is a known business partner, or an unknown personal injury victim.

0 2 4 6 8

10

1997 1999 2001 2003 2005Year

Figure Two

No piercePierce

Nu

mbe

r of c

ases



two-thirds of all the LLC veil piercing cases), plaintiffs in those cases are more successful than tort claimants. This is in accordance with Thompsons results for corporations,64 even though it defies the predictions of some scholars.65

Table Three Context Cases Pierce No Pierce % Piercing

Contract 42 14 28 33% Tort 11 1 10 9% Statutory 8 4 4 50%

Table Four reports veil piercing cases, and piercing rates, by state.66 Of those states with more than three piercing cases, piercing rates range from a low of 14% in New York and 19% in Connecticut to a high of 86% in California. Californias high rate of LLC veil piercing is interesting, since Thompson found that California also pierced in the corporations context at higher rate than any other state.67 Similarly, New York pierced at among the lowest rates for corporations than other states with a large number of piercing cases.68 It is highly likely that courts experience with corporate veil piercingand their developed bodies of corporate veil piercing precedentis helping to guide their LLC veil piercing decisions. As far as total number of cases, Connecticuts national lead in cases is not surprising given that it has the highest percentage of LLCs among new corporate entities.69 More than 80% of Connecticuts new business filings in 2002 and 2003 were LLCs.70 Similarly, Louisiana had the fourth most cases (behind New York and California); it has the third highest percentage of new business filings as LLCs (behind Connecticut and Wisconsin).71

64. See supra note 48 and accompanying text. 65. Easterbrook and Fischel predicted that veil piercing would be more common in tort cases, where the creditors are involuntary and unable to negotiate for additional personal guarantees, rather than contract cases, where creditors are voluntary. See Easterbrook & Fischel, supra note 12, at 90. However, Thompson found the opposite. See Thompson, supra note 9, at 1038. There are two viable explanations for this surprising empirical reality. First, it may be that in the tort context, sufficient insurance coverage exists to satisfy judgments, making veil piercing unnecessary in the tort context. Second, in tort cases, plaintiffs may be more successful at arguing that the individual shareholder did something wrongful for which she should be held personally liable, again making veil piercing unlikely. 66. This is the equivalent of Thompson, supra note 9, at tbl.6. 67. See Thompson, supra note 9, at 1051. 68. Id. 69. See Friedman, supra note 3, at 37 tbl. 70. Id. 71. Id. New York and California likely have a large number of LLC veil piercing cases simply because they have the largest economies, populations, and the most litigation, even though these two states have relatively slow to embrace the LLC. In New York and California, corporations still predominate over LLCs in new filings (with corporations amounting to more than two thirds of filings). Id. at 39 tbl.



Table Four State Total Number

of Cases Pierce No Pierce % Piercing

AR 1 0 1 0% AZ 1 0 1 0% CA 7 6 1 86% CO 1 1 0 100% CT 16 3 13 19% DE 1 0 1 0% FL 1 0 1 0% GA 2 1 1 50% IA 1 0 1 0% IL 3 1 2 33% LA 4 2 2 50% MA 3 0 3 0% ME 2 0 2 0% MS 2 1 1 50% NY 7 1 6 14% NV 1 0 1 0% OK 1 0 1 0% DE 2 1 1 50% SC 1 1 0 100% TN 1 1 0 100% TX 1 0 1 100%

Table Five reports veil piercing cases in federal and state courts.72 As with corporations, federal and state courts pierce at approximately the same rate (although the relative frequency is reversed, with federal courts piercing more in corporation cases and less in LLC cases).73

Table Five Category Total Number


State courts 43 15 28 34% Federal courts 18 4 14 29%

Table Six reports piercing rates and the number of cases by type of court: trial, intermediate appellate, and state supreme courts.74 Unlike the results for corporations, in which the three levels of courts pierced at roughly the same rate,75 the data for LLCs

72. This is the equivalent of Thompson, supra note 9, at tbl.3. 73. Compare tbl.5 with Thompson, supra note 9, at tbl.3. 74. This is the equivalent of Thompson, supra note 9, at tbl.4. 75. Id.



reveals much higher piercing rates in intermediate appellate courts than in trial courts. Whether this is merely a function of the small sample size of the LLC data set, or a lasting trend, will be revealed by time. It is possible that in these early years of LLC veil piercing, plaintiffs have been overly enthusiastic about pleading a veil piercing count, even though the facts fail to support imposing that remedy. The trial courts are the first line of defense against these frivolous claims, and may be weeding them out such that the bad veil piercing arguments surface less frequently at the appellate level.

