One of the first things people think of to preserve assets for their heirs is to just give it to them. The gift is already made, so the assets are safe, right? First you must wait for the 4-5 year lookback for gifts (it varies in every state). If one is within that timeframe, a creditor can convince a judge to order a clawback. Yes, a clawback is where the assets that would have been available for the creditor are forced back to the defendant in order to pay off that creditor. Assuming one get beyond the 4-5 year window, we will consider another pitfall with this strategy.

Many children are not quite as responsible as one might hope. Let’s say Mr. and Mrs. B have $500,000 sitting in an account and they don’t really need it to live. They don’t want to lose it to medical bills, so they decide to give it to their daughter. Their daughter is a graduate of a well known college and has a great job. Soon she is promoted, celebrates a little too much and smashes into an oncoming vehicle. Is that $500,000 safe now?

Best Asset Protection Strategies: Limited Liability Company?

Others think an LLC is the answer. They take what money they have, start an investment LLC and continue to run that LLC as if it were their own money. They think because they filed a piece of paper, that the assets are safe. Well, a good lawyer will “pierce the corporate veil.” This means they will prove to the court that the LLC is actually a front for the person who owns it. The attempt to safeguard the assets actually makes them not safeguarded. There are so many rules surrounding LLCs and other corporate hybrids, that it would be difficult not to run afoul of them and subject assets to outside creditors. Often times the owner is a single member or the owner does not follow the many rules to an LLC that provide the desired asset protection portion of the LLC, causing the LLC to be ineffective.

Revocable Trust

Next, people put assets into revocable trusts in order to bypass probate court upon their death and leave specific instructions for the distribution of those assets to their beneficiaries. They mistakenly believe that their assets are safe for the next generation. The truth is that aside from protecting against a few attorneys fees upon their death, they didn’t protect anything. The simple truth is that anything that one can get control over, a creditor may get control over. So the fact that a trust is revocable, meaning it can be tossed aside and the contents recovered means that there is absolutely no protection from creditors, the nursing home, Medicaid, etc.

Best Asset Protection Strategies: Irrevocable Trust

Lastly there is the irrevocable trust; specifically an irrevocable trust with an independent trustee. The irrevocable trust ranks at the top of asset protection in this group. One of the keys to good asset protection is the art of not owning anything. With an irrevocable trust, one can own nothing and still continue to enjoy assets as if they did; and the courts have supported this for 150 years – see some of the most important cases here.

An irrevocable trust has advantages of all of the above methods of asset protection with none of the pitfalls when properly drafted, executed, and funded. First, this asset protecting vehicle, like giving the assets to one’s children, gets the assets out of one’s name. After the assets are in the trust when properly drafted, executed, and funded, anybody suing cannot get at them, because the person that created the trust can’t even get at the assets. Furthermore, the children’s creditors don’t have access either. So the assets sit safely in trust waiting to be distributed to the beneficiaries (more on this later). Moreover, the assets in the trust won’t be seen by anyone trying to discover one’s personal wealth. This has the added bonus of privacy and discouraging would-be contingent fee lawyers from even taking on a case in the first place.

The irrevocable trust can also hold an LLC thereby doubling the LLC’s asset protection qualities. Now if a lawyer should try to pierce the LLC, they would only end up in the irrevocable trust. If the LLC is the only thing in the trust, then the creditor has nothing to collect. A separate irrevocable trust would hold the rest of the assets far away from the LLC and far away from creditors.

Like a revocable trust, an irrevocable trust can instruct the trustee who, what, when, if and how assets are distributed. Unlike the revocable trust, because the grantor can’t get to the assets, neither can anyone who wishes to collect from the grantor. These instructions are almost limitless and last long after the death of the grantor. Let’s say that a parent values education. They could put right in the trust that the trust will pay for education and if the child earns a college degree, then they get ½ of the assets at that time and ½ at age 35. Basically, the trust is flexible enough that a grantor could set up goals, objectives, or incentives just like if they were alive to see it.

There may be some more expensive ways to safeguard assets, but for the most bang for the buck, an irrevocable trust is the best asset protection for the average person. In fact, the irrevocable trust can be found in the estate plans of the super rich also. A good solid irrevocable trust can protect and provide for a family for years with the assets safely tucked away.

15 Cal.Rptr. 641

56 Cal.2d 576, 364 P.2d 473

William MINTON et al., Plaintiffs and Respondents,

v.

Maude N. CAVANEY, as Executrix, etc., Defendant and Appellant. [*]

L. A. 25881.

Supreme Court of California

Sept. 5, 1961.

In Bank

Rehearing Denied Oct. 4, 1961.

[56 cal.2d 577] [Copyrighted Material Omitted]

[56 Cal.2d 578] William E. McIntyre, Los Angeles, for defendant and appellant.

William M. Cavaney, in pro. per., as amicus curiae on behalf of defendant and appellant.

Charles H. Manaugh and Michael K. Lanning, Beverly Hills, for plaintiffs and respondents.

TRAYNOR, Justice.

The Seminole Hot Springs Corporation, hereinafter referred to as Seminole, was duly incorporated in California on March 8, 1954. It conducted a public swimming pool that it leased from its owner. On June 24, 1954 plaintiffs’ daughter drowned in the pool, and plaintiffs recovered a judgment for $10,000 against Seminole for her wrongful death. The judgment remains unsatisfied.

On January 30, 1957, plaintiffs brought the present action to hold defendant Cavaney personally liable for the judgment against Seminole. Cavaney died on May 28, 1958 and his widow, the executrix of his estate, was substituted as defendant. The trial court entered judgment for plaintiffs for $10,000. Defendant appeals.

Plaintiffs introduced evidence that Cavaney was a director and secretary and treasurer of Seminole and that on November 15, 1954, about five months after the drowning, Cavaney as secretary of Seminole and Edwin A. Kraft as president of Seminole applied for permission to issue three shares of Seminole stock, one share to be issued to Kraft, another to F. J. Wettrick and the third to Cavaney. The commissioner of corporations refused permission to issue these shares unless additional information was furnished. The application was then abandoned and no shares were ever issued. There was also evidence that for a time Seminole used Cavaney’s office to keep records and to receive mail. Before his death Cavaney answered certain interrogatories. He was asked if Seminole ‘ever had any assets?’ He stated that ‘insofar as my own personal knowledge and belief is concerned said corporation did not have any assets.’ Cavaney also stated in the return [56 Cal.2d 579] to an attempted execution that ‘(I)nsofar as I know, this corporation had no assets of any kind or character. The corporation was duly organized but never functioned as a corporation.’

Defendant introduced evidence that Cavaney was an attorney at law, that he was approached by Kraft and Wettrick to form Seminole, and that he was the attorney for Seminole. Plaintiffs introduced Cavaney’s answer to several interroga tories that he held the post of secretary and treasurer and director in a temporary capacity and as an accommodation to his client.