Table Six Category Total number


Trial Courts 32 5 27 16% Intermediate Appellate Courts

27 14 13 52%

Supreme Court 2 0 2 0%

Finally, Table Seven documents the appearance of various explanations for veil piercing, and the rates at which courts pierced when they found an LLC and its members satisfied each condition.76 The factors that appeared numerous times that were most likely to lead to veil piercing are alter ego, undercapitalization, and lack of substantive separation. In contrast, when courts found a failure to respect formalities, they pierced only 56% of the time (with corporations, courts pierce 66% of the time when they find a failure to respect formalities).77 These results are substantially similar to the ones Thompson obtained in his study of corporate veil piercing.78 However, although the rate of LLC veil piercing based on failure to respect formalities was lower than the equivalent rate for corporations found by Thompson, it may be surprising to some that formalities played as large a role as they have in LLC veil piercing cases. Some scholars,79 and even a number of LLC statutes,80 have rejected the consideration of corporate formalities as a basis for LLC veil piercing. The obvious reason for avoiding formalities analysis in LLC veil piercing cases is that LLCs are not characterized by the same level of formalities as corporations (mandatory director elections, shareholder meetings, etc.).81 The fact that a majority of cases that mentioned LLC formalities pierced the veil may suggest that courts are ignoring this analysis.

76. This is the equivalent of Thompson, supra note 9, at tbl.11. 77. See id. 78. See id. 79. See Bendremer, supra note 7, at 404 ([T]he corporate formalities basis for veil piercing is largely inapplicable [to Delaware LLCs]. . . . One of the advantages of utilizing the LLC entity is precisely to avoid the burdens of [corporate] formalities. It would be an ironic result if making use of one of the principal features of the Act led to liability.); Timothy P. Glynn, Beyond Unlimiting Shareholder Liability: Vicarious Tort Liability for Corporate Officers, 57 VAND. L. REV. 329, 353 n.109 (2004); Vandervoort, supra note 20, at 68-69; Fox, supra note 8, at 1172 (Many commentators contend that the formalities factor in corporate veil piercing is not appropriate for LLC veil piercing.). 80. See Bendremer, supra note 7, at 395 n.77 (collecting statutes rejecting failure to respect corporate formalities as a basis for LLC veil piercing). 81. See Vandervoort, supra note 20, at 76.



Table Seven Factor Number of Cases

in which Factor Mentioned to Describe LLC

Number of Piercing Results

No-Piercing Results

% Pierced

Instrumentality 2 2 0 100% Alter Ego 13 13 0 100% Misrepresentation 2 0 2 0% Agency 0 0 0 0% Dummy 3 3 0 100% Lack of Substantive Separation

5 5 0 100%

Intertwining 1 1 0 100% Undercapitalization 8 6 2 75% Informalities 16 9 7 56% Domination & Control 11 7 4 64% Overlap:

Officers 2 0 2 0% Directors 1 1 0 100% Owners 7 4 3 57% Office 5 3 2 60% Business Activity 1 1 0 100% Employees 2 1 1 50% Management 0 0 0 0% Other 0 0 0 0% Total Overlap 11 7 4 64%

Generally speaking, the preliminary record on LLC veil piercing does not differ dramatically from the record on corporate veil piercing. LLCs seem slightly less likely to be pierced; contract cases are more common than tort cases; piercing is particularly unlikely in LLC cases involving torts; and the rate of piercing does not seem to depend in the LLC context as much on the number of shareholder-owners as it does in the close corporation context.

III. RESPONDING TO THE CASE AGAINST LLC VEIL PIERCING

A. Statutory Critique

Bainbridges case for abolishing LLC veil piercing begins with a sort of statutory critique. Bainbridge notes that LLC statutes can be divided into two groups: statutes invoking veil piercing82 and silent statutes.83 Bainbridge is particularly critical of courts interpretation of the silent statutes. He dedicates a subsection of his paper to discussing

82. See Bainbridge, supra note 17, at 81. The only example discussed is Minnesota. Id. 83. See id. at 82-83. Examples discussed include Connecticut, New York, Utah, and Colorado. Id. at n.29.



the Wyoming LLC veil piercing case, Kaycee Land & Livestock v. Flahive.84 Bainbridge objects to the courts analysis of the Wyoming LLC statute, which is silent as to veil piercing:

[T]he court invoked the hoary canon of statutory construction under which statutes in derogation of the common law are to be strictly construed. Because the court saw no evidence of legislative intent to preclude application of the common law veil piercing to the LLC context, the court held that the LLC veil could be pierced.85

Bainbridge argues that there was no common law of LLCs . . .. The LLC . . . was an entirely new statutory creation. There was no background of common law against which it was to be implemented. Corporate common law was relevant to the problem at bar only by virtue of judicial fiat.86

Unfortunately, none of the scholars addressing LLC veil piercing has attempted to return to the LLC statutory debates to determine if there was any discussion of the issue of veil piercing in the enactment of LLC laws.87 Such research is complicated by the fact that states adopted LLC laws in various waves,88 and in many cases little debate occurred at the state level.89 The most thorough review of the liability-limitation provisions of the statutes themselves concluded that LLC laws do little, if anything, to change the long-standing and well-developed judicial exceptions to limited liability based on either piercing the corporate veil or direct liability for active participation.90

Bainbridges statutory critique ignores an important detail of LLCs. While there may not have been American common law on LLCs prior to the enactment of state LLC statutes, there is developed law on the models upon which LLCs were based. There is some dispute as to the true intellectual origins of the LLC.91 Most commentators argue that state legislatures explicitly sought to create a form similar to the German Gesellschaft mit beschraeukter Haftung,92 the Portugese sociedate por quotas responsibilidade limitada, and the Latin American limitada.93 Others argue that the LLC

84. Id. at 85-86. 85. Bainbridge, supra note 17, at 86. 86. Id. at 86-87. 87. The most thorough account of the enactment of LLC statutes nationwide, which was based on a number of first person interviews with the drafters of LLC statutes, unfortunately does not contain any information on legislatures thinking on the issue of veil piercing. See generally Goforth, supra note 29. 88. John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners Limited-Liability Protection, 75 WASH. L. REV. 147, 164-65 nn.83-88 and accompanying text (2000). 89. State legislative histories are often scarce and . . . fraught with peril for the careful investigator . . . . In re Giampietro, 317 B.R. 841, 847 n.8 (Bankr. D. Nev. 2004). 90. Robert G. Thompson, The Limits of Liability in the New Limited Liability Entities, 32 WAKE FOREST L. REV. 1, 21 (1997). 91. See Cohen, supra note 5, at 468. 92. See William J. Carney, Limited Liability Companies: Origins and Antecedents, 66 U. COLO. L. REV. 855, 857 (1995) (citing WILLIAM D. BAGLEY & PHILIP P. WHYNOTT, THE LIMITED LIABILITY COMPANY: THE BETTER ALTERNATIVE 1.501-.503 (1992)). 93. See Cohen, supra note 5, at 468. These forms were common even prior to the widespread adoption of LLC statutes in America. See Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company: From Sure Bet to Long Shot, 22 J. CORP. L. 131 n.1 (1996).



is derived from the Anglo-American joint-stock company.94 Both of these models upon which LLC statutes were crafted involve some element

of veil piercing. Indeed, in a joint-stock company there is no corporate veil, even if the holders of stock certificates assume they are only liable to the extent of their contribution.95 The joint-stock companys members are liable as if they were partners.

The German Gesellschaft mit beschraeukter Haftung, Portugese sociedate por quotas responsibilidade limitada, and the Latin limitada, are therefore the most relevant examples for determining whether the entity legislatures created by enacting LLC statutes was meant to be subject to veil piercing like a corporation or enjoy even greater immunity.96 Wyomings LLC law was enacted to create an American business form similar to the Latin limitada, at the behest of a special interest (a mining concern) that had experience with limitadas in its international operations.97 The Panamanian limitada inspired the Hamilton Brothers Oil Company of Denver to seek enactment of an LLC law in Wyoming after their initial efforts in Alaska were unsuccessful.98 The Florida legislaturethe second legislature (after Wyoming) to enact an LLC lawspecifically discussed how the LLCs empowered by its statute were similar to the Central and South American limitada.99

These entities are all subject to veil piercing.100 Brazils New Civil Code, for instance, provides that the quota-holders (owners) of a Brazilian limitada may be held personally liable for the limitadas debts when they have used the limitada for improper purposes.101 Even though German GmbH statutes, like American LLC laws, provide that only the companys assets can be used to satisfy its liabilities,102 German courts have developed a body of case law (referred to as Durchgriffshaftung) which provides for piercing of the [privately owned GmbH] corporate veil in exceptional cases for serious reasons of equity and good faith.103

94. See Carney, supra note 92, at 856. 95. See 13 AM. JUR. 2d Joint-Stock 11 (2005) (citing cases). 96. See Carney, supra note 92, at 856 ([T]he very origins of the Wyoming LLC, which are said to lie in part in the Latin limitada, invite us to look abroad as well.). 97. But see id. (While some writers have credited the limitada as the source of LLCs, I will argue . . . that the LLC represents a fairly close approximation of the unincorporated joint-stock company that developed in England in tandem with, and as a substitute for, the royally chartered corporation.). 98. See id. at 857. 99. See Goforth, supra note 29, at 1201 (The committee reports discussing LLCs specifically noted that LLCs were similar to a form of business organization prevalent in Central and South America . . . .). 100. Italian limitadas are subject in exceptional circumstances of veil piercing: superamento dello schermo della personalita guiridica. Jose Engracia Antunes, The Liability of Polycorporate Enterprises, 13 CONN. J. INTL L. 197, 215 (1999). Similarly, Central and South American limitadas are subject to veil piercing: abuso de la personalidad juridica. Id. 101. See Matthew S. Poulter, My Clients Going to Brazil: A U.S. Practitioners Guide to Brazilian Limitadas Under the New Civil Code, 11 SW. J.L. & TRADE AM. 133, 139-40 (2005). 102. See Daniela Weber-Rey, Insolvency of a German Limited Liability Company: De Facto Shareholders, Group Liability for Individual Shareholders, 7 PACE INTL L. REV. 523, 523 (1995). 103. Sandra K. Miller, Piercing the Corporate Veil Among Affiliated Companies in the European Community and in the U.S.: A Comparative Analysis of U.S., German, and U.K. Veil Piercing Approaches, 36 AM. BUS. L.J. 73, 99 (1998). German courts have also developed a body of law to hold a parent company liable for the obligations of a subservient company in certain cases where the parent controls the subsidiary extensively and places insufficient importance upon the separate interests of the subsidiary company. Id. at 76. In fact, although there is less veil piercing litigation in Germany than in the U.S., German law is said to be more