Defendant contends that the evidence does not support the court’s determination [1] that Cavaney is personally liable for Seminole’s debts and that the ‘alter ego’ doctrine is inapplicable because plaintiffs failed to show that there was “(1) * * * such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Riddle v. Leuschner, 51 Cal.2d 574, 580, 110; Automotriz Del Golfo De California S. A. De C. V. v. Resnick, 47 Cal.2d 792, 796, 63 A.L.R.2d 1042; Minifie v. Rowley, 187 Cal. 481, 487.

The figurative terminology ‘alter ego’ and ‘disregard of the corporate entity’ is generally used to refer to the various situations that are an abuse of the corporate privilege. Ballantine, Corporations (rev. ed. 1946) § 122, pp. 292-293; Lattin, Corporations, p. 66; Latty, The Corporate Entity as a Solvent of Legal Problems, 34 Mich.L.Rev. 597 (1936). The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will (see Riddle v. Leuschner, 51 Cal.2d 574, 577-581; Thomson v. L. C. Roney & Co., 112 Cal.App.2d 420, 429); when they hold themselves out as being personally liable for the debts of the corporation (Stark v. Coker, 20 Cal.2d 839, 847); or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.

[56 Cal.2d 580] Automotriz Del Golfo De California S. A. De C. V. v. Resnick, supra, 47 Cal.2d 792, 796, 797; Riddle v. Leuschner, supra, 51 Cal.2d at page 580; Stark v. Coker, 20 Cal.2d 839, 846-849; Shafford v. Otto Sales Co. Inc., 149 Cal.App.2d 428, 432; see Carlesimo v. Schwebel, 87 Cal.App.2d 482, 492-493; Ballantine, Corporations (rev. ed. 1946) § 129, pp. 302-303; Lattin, Corporations, pp. 68-72; Fuller, The Incorporated Individual: A Study of the One-Man Company, 51 Harv.L.Rev. 1373, 1381-1383.

In the instant case the evidence is undisputed that there was no attempt to provide adequate capitalization. Seminole never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was “trifling compared with the business to be done and the risks of loss * * *.” Automotriz Del Golfo De California S. A. De C. V. v. Resnick, supra, 47 Cal.2d 792, 797, 4. The evidence is also undisputed that Cavaney was not only the secretary and treasurer of the corporation but was also a director. The evidence that Cavaney was to receive onethird of the shares to be issued supports an inference that he was an equitable owner (see Riddle v. Leuschner, supra, 51 Cal.2d 574, 580), and the evidence that for a time the records of the corporation were kept in Cavaney’s office supports an inference that he actively participated in the conduct of the business. The trial court was not required to believe his statement that he was only a ‘temporary’ director and officer ‘for accommodation.’ In any event it merely raised a conflict in the evidence that was resolved adversely to defendant. Moreover, section 800 of the Corporations Code provides that ‘* * * the business and affairs of every corporation shall be controlled by, a board of not less than three directors.’ Defendant does not claim that Cavaney was a director with specialized duties (see 5 U.Chi.L.Rev. 668). It is immaterial whether or not be accepted the office of director as an ‘accommodation’ with the understanding that he would not exercise any of the duties of a director. A person may not in this manner divorce the responsibilities of a director from the statutory duties and powers of that office.

There is no merit in defendant’s contentions that the ‘alter ego’ doctrine applies only to contractual debts and not to tort claims (Marabito v. San Francisco Dairy Co., 1 Cal.2d 400, 406; see Ballantine, Corporations (rev. ed. 1946) § 127, p. 298); that plaintiffs’ cause of action [56 Cal.2d 581] abated when Cavaney died (Civ. Code § 956; see Damiano v. Bunting, 40 Cal.App. 566, 567), or that the judgment in the action against the corporation bars plaintiffs from bringing the present action. Dillard v. McKnight, 34 Cal.2d 209, 214, 11 A.L.R.2d 835. Defendant Cavaney waived the defense of the statute of limitations by failing to plead that defense in the answer to the complaint or by specifying the statute of limitations as a ground of its general demurrer. Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 741-745; Miller v. Parker, 128 Cal.App. 775, 776; see Burke v. Maguire, 154 Cal. 456, 462; 2 Witkin, California Procedure, § 489, 545, pp. 1476-1477, 1541; Limitations of Actions, 31 Cal.Jur.2d § 243, p. 659.

In this action to hold defendant personally liable upon the judgment against Seminole plaintiffs did not allege or present any evidence on the issue of Seminole’s negligence or on the amount of damages sustained by plaintiffs. They relied solely on the judgment against Seminole. Defendant correctly contends that Cavaney or his estate cannot be held liable for the debts of Seminole without an opportunity to relitigate these issues. Motores De Mexicali, S. A. v. Superior Court, 51 Cal.2d 172, 176; see also Dillard v. McKnight, supra, 34 Cal.2d 209, 214, 11 A.L.R.2d 835. Cavaney was not a party to the action against the corporation, and the judgment in that action is therefore not binding upon him unless he controlled the litigation leading to the judgment. Motores De Mexicali S. A. v. Superior Court, supra, 51 Cal.2d 172, 175; Thomson v. L. C. Roney & Co., supra, 112 Cal.App.2d 420, 427; Mirabito v. San Francisco Dairy Co., 8 Cal.App.2d 54, 58-59; see Restatement of Judgments § 84. Although Cavaney filed an answer to the complaint against Seminole as its attorney, he withdrew before the trial and did not thereafter participate therein. The filing of an answer without any other participation is not sufficient to bind Cavaney. ‘In order that the rule stated in this section (that a person in control of the litigation is bound by the judgment) should apply it is necessary that the one in whose favor or against whom the rules of res judicata operate participate in the control of the action and if judgment is adverse, be able to determine whether or not an appeal should be taken. It is not sufficient that he supplies the funds for the prosecution or defense, that he appears as a witness or cooperates without having control.’

[56 Cal.2d 582] Restatement of Judgments § 84 comment e; see Motores De Mexicali, S. A. v. Superior Court, supra, 51 Cal.2d 172, 176.

The judgment is reversed.

GIBSON C. J., and PETERS, WHITE and DOOLING, JJ., concur.

SCHAUER, Justice (concurring and dissenting).

I concur in the judgment of reversal on the ground that (as stated in the majority opinion, 15 Cal.Rptr. 644,) ‘In this action to hold defendant personally liable upon the judgment against Seminole plaintiffs did not allege or present any evidence on the issue of Seminole’s negligence or on the amount of damages sustained by plaintiffs. They relied solely on the judgment against Seminole. Defendant correctly contends that Cavaney or his estate cannot be held liable for the debts of Seminole without an opportunity to relitigate these issues. (Citations.) Cavaney was not a party to the action against the corporation, and the judgment in that action is therefore not binding upon him * * *.’