LLC statutes were enacted initially at the behest of a special interest seeking to replicate a foreign corporate form. The legislative intent to create such a form cannot be ignored, and if that form is susceptible to veil piercing, it is at least plausible to assert that the LLC was meant to be subject to veil piercing as well.104 Even if its foreign antecedents were not in the forefront of the minds of legislators enacting LLC statutes, it seems unreasonable to assert that the legislatures did not act with the knowledge and awareness of the longstanding corporate veil piercing doctrine. Had the legislatures intended to do away with that doctrine in the new LLCs, one would expect them to have said so. As one court noted,

[t]he legislature is deemed to have been aware of our deeply rooted common law remedy of imposing personal liability upon a shareholder of a corporation where the corporate shield has been used to promote injustice, and the legislature surely could have expressly created a blanket limitation of [LLC] member liability had it so chosen. Not much imagination is required to hypothesize all sorts of pernicious uses of such a blanket limitation.105 If LLCs were meant to be free of corporate law veil piercing, why is there no anti-

piercing language in LLC statutes? Why is there only limited language restricting the cases in which the LLC veil may be pierced? It is, of course, possible that LLC statute drafters hoped that by never mentioning veil piercing they would preserve their ability to later argue (as lawyers representing LLC defendants) that LLCs are not subject to veil piercing at all. Interpreting LLC statutes as barring veil piercing based on this kind of speculation would be to reward defense-side lawyers (and their clients) for legislative chicanery. Legislatures are, of course, free to amend statutes to abolish LLC piercing, but they have not done so.

B. Policy Concerns

1. Indeterminacys Last Stand?

One of the most often lodged attacks against veil piercing generally is that the doctrine is indeterminate. That is to say, that its application is inconsistent, and cannot be accurately predicted. Veil piercing has been called freakish[]106 and inconsistent with

liberal in terms of the circumstances in which the court will pierce the subsidiarys corporate veil. Id. at 83; see also Carsten Alting, Piercing the Corporate Veil in American and German LawLiability of Individuals and Entities: A Comparative View, 2 TULSA J. COMP. & INTL L. 187 (1995); Rudolf F. Colle & Claus Caspary, International Financing of U.S. Takeovers: Country by Country ReviewFederal Republic of Germany, 671 PLI/CORP 401, 435 (1990); Weber-Rey, supra note 102, at 523. 104. One might argue that the Brazilian or Panamanian legal system, given rampant fraud and corruption, is not the right source of legal cues for American lawmakers and courts. However, the author cannot come up with a way that veil piercing promotes fraud, bribery, or black-masked death squads. To the extent that LLCs were designed to mirror the economic and legal function of the limitada, the veil piercing aspects of those legal regimes seem a reasonable place to look for insight into the ideal legal regime for such entities. 105. Bastan v. RJM & Assocs., LLC, No. CV99 0593189 S, 2001 WL 1006661 at *1 (Conn. Super. Ct. June 4, 2001) (unpublished opinion). 106. Easterbrook & Fischel, supra note 12, at 89.



the goals of certainty and predictability.107 Thus, the veil piercing invites the prospect of occasional judicial errors.108

Justice (then Judge) Cardozos oft-quoted opinion on veil piercing no doubt inspired much of this criticism: The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched for starting as devices to deliberate thought, they end often by enslaving it.109 It is somewhat understandable why this mist is so vexing to scholars. Legal scholars strive for predictive accuracy. Law schools defend their intellectual integrity against more empirically based social sciences by striving to characterize the study of law as a quasi-scientific venture (when pseudo-scientific is probably more accurate).110 Legal scholars seem to hate rules that are left to the common sensibilities of ordinary judges to decide.111

Of course, indeterminacy can have real efficiency costs, particularly in certain branches of litigation that have developed highly sophisticated practices on both the defense and plaintiff side. For example, given the high rates of either pretrial dismissal or settlement of securities litigation and arbitration, predictability in that context helps price settlements and reduces unnecessary litigation expenses.112

However, the truth is that the LLC context may not be one in which indeterminacy is of major concern. LLCs are small businesses. When they face contract disputes, it is on an ad hoc basis. LLC contract disputes are not routine and standardized so as to necessitate perfect prediction of likely outcomes in order to calculate settlement values.

a. Indeterminacys Limited Costs in the LLC Context

Bainbridge argues that the uncertainty and unpredictability manifest themselves in the LLC context in increasing transaction costs for small businesses.113 His argument

107. Bainbridge, supra note 16, at 515. 108. Bainbridge, supra note 17, at 102. 109. Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 58 (N.Y. 1926). 110. Critics have suggested that

the current state of empirical legal scholarship is deeply flawed . . . . The sustained, self-conscious attention to the methodology of empirical analysis so present in the journals in traditional academic fields (without which scholars in those disciplines would be unable to publish their work in reputable journals or expect it to be read by anyone with an interest in how the world works)that is, the articles devoted to methodology in these disciplinesis virtually nonexistent in the nations law reviews.

Lee Epstein & Gary King, The Rules of Inference, 69 U. CHI. L. REV. 1, 6 (2002) (emphasis omitted). 111. See Daniel Q. Posin, Turning Green: Louisianas Piercing-the-Corporate-Veil Jurisprudence and its Economic Effects, 79 TUL. L. REV. 311, 315 (2004) (describing veil piercing as having a quicksilver nature and asking when you get down to it, just when do courts pierce the corporate veil?). 112. See Brain S. Sommer, The PSLR Decade of Decadence: Improving Balance in the Private Securities Litigation Arena with a Screening Panel Approach, 44 WASHBURN L.J. 413, 422 n.56 (2005) (noting that high discovery expenses account for a high settlement rate in securities litigation); Matthew Roskowski, Note, A Case-by-Case Approach to Pleading Scienter Under the Private Securities Litigation Reform Act of 1995, 97 MICH. L. REV. 2265, 2267 (1999) (Securities fraud lawsuits that withstand a 12(b)(6) motion almost always settle, regardless of the actual merits of the case or the probability of success at trial, because of the massive discovery and defense costs associated with such suits.). 113. Bainbridge, supra note 17, at 77.



begins with the unpredictability of veil piercing. That is, because the doctrine lacks analytical rigor, it is hard for businesses to predict how a court will decide a particular veil piercing claim. Because veil piercing can be avoided in most cases by keeping proper books and respecting corporate formalities, Bainbridge predicts that LLCs will invest to inefficient excess in lawyers114 and other intermediaries rather than growing their businesses.115 Since LLCs are predominantly small businesses,116 they are the entities least able to afford such an investment.117 Bainbridge also suggests that an indeterminate veil piercing doctrine distorts the insurance purchase decisions of both LLCs and their owners.118 If owners are uncertain of whether they might be held personally liable for the LLC debts, they might cause LLC managers to purchase more insurance for the LLC (so that the LLCs assets are never wholly depleted). Alternatively, owners might over-insure against personal liability out of a fear of veil piercing. On the other hand, some LLC owners might fail to appreciate the risk of veil piercing and systematically underinvest in such insurance. Either way, indeterminacy might skew LLCs insurance choices.119

If LLC veil piercing really were such an inefficient policy, one might expect some state legislature to have clearly forbidden veil piercing. States could begin to compete for LLCs the way they once competed for corporations,120 and offering a more efficient liability regime would be one way to do so. Yet to date, there is no evidence that such racing is widespread.121 At least one legislature sought to restrict judicial veil piercing

114. It is worth noting that many LLCs already have a lawyer, since a lawyer may have filed the LLCs articles of organization. Thus, the LLC is not an unlawyered corporate form, which the general partnership is now becoming. Friedman, supra note 3, at 49 (The general partnership has essentially disappeared as a lawyered business form.). 115. Bainbridge, supra note 17, at 102 ([V]eil piercing focuses entrepreneurial incentives on the wrong issues, such as by encouraging them to spend time and effort on organizational formalities that simply dont address the real problem of negative externalities.). 116. See Friedman, supra note 3, at 35. 117. See Larry T. Garvin, Small Business and the False Dichotomies of Contract Law, 40 WAKE FOREST L. REV. 295, 312 (2005). For small business owners, [l]egal issues may be high among those neglected. Given form contracting, the likely ubiquity of boilerplate terms, and the fairly high probability that any particular contract will be performed, it would not make sense for a small merchant to hire a lawyer to scrutinize all contracts. Id. 118. Bainbridge, supra note 17, at 101 (Some investors will over-invest in expensive precautions, while others will under-invest in insurance and risk reduction.); Fox, supra note 8, at 1144 (Legislatures and courts must resolve this issue because, without guidance regarding the potential liability involved in LLC membership, investors and entrepreneurs will be unable to make informed decisions regarding the risk and return on their investments.). 119. Small business ownersthe ones most likely to use the LLC as the entity of choicehave repeatedly complained about the high costs of insurance. See Garvin, supra note 117, at 307 n.51. To the extent that veil piercing, or abolishing LLC veil piercing, does upset small business insurance markets, those costs would be particularly hard to bear. 120. See Bacon, supra note 6, at 1119. See generally Goforth, supra note 29. 121. This may not be true in the context of LLCs used specifically in the context of complicated business transactions. It seems a fair speculation that Delaware LLCs are the vehicle of choice for business practitioners using LLCs for the sake of effecting triangular mergers, going private transactions, and other complicated processes. Recent amendments to the Delaware LLC law may reflect a desire to attract additional LLC business for the state. For example, in 2000 Delaware clarified Section 18-215(b) of the Delaware Limited Liability Company Act to make more clear the fact that the liabilities of one series of an LLC may not be enforced against the general assets of the LLC or other series of the LLC so long as assets are held or accounted for separately. The 2000 amendment added the terms directly or indirectly, including through a nominee or



in the corporate context,122 but no states have sought to abolish LLC veil piercing. In truth, the kinds of behaviors veil piercing might induce on the part of LLC

operators are not all that burdensome. One commentator advised LLC owners to ensure that (1) one member does not operate the company without consultation from other members; (2) the business is held out as a separate legal entity; (3) that members do not usurp the corporate decisions of the manager, when the LLC elects to have the LLC manager managed; and (4) members dont commingle personal funds or property with that of the LLC or hoard company assets for personal use.123

All of these suggestions are really just good business practice.124 While avoiding commingling funds, for example, might be somewhat inconvenient, it also makes it more likely that a small business will be able to monitor accurately its cash flows, something that is profit-enhancing rather than wasteful. Similarly, ensuring that an LLC is managed by its manager, or by participation of all, rather than a single member-owner, is really just good corporate governance.