I dissent from any implication that mere professional activity by an attorney at law, as such, in the organization of a corporation, can constitute any basis for a finding that the corporation is the attorney’s alter ego or that he is otherwise personally liable for its debts, whether based on contract or tort. That in such circumstances an attorney does not incur any personal liability for debts of the corporation remains true whether or not the attorney’s professional services include the issuance to him of a qualifying share of stock, the attendance at and participation in an organization meeting or meetings, the holding and exercise for such preliminary purposes, in the course of his professional services, of an office of offices, whether secretary or treasurer or presiding officer or any combination of offices in the corporation.

The acts and services performed in organizing a corporation do not constitute the carrying on of business by a corporation. In this respect a corporation cannot properly be regarded as organized and ready to even begin carrying on business until at least qualifying shares of stock have been issued, a stockholders’ meeting held, by-laws adopted and directors and officers elected. Furthermore, a permit from the Commissioner of Corporations must have been secured and minimum requirements of that agency met before the corporation can secure assets for which its stock may issue (possibly to be impounded [56 Cal.2d 583] on conditions) and without which it cannot (at least normally) commence business. The scope of a lawyer’s services in corporate organization may often include advice and direction as to the legal architecture of financial structures but does not, as such, encompass responsibility for securing assets.

In the process of developing an idea of a person or persons into an embryonic corporation and finally to full legal entity status with a permit issued, directors and officers elected, and assets in hand ready to begin business, there may often be delays. In such event a qualifying share of stock may stand in the name of the organizing attorney for substantial periods of time. In none of the activities indicated is the corporation actually engaging in business. And the lawyer who handles the task of determining and directing and participating in the steps appropriate to transforming the idea into a competent legal entity ready to engage in business is not an alter ego of the corporation. By his professional acts he has not been engaging in business in the name of the corporation; he has been merely practicing law.

McCOMB, J., concurs.

—————

NOTES:

[*] Case was previously entitled, ‘Minton v. Kraft.’

[1] Defendant did not request that the findings of the trial court be included in the record on appeal. It must be presumed therefore that the findings support the judgment. See 3 Witkin, California Procedure pp. 2238-2239.

—————–

Colorado Court of Appeals — February 2, 2012

2012 COA 21. No. 11CA0145. Martin v. Freeman.

Court of Appeals No. 11CA0145

El Paso County Court No. 10CV1445

Honorable David S. Prince, Judge

Robert L. Martin,

Plaintiff-Appellee,

v.

Dean C.B. Freeman; and Tradewinds Group, LLC, a Delaware limited liability company,.

Defendants-Appellants.

JUDGMENT AFFIRMED

Division VII

Opinion by JUDGE NEY*

Casebolt, J., concurs J. Jones, J., dissents

Announced February 2, 2012

Mulliken Weiner Karsh Berg & Jolivet, P.C., Murray I. Weiner, Colorado Springs, Colorado, for Plaintiff-Appellee

Rothgerber Johnson & Lyons LLP, Michael Francisco, Colorado Springs, Colorado, for Defendants-Appellants

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art. VI, § 5(3), and § 24-51-1105, C.R.S. 2011.

/div>1 In this limited liability company (LLC) veil-piercing case, defendants, Dean C.B. Freeman and Tradewinds Group, LLC, appeal the trial court’s judgment in favor of plaintiff, Robert C. Martin. We affirm.

I. Factual Background

2 Freeman managed Tradewinds as a single member LLC. Tradewinds contracted to have Martin construct an airplane hangar. In 2006, Tradewinds sued Martin for breaching the construction agreement. In 2007, while the litigation against Martin was pending, Tradewinds sold its only meaningful asset, an airplane, for $300,000, and the proceeds of that sale were diverted to Freeman, who paid Tradewinds’ litigation expenses. In 2008, a judgment was entered in favor of Tradewinds. Martin appealed. Another division of this court concluded that Tradewinds’ damages were speculative and remanded with directions to enter judgment in Martin’s favor. Tradewinds Group, L.L.C. v. Martin, (Colo. App. No. 08CA1300, June 11, 2009) (not published pursuant to C.A.R. 35(f)). On remand, the trial court declared Martin the prevailing party and awarded him $36,645.40 in costs.

3 Because the proceeds of the sale of Tradewinds’ only significant asset, the airplane, went directly to Freeman, the LLC was without any assets. Martin initiated this action to pierce the LLC veil. Following a bench trial in 2010, the trial court pierced the LLC veil and found Freeman personally liable for the cost award entered against Tradewinds. Defendants appeal.

II. Veil Piercing

4 Defendants contend that the court erred in piercing the LLC veil. We disagree.

5 The piercing of an LLC veil is a mixed legal and factual question. See McCallum Family L.L.C. v. Winger, 221 P.3d 69, 73 (Colo. App. 2009) (standard of review for piercing corporate veil); see also Sheffield Services Co. v. Trowbridge, 211 P.3d 714, 721 (Colo. App. 2009) (veil piercing applies to limited liability companies). Defendants have not designated the trial transcripts and do not dispute the court’s factual findings. We therefore accept the court’s factual findings and review de novo its application of the law to those facts. See McCallum Family L.L.C., 221 P.3d at 73.

6 To pierce the LLC veil, the court must conclude (1) the corporate entity is an alter ego or mere instrumentality; (2) the corporate form was used to perpetrate a fraud or defeat a rightful claim; and (3) an equitable result would be achieved by disregarding the corporate form. Id. at 74. The third prong, in particular, recognizes that veil piercing is a “fact-specific” inquiry. See id. at 79; see also Micciche v. Billings, 727 P.2d 367, 373 (Colo. 1986) (in the absence of a fully developed factual record and adequate factual findings, appellate court could not determine whether to disregard the corporate form).

7 Defendants contend that the court’s factual findings do not support piercing the LLC veil. Specifically, they challenge the court’s conclusions that the first and second prongs were satisfied. We address each prong in turn.

A. Alter Ego

8 Defendants contend that the court erred in finding that Tradewinds was Freeman’s alter ego. We disagree.

9 Courts consider a variety of factors in determining alter ego status, including whether (1) the entity is operated as a distinct business entity; (2) funds and assets are commingled; (3) adequate corporate records are maintained; (4) the nature and form of the entity’s ownership and control facilitate insider misuse; (5) the business is thinly capitalized; (6) the entity is used as a mere shell; (7) legal formalities are disregarded; and (8) entity funds or assets are used for non-entity purposes. McCallum Family L.L.C., 221 P.3d at 74.