While Bainbridge argues that LLC veil piercing increases costs and reduces efficiency for small business, abolishing LLC veil piercing would perversely lead to the same result. Just as an LLC is most likely a small business, those who engage in commerce with that LLC are most likely to be small businesses or individuals. In other words, in thinking about LLC veil piercing, we cant focus solely on the identity and character of the defendant LLC. We need to think of the effects on dyads composed of what is most likely a small business LLC defendant and a small business or individual plaintiff. My speculation is that most of the LLC veil piercing cases will involve small business or individual plaintiffs.125 Where the plaintiff in an LLC veil piercing case is a

otherwise as a parenthetical following the statutory term held. See John H. Small, Delawares 2000 Legislation for LPs, LLCs and Corporations, available at http://www.prickett.com/00legislation.htm (last vistied June 27, 2006). Delawares renewed interest in clarifying this provision is clearly aimed at targeting high-end LLCs. It is hard to imagine an LLC needing series of membership units unless it is a venture capital LLC, hedge fund, or other high-end enterprise. However, Delawares attractiveness to high-end LLCs may also be based on the institutional competence of its chancery courts, rather than the features of its LLC law. See Bendremer, supra note 7, at 387. 122. See OHIO REV. CODE ANN. 1701.95(H) (West 2006); TEX. BUS. CORP. ACT. ANN. art. 2.21(A) (Vernon 2006); see also Thompson, supra note 9, at 1042 (describing statute and probable origins). 123. Brigham, supra note 7, at 77-78 (citing Steven C. Bahls, Application of Corporation Common Law Doctrines to Limited Liability Companies, 55 MONT. L. REV. 43, 63-64 (1994)). 124. Doing these simple things has helped some LLCs escape veil piercing claims. See, e.g., KLM Indus. v. Tylutki, 815 A.2d 688, 693 (Conn. App. Ct. 2003). The KLM court reversed the lower courts finding that the veil should be pierced and noted that the defendant entity maintained its returned checks and statements, filed and maintained corporate tax returns, and filed its biannual reports. Id. 125. See, e.g., Law Offices of Gary Oberst PC v. Omerta LLC, No. CV030197379, 2004 WL 2757633 (Conn. Super. Ct. Nov. 4, 2004) (unpublished opinion) (discussing solo practitioner lawyers attempt to pierce restaurant LLCs veil). But see S.R. Intl Bus. Ins. Co. v. World Trade Center Props., LLC, 375 F. Supp. 2d 238, 245 (S.D.N.Y. 2005) (addressing LLC veil piercing in the context of the World Trade Center insurance dispute); Duke Energy Trading & Mktg., LLC v. Enron Corp., No. 01 B 16034, 2003 WL 1889040, at n.3 (Bankr. S.D.N.Y. Apr. 17, 2003) (unpublished opinion) (rejecting plaintiffs LLC veil piercing claims regarding Enron trading subsidiaries on standing grounds). This is of course an empirical question, which cannot be answered with firm data. It is possible that LLC creditors are mostly sophisticated business entities. In that case, Bainbridges indeterminacy critique would be more persuasive.



sophisticated business entity rather than a small business, courts would be less likely to pierce an LLCs veil.126

If LLC veil piercing were abolished without the general abolition of veil piercing (something that seems unlikely), LLCs and close corporations would become subject to different sets of rules: corporations would be vulnerable to veil piercing, but LLCs would not. This would introduce indeterminacy because the businesses dealing with these firms would have to know the difference. LLC owners have not always been clear to their customers and suppliers about what type of entity they were operating.127 LLCs business partners would be the least equipped to appreciate the extremely significant consequences of their business partners organizational forms. As such, the small businesses that deal with LLCs would increase their investment in lawyers, investigators and the like, and might systematically over- or under-insure.

Moreover, if LLC veil piercing is not abolished nationwide, but on a piecemeal basis with some states abolishing and others not abolishing, further confusion would be introduced to the small business arena.128 Small businesses would need to research the status of veil piercing in the state in which the LLC they are contracting with happens to be domiciled before determining what sort of additional legal guarantees to seek. That would raise costs and reduce efficiency for the very entities targeted by proponents of LLC abolition.

For involuntary or tort creditors, abolishing veil piercing in the LLC arena without also abolishing it in the general corporate arena would produce severe inequities. A pedestrian struck by a van driven by ABC, Inc.s employee could seek to pierce the veil under appropriate circumstances, but a pedestrian struck by a van driven by XYZ, LLCs employee could not. Since an involuntary creditor most likely did not even know of the LLCs existence, let alone its limitation of liability,129 this result is profoundly unfair.

126. See, e.g., Advanced Tel. Sys., Inc. v. Com-Net Profl Mobile Radio, LLC, 846 A.2d 1264, 1282 (Pa. Super. Ct. 2004) ([Plaintiff] knew it was dealing with [the LLC, a limited liability company], knew [the LLCs] liability is very limited, and admits it knew that [the LLC] would have assets, and $15 million of financing . . . . [Plaintiff] had demanded no guarantees for the [LLCs] obligations yet now it asks the Court, in effect, to provide guarantees after-the-fact.); Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663, 671-72 (La. Ct. App. 2003) (Imperial representatives knew or reasonably should have known that Uter and Menzie were acting in a representative capacity, as opposed to an individual capacity.). 127. See, e.g., LM Ins. Corp. v. Sourceone Group, Inc., 381 F. Supp. 2d 761, 762 (N.D. Ill. 2005) (describing a corporation as also known as an LLC). Shockingly, even corporate law scholars have occasionally made dramatic errors of confusion with respect to LLCs and corporations. Stephen Pressers casebook includes a subchapter titled The Limited Liability Corporation. See STEPHEN B. PRESSER, AN INTRODUCTION TO THE LAW OF BUSINESS ORGANIZATIONS: CASES, NOTES AND QUESTIONS 57 (2005). While one might be tempted to chalk that up to an editing or typographical error, the error is repeated in the Notes and Questions section of the chapter. Id. at 66. If leading corporate law scholars sometimes miss the distinction between LLCs and corporations, law students, courts and small-business people certainly can be expected to make similar mistakes. See also Mowles v. Predictive Control Sys., Inc., No. Civ.A. CV-02-355, 2003 WL 23109994 (Me. Super. Ct. Dec. 4, 2003) (involving a LLC mistakenly captioned Inc.); Quantum Color Graphics, LLC v. Fan Assn Event Photo GmbH, 185 F. Supp. 2d 897 (2002) (referring to a party as a California Limited Liability Corporation); Meterlogic v. Copier Solutions, Inc., 185 F. Supp. 2d 1292 (S.D. Fla. 2002) (involving Copier Solutions, Inc., a Missouri Limited Liability Company). 128. One might argue, conversely, that since states currently differ in their legal treatment of LLC veil piercing claims, see supra Part II, abolishing LLC veil piercing would do away with state-by-state variation and reduce indeterminacy. 129. Cohen, supra note 5, at 488.



In addition to the fact that indeterminacy is not a major down-side to LLC veil piercing (or a down side that would be exacerbated by abolishing LLC piercing), it could also be argued that this indeterminacy has advantages. The veil piercing doctrines muddiness may lead business founders to overcapitalize their business ventures (fearing that a court will find that they undercapitalized a business, pierce the veil, and find them personally liable for LLC torts or contracts). But is overcapitalization really such a bad thing?130 Overcapitalization reduces the risk that a business will face a successful veil piercing claim. But it also reduces the risk that the business will fail. Business failures may have negative externalities that, from a social utility-maximizing perspective, mean that an individual businesspersons capitalization decisions may not be optimal. When a business fails, there are administrative costs arising from bankruptcy;131 owners and employees are dislocated;132 and customers and suppliers face transaction costs in finding new ways to satisfy their product and service needs.133 Small businessesthe predominant use of LLCsare particularly vulnerable to failure.134 To the extent that LLC owners fearing application of an indeterminate veil piercing doctrine put more money into their businesses than their own individual marginal utility analysis would dictate, that might serve to reduce the rate of business failures and alleviate associated negative externalities.135

Abolishing LLC veil piercingand insisting courts focus instead on whether particular LLC owners did something for which they can be held personally liablecan also have a perverse impact on sharing work within a firm and on the firms incentive structure. If only those who personally participate are liable for particular transactions, members may dodge high risk transactions or demand higher compensation.136

2. Reversing Tort Reform Finally, Bainbridge makes a roundabout and at times even poetic argument that LLC

veil piercing somehow subverts a meaningful legislative effort to achieve tort reform. If LLCs and other unincorporated limited liability entities spread as a backdoor

130. Overcapitalization would be capitalization of a business at a level beyond the point of optimal investment. The excess investment does not lead to a positive expected return, at least compared to the expected return of other investments. See John Lee et al., Restating Capitalization Standards and Rules: The Case for Rough Justice Regulations (Part One), 23 OHIO N.U. L. REV. 631, 725 n.348 (1997). 131. Adam Feibelman, Defining the Social Insurance Function of Consumer Bankruptcy, 13 AM. BANKR. INST. L. REV. 129, 162-64 (2005). 132. See generally CLAIRE WHYLEY, RISKY BUSINESS: THE PERSONAL AND FINANCIAL COSTS OF SMALL BUSINESS FAILURE (1998). 133. See Ted Janger, Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design, 43 ARIZ. L. REV. 559, 579 (2001). 134. See Donald R. Korobkin, Vulnerability, Survival, and the Problem of Small Business Bankruptcy, 23 CAP. U. L. REV. 413, 435 (1994). 135. In addition, if veil piercing helps reduce the rate of LLC veil piercing in particular (as opposed to piercing for other business entities), it may help speed the adoption of LLCs in states where they do not yet account for a majority of new corporate filings. See Friedman, supra note 3, at 55-58. As LLCs become more widespread and more successful, network economic effects will multiply the advantages (and reduce the risks associated with forming a business as an LLC, as opposed to a Subchapter S corporation, limited partnership, or limited liability partnership). If LLCs are actually the efficient entity choice in many cases, as commentators suggest, anything that spreads or encourages their adoption helps promote economic growth and efficiency. 136. Thompson, supra note 2, at 942-43.



mechanism for achieving tort reform,137 then continuing to allow veil piercing in the LLC context somehow thwarts this reform effort.