10 In concluding that Tradewinds was Freeman’s alter ego, the court found:

• Tradewinds’ assets were commingled with Freeman’s personal assets and the assets of one of his other entities, Aircraft Storage LLC;
• Tradewinds maintained negligible corporate records;
• the records concerning Tradewinds’ substantive transactions were inadequate;
• the fact that a single individual served as the entity’s sole member and manager facilitated misuse;
• the entity was thinly capitalized;
• undocumented infusions of cash were required to pay all of Tradewinds’ operating expenses, including its litigation expenses;
• Tradewinds was never operated as an active business; legal formalities were disregarded;
• Freeman paid Tradewinds’ debts without characterizing the transactions;
• Tradewinds’ assets, including the airplane, were used for non­entity purposes in that the plane was used by Aircraft Storage LLC, without agreement or compensation;
• Tradewinds was operated as a mere assetless shell, and the proceeds of the sale of its only significant asset, the airplane, were diverted from the entity to Freeman’s personal account.

Defendants maintain that the court erred in finding that the first prong was satisfied because Freeman did not use Tradewinds’ assets as his own. However, although the trial court recognized that “most of the examples of commingling were the use of the member’s personal assets to satisfy the entity’s obligations,” it also noted that proceeds from the sale of the entity’s only significant asset, the airplane, were diverted from the entity to Freeman’s personal account.

Defendants further argue that the court erred in not recognizing that (1) limited liability companies have fewer restrictions than corporations concerning maintaining formal corporate records, (2) member-owners are permitted to fund LLCs, (3) thin capitalization is not a reason to disregard the corporate form, and (4) third-party payment of attorney fees is proper. See, e.g., § 7-80-107(2), C.R.S. 2011 (“the failure of a limited liability company to observe the formalities or requirements relating to the management of its business and affairs is not in itself a ground for imposing personal liability on the members for liabilities of the limited liability company”); 1 Fletcher’s Cyclopedia of the Law of Corporations§ 41.35 (“a sole shareholder will not likely be suspect merely because he or she conducts business in an informal manner”); 2 Ribstein and Keatinge on Limited Liability Companies § 12.3 (“veil piercing on the ground of inadequate capitalization is even less likely for LLCs than corporations”; “LLCs normally receive little funding apart from member contributions”; “LLCs might be distinguished from corporations regarding the likelihood that the veil will be pierced for failure to observe formalities”); see also Colo. RPC 1.8(f) (allowing third-party attorney fee payment arrangements). However, the court considered the appropriate factors and its findings support a conclusion that Tradewinds was Freeman’s alter ego. See also Sheffield Services Co., 211 P.3d at 720-21 (extending veil piercing to LLCs and identifying alter ego factors).

B. Defeat of a Rightful Claim

11 Defendants contend that the court erred in finding that the second prong of veil piercing was satisfied because the court did not find wrongful intent or bad faith. We disagree.

12 “The second prong of the veil-piercing test is whether justice requires recognizing the substance of the relationship between the corporation and the person or entity sought to be held liable over the form because the corporate fiction was ‘used to perpetrate a fraud or defeat a rightful claim.'” McCallum Family L.L.C., 221 P.3d at 78 (quoting In re Phillips, 139 P.3d 639, 644 (Colo. 2006)). Defendants have not cited any Colorado case, and we are aware of none, establishing that a party seeking to pierce the corporate veil must show wrongful intent. We conclude that showing that the corporate form was used to defeat a creditor’s rightful claim is sufficient and further proof of wrongful intent or bad faith is not required.

13 Here, in finding that the corporate form was used to defeat a rightful claim, the court relied on Tradewinds’ sale of its only asset, the airplane, and diversion of the proceeds to Freeman during the litigation with Martin. Defendants argue that the airplane’s sale in 2007 does not support the second prong because Martin did not have a rightful claim until the cost award in his favor was entered in 2009. We conclude that defeating a potential creditor’s claim is sufficient to support the second prong. We further conclude, as a matter of first impression, that wrongful intent or bad faith need not be shown to pierce the LLC veil.

14 Any party engaged in litigation is exposed to potential liability. See, e.g., C.R.C.P. 54(d) (authorizing award of costs to prevailing party).

15 Here, Freeman drained Tradewinds of all assets during litigation, even though it was exposed to potential liability because it had sued Martin. Leaving Tradewinds without any assets would have, without a finding that veil piercing was appropriate, defeated any of Martin’s potential valid claims. We conclude that transferring all of the LLC’s assets to defeat a rightful creditor’s potential claim is sufficient to support piercing the corporate veil. See McCallum Family L.L.C., 221 P.3d at 78 (creditor seeking to pierce the veil must show an effect on its lawful rights as a creditor resulting from the corporate form’s abuse). We therefore conclude that the trial court did not err in concluding that the sale of the only asset and transfer of the proceeds to Freeman satisfied the second prong.

16 Relying on the court’s finding that, “to the best of his [Freeman’s] knowledge, all of the known or reasonably possible debts of the entity were fully provided for at the time of the distribution,” defendants maintain that the second prong was not satisfied. However, the court made this finding in analyzing Martin’s claim that defendants violated section 7-80-606, C.R.S. 2011, because following the distribution, Tradewinds’ liabilities exceeded its assets. Accordingly, that finding is not relevant to the court’s veil-piercing analysis.

C. Waiver

17 Defendants argue that Martin waived the ability to collect litigation costs by not contesting the amount of the cost bond that Tradewinds filed. We disagree.

18 During the contract litigation, Martin requested that Tradewinds, an out-of-state entity, post a cost bond. See§ 13-16- 101(2), C.R.S. 2011 (requiring nonresident plaintiffs to post a cost bond not to exceed $5,000). Tradewinds posted a $500 cost bond, which the trial court found sufficient. We conclude that Martin’s failure to contest the cost bond did not constitute an unequivocal act manifesting intent to relinquish the right to collect costs. See Dep’t of Health v. Donahue, 690 P.2d 243, 247 (Colo. 1984) (waiver is the intentional relinquishment of a known right or privilege and involves conduct clearly manifesting the intent not to assert the benefit). Accordingly, waiver does not apply.

III. Attorney Fees

19 Martin requests an award under C.A.R. 38(d) of the costs he incurred on appeal, including attorney fees. We conclude that this appeal is not so futile, irrational, or unjustified as to be frivolous. See Hinojos v. Lohmann, 182 P.3d 692, 702 (Colo. App. 2008); see also Mission Denver Co. v. Pierson, 674 P.2d 363, 365-66 (Colo. 1984) (C.A.R. 38(d) should be used to penalize “egregious conduct”). Thus, Martin’s request is denied.

IV. Conclusion

20 A judgment is presumed to be correct until it is affirmatively shown otherwise; thus, the party asserting error on appeal must present a record that discloses the error. Dillen v. HealthOne, L.L.C., 108 P.3d 297, 300 (Colo. App. 2004); see also C.A.R. 10(b) (“If the appellant intends to urge on appeal that a finding or conclusion is unsupported by the evidence or is contrary to the evidence, the appellant shall include in the record a transcript of all evidence relevant to such finding or conclusion.”). On the record before us, which does not include the trial transcript, we discern no basis for reversal.

The judgment is affirmed. JUDGE CASEBOLT concurs.

JUDGE J. JONES dissents.

JUDGE J. JONES dissenting.