Even if LLC statutes spread because legislators sought to actively promote[e] business,138 offering an alternative government subsid[y] that offsets the differential burden of the tort system on small business,139 that does not make such backdoor reform an efficient policy. While occasionally backdoor redistribution may be necessary where forces of political economy make it impossible to achieve direct reform,140 that certainly is not the case in the context of the tort reform debate. Proponents of tort reform have been successful in many states and have achieved a considerable amount of national political support.141 Tort reform using a backdoor method is simply not as efficientfrom a marginal perspectiveas direct tort reform, since it will inevitably introduce unanticipated behavioral incentives to the business world.142 Indeed, if LLCs were meant to be a subsidy, the efficient way to go about that is to simply transfer wealth to the target businesses. Any other method has additional inefficiency generating consequences.

But Bainbridge does not rest his argument on the efficiency of limited liability alone. No, instead he invokes populist democracy, drawing on the work of Stephen Presser. Limited liability encourages small and impecunious entrepreneurs to start and grow new business.143 Otherwise, only the rich would invest in new ventures. Limited liability therefore helps destroy[] class distinctions and enhance[] personal and social mobility.144 Presumably, if limited liability did all of these good things during the nineteenth century, superlimited liability, in the form of LLCs not subject to veil piercing, would lead to even more class mobility and populist democracy.

137. Bainbridge, supra note17, at 104 n.166 (citing Larry E. Ribstein, The Evolving Partnership, 26 J. CORP. L. 819, 836 (2001)). 138. See Bainbridge, supra note 17, at 99 (citing John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners Limited-Liability Protection, 75 WASH. L. REV. 147, 182 (2000)). In fact, the LLC is better understood as a simple effort to expand the availability of limited liability/pass-through tax treatment beyond the group that could use it under Subchapter S to include ventures with more complicated governance and financial arrangements among their participants, Thompson, supra note 2, at 929, rather than as part of a broader move for tort reform. 139. Bainbridge, supra note 17, at 99. 140. See, e.g., Geoffrey Christopher Rapp, Monopolys Hidden Justice: How Lax Antitrust Enforcement May Stimulate Charitable Giving and Overcome the Political Economy Barriers to Redistributive Taxation, 70 UMKC L. REV., 303, 303-04 (2001). 141. See Sara Falkinham, Recent Decision, TortsPremises LiabilityThe Open and Obvious Defense is no Longer a Complete Bar to Plaintiff Recovery, 64 MISS. L.J. 241, 255 (1994) (noting the rising popularity of tort reform). 142. In other contexts, leading law and economics scholars have asserted that direct reforms designed to obtain redistribution are more efficient than indirect reforms because direct reforms do not have unintended behavioral incentive effects. See Louis Kaplow & Stephen Shavell, Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income, 29 J. LEG. STUD. 821 (2000). Here, if LLCs were intended to redistribute wealth from plaintiffs to defendants, one of the apparent goals of tort reform legislation, a more direct effort would have been more efficient. 143. Bainbridge, supra note 17, at 104 (citing Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy and Economics, 87 NW. U. L. REV. 148, 155-56 (1992)). 144. Bainbridge, supra note 17, at 105 (citing MICHAEL NOVAK, TOWARD A THEOLOGY OF THE CORPORATION 42 (2d ed. 1990)).



This claim strikes me as a stretch. While it may be true (although there is room to doubt)145 that in the nineteenth century limited liability was necessary to permit the development of a modern economy and, in particular, modern investment markets, that is no longer the case.146 Under the current state of affairsin which veil piercing is an established part of corporate lawthe financial markets are more diversified and accessible than ever.147 Veil piercing is rare enoughand one suspects, sufficiently unknown outside of educated legal circlesthat eliminating it in the LLC context simply couldnt have any effect on income distribution and the democratic essence of American society.

IV. THE EFFICIENCY CASE FOR LLC VEIL PIERCING

Relatively little work has concentrated on the efficiency gains of the veil piercing doctrine, as opposed to the efficiency gains of unlimited liability generally. Critics of LLC veil piercing describe two supposedly proffered policy justifications for LLC veil piercing. The first has something to do with the legal fiction of personhood associated with certain types of business entities.148 The actual shape of this argument is somewhat difficult to make out, and no scholar has used it as a justification for defending LLC veil piercing. The argument would go something like this: limited liability is something we confer upon corporate entities because they are distinct fictitious persons; if the owners of those entities fail to respect that fiction, then t

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