21 The majority affirms the district court’s decision to pierce the veil of defendant Tradewinds Group L.L.C. (Tradewinds or the LLC) and hold defendant Dean C.B. Freeman liable for a debt of Tradewinds that arose in November 2009. It does so based entirely on a transaction – Tradewinds’ sale of its airplane, and the distribution of the proceeds of that sale to Mr. Freeman – that occurred more than two years earlier and bore no relationship to the debt which later arose. Were that transaction somehow wrongful, such a result might be justified. But the district court did not find that the transaction was wrongful, and its factual findings, which are uncontested on appeal, permit no such inference. Therefore, the district court’s decision was, in my view, contrary to the controlling Colorado authority, which requires the party seeking to pierce the corporate veil to prove, at a minimum, wrongful conduct in the use of the corporate form. Accordingly, I respectfully dissent.

22 Fundamentally, “[i]nsulation from individual liability is an inherent purpose of incorporation . . . .” Leonard v. McMorris, 63 P.3d 323, 330 (Colo. 2003); accord In re Phillips, 139 P.3d 639, 643 (Colo. 2006); McCallum Family, L.L.C. v. Winger, 221 P.3d 69, 74 (Colo. App. 2009) (applying principles of corporate veil-piercing to a limited liability company). This treatment of a corporation as an entity separate from its shareholders, officers, and directors gives investors assurance that they can invest in and act through the corporation without being held individually liable for the corporation’s obligations. Micciche v. Billings, 727 P.2d 367, 372 (Colo. 1986); McCallum, 221 P.3d at 73; see Lowell Staats Mining Co., Inc. v. Pioneer Uravan, Inc., 878 F.2d 1259, 1262 (10th Cir. 1989) (applying Colorado law); see also Cathy S. Krendl & James R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Den. L. J. 1, 1-2 (1978).

23 “[O]nly extraordinary circumstances justify disregarding the corporate entity to impose personal liability.”Leonard, 63 P.3d at 330; accord In re Phillips, 139 P.3d at 644; McCallum, 221 P.3d at 74. Application of the alter ego doctrine is one means, however, by which an individual may be held personally liable for a corporate obligation.See In re Phillips, 139 P.3d at 644; Rosebud Corp. v. Boggio, 39 Colo. App. 84, 88, 561 P.2d 367, 371 (1977).

24 As the majority recognizes, whether to pierce the corporate veil by means of the alter ego doctrine involves a three-part inquiry. First, the party seeking to pierce the corporate veil must prove that the corporate entity is the individual’s “alter ego.” This requires consideration of many factors, but essentially asks whether the corporate form was disregarded to such an extent so as to make the corporation no more than the mere instrumentality of the individual. See Fink v. Montgomery Elevator Co., 161 Colo. 342, 350, 421 P.2d 735, 739 (1966); Rosebud, 39 Colo. App. at 89, 561 P.2d at 371; see also In re Phillips, 139 P.3d at 644 (identifying factors); McCallum, 221 P.3d at 74 (same). Second, the claimant must prove that “justice requires recognizing the substance of the relationship between the person or entity sought to be held liable and the corporation over the form because the corporate fiction was ‘used to perpetrate a fraud or defeat of a rightful claim.'” McCallum, 221 P.3d at 74 (quoting in part In re Phillips, 139 P.3d at 644). Third, the court must consider whether holding the individual liable for the corporate obligation is equitable under all the relevant circumstances. See In re Phillips, 139 P.3d at 644; McCallum, 221 P.3d at 74.

25 The district court made findings as to all three of these elements. Defendants, however, challenge only the court’s findings under the first and second elements. More specifically, defendants do not challenge the court’s underlying factual findings, but challenge the court’s ultimate conclusions that Mr. Martin had proved the first two elements. I agree with the majority that our review of these conclusions is de novo. See McCallum, 221 P.3d at 73.

26 As to the first element, I believe the district court’s conclusion presents a close question. Some of the facts relied on by the district court and the majority do not show disregard of the corporate form, but rather were common, permissible, and unremarkable circumstances or acts consistent with (or at least not inconsistent with) proper regard for the Tradewinds’ separate existence.1 But for present purposes I accept that the first element is satisfied.

27 As to the second element, however, I believe the district court’s factual findings preclude a result favorable to Mr. Martin under the governing law, and that both the district court and the majority have applied this element in a manner inconsistent with the principle underlying it.

28 My disagreement with the district court and the majority stems from my understanding of the requirement that the claimant prove that the corporate form was misused to perpetrate fraud or defeat a rightful claim. More precisely, because, as the district court noted, “[n]o allegation of fraud is at issue in this case,” the outcome here turns on the proper application of the requirement to prove misuse of the corporate form to defeat a rightful claim.

29 Clearly, the mere fact that the creditor would not be paid absent piercing of the corporate veil is not enough.McCallum, 221 P.3d at 78 (citing Lowell Staats Mining Co., 878 F.2d at 1265). In Fink, the supreme court held that it must be shown “either that the corporate entity was used to defeat public convenience, or to justify or protect wrong, fraud or crime . . . .” Fink, 161 Colo. at 350, 421 P.2d at 739; see also LaFond v. Basham, 683 P.2d 367, 369 (Colo. App. 1984) (“promote injustice, protect fraud, defeat a rightful claim, or defend crime”); Rosebud, 39 Colo. App. at 88, 561 P.2d at 371. The next year, the supreme court said that there must be a showing of “fraud or some other wrong being perpetrated . . . .” Contractors Heating & Supply Co. v. Scherb, 163 Colo. 584, 587, 432 P.2d 237, 239 (1967). And one year after that, the supreme court, quoting a much earlier case, characterized this requirement as a showing that the individual conducted business through the corporation “‘as a means of accomplishing a fraud or an illegal act.'” Lavach, 165 Colo. at 437, 439 P.2d at 361 (quoting Gutheil v. Polichio, 103 Colo. 426, 431, 86 P.2d 972, 974 (1939)). In Micciche, 727 P.2d at 373, the supreme court articulated the type of conduct required as being “for the purpose of defeating or evading important legislative policy, or in order to perpetrate a fraud or wrong on another . . . .”

30 More recent decisions have reinforced the notion that a showing of at least wrongful conduct is required. For instance, in In re Phillips, 139 P.3d at 644, the supreme court held that the claimant must prove that “the corporate structure is used to perpetrate a wrong,” and that the corporate veil may be pierced “[o]nly when the corporate form was used to shield a dominant shareholder’s improprieties . . . .” See also McCallum, 221 P.3d at 78; Sheffield Services Co. v. Trowbridge, 211 P.3d 714, 720 (Colo. App. 2009) (applying veil piercing to a limited liability company).

31 Though the cases contain somewhat different language, it is clear to me that the claimant must show, in the absence of blatant circumvention of a legislative policy or fraud, that the individual sought to be held liable must have misused the corporate form in a manner that, if not criminal, was at least unlawful or intended to defeat a claim. See also 1 Fletcher Cyclopedia of the Law of Corporations§ 45.10, at 125-30 (2006) (the alter ego doctrine is intended “to hold the individuals responsible for their acts knowingly and intentionally done in the name of the corporation”), 144 (the plaintiff must show that the individual used his control over the corporation “to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of the plaintiff’s rights”).2 Any lower standard would fail to give meaningful content to the supreme court’s consistent references to “wrongful” conduct and would make veil piercing less than the “extraordinary” remedy it has always been intended to be.

32 This view is borne out by the few Colorado cases finding that the corporate veil should be pierced. For example, piercing the corporate veil has been found to be appropriate when a shareholder, officer, or director drained the corporation of funds so as to avoid paying a known creditor or a potential judgment in an existing lawsuit against the corporation. See McCallum, 221 P.3d at 79 (removal of all corporate funds to avoid paying debt owed to the corporation’s lessor); Sheffield Services, 211 P.3d at 722 (manager of a limited liability company “concealed” transactions and actively transferred funds for the purpose of frustrating claims against the entity);LaFond, 683 P.2d at 369-70 (president and general manager took corporate funds to avoid paying builder for home remodeling work contracted for by the corporation); Rosebud Corp., 39 Colo. App. at 86-89, 561 P.2d at 369-71 (director “converted” corporate funds to avoid paying lender’s promissory note).

33 Applying this understanding of the second element of the veil piercing test to the facts as found by the trial court, I conclude that the district court erred in piercing the LLC veil. The district court’s analysis focused entirely on Tradewinds’ sale of its most significant asset – the airplane – and the fact that the proceeds of that sale were distributed to Mr. Freeman. After reciting the requirement that Mr. Martin prove the corporate form was used to defeat a rightful claim, the court said: “Martin’s cost award goes unpaid if the entity shield is recognized.” But as to the sale of the airplane and the distribution to Mr. Freeman specifically, the district court expressly found:

• Tradewinds sold the airplane “to a third party in an arm’s length transaction for a gross price of $285,000.”
• “The parties are characterizing the payment of the proceeds of the sale of the airplane as a distribution to Freeman.”
• “Freeman was not aware of any impropriety or financial recklessness of the transfer.”
• “[T]o the best of [Mr. Freeman’s] knowledge, all of the known or reasonably possible debts of the entity were fully provided for at the time of the distribution.” (Emphasis added.) (footnote 3)
• “Freeman actually and reasonably believed at the time [of the sale and distribution that Tradewinds] had more than sufficient value to cover any reasonably possible obligation on the horizon for the corporate entity.” (Emphasis added.)
• The distribution was lawful under section 7-80-606.

34 The court also found that the airplane was Tradewinds’ primary hard asset.” Indeed, the airplane was Tradewinds’ reason for existing. Once Tradewinds no longer owned the airplane, it made sense that the business would be “closed” (as the district court found) and its funds taken by its sole member. It also must be remembered that the sale and transfer occurred two years before anyobligation to Mr. Martin arose. Mr. Martin did not assert any counterclaim against Tradewinds in the underlying litigation. He was, at best, a potential creditor of Tradewinds. He would have no claim against Tradewinds absent the occurrence of a far from certain contingency. And Tradewinds had posted a cost bond, the amount of which Mr. Martin never asked the court to increase, and, as the district court found, had other assets. (footnote 4)

35 Viewing the district court’s findings and other relevant circumstances as a whole, it appears to me that the district court concluded, in essence, that because the distribution of the proceeds of the sale to Mr. Freeman rendered Tradewinds unable to pay a future contingent obligation related to the prosecution of the litigation, the second element was satisfied.5The majority appears to have concluded likewise. As I hope I have made clear above, I do not believe that a mere showing of cause and effect is sufficient under the controlling authority.

36 Thus, I conclude that Mr. Martin failed to prove that Mr. Freeman engaged in any wrongful conduct as required to pierce the LLC veil. Cf. Lavach, 165 Colo. at 436-37, 439 P.2d at 360-61 (fact that the corporation could not pay employee’s workers’ compensation claim did not justify piercing the corporate veil where there was not showing the corporate form was used to accomplish fraud or an illegal act); In re Death of Smithour, 778 P.2d 302, 303- 04 (Colo. App. 1989) (corporation’s failure to maintain workers’ compensation insurance was insufficient to hold shareholders? officers liable for injured employee’s judgment against the corporation); Hill, 44 Colo. App. at 124-25, 609 P.2d at 128-29 (where shareholder loaned money to the corporation and guaranteed certain corporate debts, but there was no evidence he did so to perpetrate a fraud or promote his personal affairs, piercing the corporate veil was improper). Therefore, I respectfully dissent.

FOOTNOTES:

1. For example, the court noted that Mr. Freeman was the sole member of the LLC. See Industrial Comm’n v. Lavach, 165 Colo. 433, 437, 439 P.2d 359, 361 (1968) (fact stock is owned by a single shareholder is not grounds for disregarding the corporate entity); see also Lowell Staats Mining Co., 878 F.2d at 1263 (same). The court also noted that Mr. Freeman had contributed substantial capital to the LLC. See Hill v. Dearmin, 44 Colo. App. 123, 125, 609 P.2d 127, 128 (1980) (contributing funds to, or on behalf of, a corporation is not indicative of misuse of the corporate form). And the court also found that Mr. Freeman had received the proceeds of the airplane sale. As discussed below, however, the court found that this was a lawful distribution, and given that the sale effectively ended the LLC’s business, it is logical that the sole member would receive the proceeds of that sale.

2. As the division held in McCallum, there is no requirement that the claimant prove conduct specifically directed at the creditor. McCallum, 221 P.3d at 78.

3. The majority discounts this finding because the court made it in the context of resolving Mr. Martin’s claim under section 7-80-606, C.R.S. 2011 (which imposes limits on distributions to members of a limited liability company). But the finding was one of fact, pertaining directly to the state of affairs and Mr. Freeman’s state of mind at the time of the sale. It is, in my view, the factual finding most relevant to the proper inquiry under the second element, so I do not see how it can be ignored.

4. The majority characterizes the airplane as Tradewinds’ “only meaningful asset.” I do not believe that characterization can be reconciled with the district court’s findings. I also take issue with the majority’s assertion that the proceeds of the sale were “diverted” to Mr. Freeman. That term carries a connotation at odds with the district court’s findings that Mr. Freeman received the funds through a lawful distribution from the LLC, with no knowledge that the LLC would be unable to pay “any reasonably possible” obligation.

5. The district court did say that Mr. Freeman “drain[ed] the entity of assets such that it did not have the assets needed to pay the expenses of ongoing litigation.” But it also found that Mr. Freeman continued to pay the litigation expenses. And the court also found, as discussed above, that Mr. Freeman had no knowledge of any potential claim by Mr. Martin or wrongful intent when he took the distribution.

These opinions are not final. They may be modified, changed or withdrawn in accordance with Rules 40 and 49 of the Colorado Appellate Rules. Changes to or modifications of these opinions resulting from any action taken by the Court of Appeals or the Supreme Court are not incorporated here.

Colorado Court of Appeals Opinions || February 2, 2012

405 B.R. 555 (Bkrtcy.M.D.Pa. 2009)

In re LMcD, LLC, a/k/a ICE 4 U 2 C, Debtors.

William G. Schwab, Trustee, Plaintiff,

v.

Kevin McDonald, Helen McDonald, Defendants.

William G. Schwab, Trustee, Plaintiff,

v.

Damenti’s, Inc., Defendant.

Bankruptcy No. 5-05-bk-54237.

Adversary Nos. 5-07-ap-50007, 5-07-ap-50098.

United States Bankruptcy Court, M.D. Pennsylvania.

March 4, 2009

[Copyrighted Material Omitted]

William G. Schwab, William G. Schwab and Associates, Lehighton, PA, pro se.

David J. Rice, William G. Schwab and Associates, Lehighton, PA, for Plaintiff.

Charles A. Shea, III, Wetzel CaverlyShea Phillips and Rodgers, Wilkes-Barre, PA, for Defendants.

JOHN J. THOMAS, Bankruptcy Judge.

Kevin McDonald is a restaurateur, businessman, chef, and master ice carver. These talents have led him to significant successes in many fields. Unfortunately, his skills could not rescue him from a rather unique venture known as ” ICE 4 U 2 C.” This entity was a trade name for LMcD, LLC. ICE 4 U 2 C’s sole effort, in its rather short history, was to conduct a demonstration of the artwork of the world’s most talented ice carvers. These ice carvers gathered in Forty Fort, Pennsylvania, to ply their craft and illustrate their artwork to the members of the public who paid admission and ventured past this marvelous collection.

Kevin McDonald worked as a chef for one of Luzerne County’s most well-known eateries, Damenti’s Restaurant. Some years later, in 1977, McDonald purchased the restaurant from the then owners but retained the restaurant name. In 1989, he incorporated the restaurant and divided the stock between himself and his spouse, Helen.

McDonald had been trained as a master ice carver in his early years during his employment out of state. In 1993, he decided to embellish the success of his current restaurant with a small display of ice carving art as a seasonal attraction on property adjacent to Damenti’s. Year after year that display grew in size and popularity. In 2004, McDonald decided to take the ice display to a higher level. He formed a ” for profit” limited liability company (LLC), known as LMcD, for the purpose of showcasing the artistry of various tradesman. LMcD filed for a fictitious name with the State of Pennsylvania for the appellation ” ICE 4 U 2 C” on October 25, 2004. The maiden venture would be the 2005 presentation of ICE 4 U 2 C. Unfortunately, the show was not the success that McDonald had hoped. A significant amount of debt was incurred, far in excess of the revenues generated primarily by admission fees and donations. LMcD found itself in voluntary Chapter 7.

William Schwab was appointed Chapter 7 Trustee for LMcD. After an investigation of the affairs of the company, he initiated lawsuits against Kevin McDonald and his wife, Helen (Adv. No. 5:07-50007), and Damenti’s Inc. (Adv. No. 5:07-50098). His theories of liability are founded on the rather loose operations of LMcD and its principal, Kevin McDonald. His argument is that LMcD, as a limited liability company, can be ” pierced” in order to seek liability against its members, Kevin and Helen McDonald. The Trustee argues that LMcD and the McDonalds are ” alter egos” of each other and are jointly liable for the debts of LMcD. The Trustee further states a claim that the McDonalds’ corporate interest in Damenti’s Restaurant, Inc. can be ” reverse pierced” so as to also hold Damenti’s Restaurant liable for the debts of the share holders, Kevin and Helen McDonald, ” alter egos” of LMcD. Additionally, the Trustee argues the single entity theory, or the enterprise theory [1], in attempting to impose liability on both LMcD and Damenti’s Restaurant since they, arguably, advanced the ice show on a joint basis. The final theory advanced by the Trustee is based on quantum meruit, who argues that Damenti’s restaurant received significant promotional advantage from the ice show for which it should compensate the Debtor.

Much of the Trustee’s case centered around the array of ostensible LMcD trade creditors whose billing statements were indefinite as to obligor. Compounding that situation was the prominent role that Damenti’s Restaurant played in ” sponsoring” the ice show with much of the promotional material bearing the name ” Damenti’s presents ICE 4 U 2 C.”

I find that a key component of the Trustee’s argument was the fact that Kevin McDonald unquestionably utilized his personal line of credit in funding the cash requirements of Damenti’s Restaurant and LMcD. In turn, Damenti’s Restaurant would further advance the cash requirements of LMcD. As a case in point, McDonald admitted that neither LMcD, nor Damenti’s Restaurant, possessed a credit card in their names. All credit card purchases were made on the personal credit card of Kevin and Helen McDonald. Charges attributed to Damenti’s Restaurant, LMcD, and the McDonalds were then identified and checks were drawn to the credit card company from the McDonalds, for their personal charges, and Damenti’s Restaurant to pay the credit card bill. Damenti’s would pay its own assessed portion as well as the LMcD share. Damenti’s would actually advance the payment on behalf of LMcD and anticipate reimbursement from LMcD. I mention these facts because they play a pivotal role in discussing the legal issues which are dispositive of the litigation.

I. Piercing the Veil of LMcD, LLC.

LMcD was created under the Pennsylvania Limited Liability Company Law of 1994. 15 Pa.C.S.A. § 8901 et seq. Under that law, much like corporate stockholders, members are not typically liable for the obligations of the company. 15 Pa.C.S.A. § 8922. Nevertheless, the Committee Comment to 15 Pa.C.S.A. § 8904(b) makes clear that the equitable remedy of ” piercing” is available regarding an LLC.

In Pennsylvania there is a strong presumption against piercing the veil. See, Lumax Indus., Inc. v. Aultman, 543 Pa. 38, 669 A.2d 893, 895 (1995). There is no definitive standard in Commonwealth law for the application of this theory, but the typical argument states that it is appropriate to pierce the veil in order to ” prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat the public purpose or shield someone from a liability for a crime.” Village at Camelback Property Owners Assn. Inc. v. Carr, 371 Pa.Super. 452, 461, 538 A.2d 528, 533 (Pa.Super.1988)(citing Zubik v. Zubik, 384 F.2d 267 (3d Cir.1967)). The factors to be considered in disregarding the corporate form are said to be undercapitalization, failure to adhere to corporate formalities, substantial intermingling of corporate and personal affairs, and use of the corporate form to perpetuate a fraud. Lumax, 669 A.2d at 895.

Undercapitalization

The United States Supreme Court has recognized the vulnerability created by the undercapitalization of an entity. Anderson v. Abbott, 321 U.S. 349, 365, 64 S.Ct. 531, 539, 88 L.Ed. 793 (1944). The law of the Commonwealth provides little guidance as to what constitutes undercapitalization. See, Fletcher-Harlee Corp. v. Szymanski, 936 A.2d 87, 100 n. 17 (Pa.Super.2007). Capital is defined as ” [o]wners’ equity in a business.” Black’s Law Dictionary 208 (6th ed.1990). While the record was somewhat unclear as to the exact capital investment of the McDonalds, I find the record supports a capital contribution of $25,000.

At trial, the defense expert testified that, at the very least, the Debtor’s initial capital should have been 10% of its debts. (Transcript of 7/31/2007 at 228.) That would calculate to be about $30,000. [2] The Trustee suggested that the capitalization of the Debtor should have been 20-25% of the debts incurred given the short length of operation. Id. at 42. Using either of these formulas results in a finding that the Debtor was not ” adequately” capitalized. Even so, undercapitalization alone is not dispositive in this case. Southeast Texas Inns, Inc. v. Prime Hospitality Corp., 462 F.3d 666, 680 (6th Cir.2006); Browning-Ferris Industries of Illinois, Inc. v. Ter Maat, 195 F.3d 953, 961 (7th Cir.1999); Gartner v. Snyder, 607 F.2d 582, 588 (2d Cir.1979). But see, Nilsson Robbins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1544 (9th Cir.1988). Without additional findings, this Court will not pierce the veil.

Failure to Adhere to Company Formalities/Absence of Company Records

Another element to consider when piercing the veil is the failure to adhere to company formalities. Not every disregard of formalities justifies piercing the veil, but deviations should be considered in the overall picture. Advanced Telephone Systems, Inc. v. Com-Net Professional Mobile Radio, LLC et al., 846 A.2d 1264 (Pa.Super.2004). In the case of a limited liability company, such as the Debtor, the requirements are less stringent. Mark C. Larson, Piercing the Veil of Pennsylvania Limited Liability Companies, 75 Pa. B.A. Q. 124 (2004). Despite the flexibility of a limited liability company, the members are still required to adhere to some formalities in running a limited liability company.

Entered into evidence was the Certificate of Organization of the LLC, dated October 8, 2004(M-1); the Limited Liability Operating Agreement dated October 12, 2004(M-2); the registration of the fictitious name, ICE 4 U 2 C, filed October 25, 2004(M-3); the Application for Employer Identification Number (M-5) dated October 25, 2004; a document establishing a bank account for ICE 4 U 2 C dated October 18, 2004 [3] (M-6); a commercial lease with LMcD dated January 11, 2005(M-7); a Certificate of Occupancy issued to ” Kevin McDonald DBA LMcD, LLC” dated January 18, 2005(M-8); and a license to Operate a Public Eating and Drinking Place issued to ICE 4 U 2 C dated February 20, 2005(M-9). Also submitted were various tax returns filed by LMcD (M-16, 17, 21, and 22). The McDonalds also maintained separate books for the Debtor.

The conclusion is inescapable that LMcD well documented its fundamental dealings with the government in its short business life.

Substantial Intermingling of Personal and Corporate Affairs

The Trustee argues that the evidence presented at trial and admissions made by the defense support a finding that there was a substantial intermingling of personal and corporate affairs.

Undoubtedly, Kevin McDonald was lax about identifying himself as a member of an LLC when dealing with creditors. The question becomes whether McDonald forfeited the protections of the Limited Liability Act by his casual attention to his membership position. I tend to think not. As an example, McDonald was primarily liable on the credit charges he made for Damenti’s and LMcD, even though he directed that each entity pay their share. The creditors were not harmed by this procedure. In fact, they may have benefitted by having two entities liable for the same obligation where usually there would be but one. If Kevin McDonald arranged for services or materials for LMcD without disclosing his position with the LLC, then he should be primarily liable. He cannot later argue that he was a mere ” agent” for LMcD.

At the time of trial, the Trustee submitted numerous examples of what he perceived was the ” commingling” of assets. Commingling is the ” fiduciary’s mixing of personal funds with those of a beneficiary or client.” Black’s Law Dictionary (8th ed.2004). The Trustee did not cite one example of LMcD funds being deposited in a personal account of McDonald or Damenti’s Restaurant. Rather, the Trustee referred to numerous situations where McDonald or Damenti’s Restaurant simply paid for bills that were incurred by LMcD. This is not commingling of assets by LMcD. Instead of loaning the Debtor the funds to pay for necessities, the McDonalds bypassed the LLC and made the payments directly. (Transcript of 8/7/07 at 206.) The McDonalds used money from their personal account to pay for rent, the liquor license, and some bills, all paid in cash. Id. Furthermore, the McDonalds used their personal credit cards to make purchases for the Debtor. Instead of reimbursing the McDonalds for purchases they made, Damenti’s paid for the credit card purchases made for the restaurant and ICE 4 U 2 C. (Tr. of 7/31/07 at 161.)

Additionally, the invoices for supplies and services purchased by the Debtor indicate that many of those doing business with the Debtor could not differentiate between LMcD, Damenti’s, and the McDonalds. Despite testimony from the defense that they did their best to ensure that everyone knew they were dealing with the Debtor, (Tr. of 7/31/07 at 140-41), the intermingling of identities, starting early in the venture, clearly confused some of the vendors. Id. at 126. Kevin McDonald admits that some of this was done intentionally for more successful advertising. (Tr. of 8/7/07 at 182-83.) Although confusion over the identities of the recipients of goods and services can be attributed to the vendors’ prior dealings with Kevin McDonald or Damenti’s Restaurant, ( Id. at 133), it does not explain why or how vendors from out of the area, who had no prior association with Kevin McDonald or Damenti’s, concluded that they were doing business with Damenti’s or Kevin McDonald in spite of Kevin McDonald’s assertions that he explicitly told them otherwise. Id. at 169. It should be noted, however, that McDonald’s use of the fictitious name, ICE 4 U 2 C, should have alerted vendors that state records could be examined to determine the party in interest. The very purpose of the Pennsylvania Fictitious Name Act, 15 Pa.C.S.A. § 301 et seq., is to protect those dealing with an assumed name so as to enable them to know with whom they do business. Rowland v. Canuso, 329 Pa. 72, 79, 196 A. 823, 827 (1938).

While there may have been an intermingling of identities, there appears to be no evidence of the commingling of assets, financial records, or employees. I believe this factor weighs against piercing the LLC.

Use of the Corporate Form to Perpetrate a Fraud

The elements required for a finding of fraud are: (1) a false representation of fact made by the maker; (2) a fraudulent utterance thereof; (3) an intention by the maker that the recipient will thereby be induced to act; (4) action in reliance thereupon by the recipient; and (5) damage resulting to the recipient from such misrepresentation. Delahanty v. First Pennsylvania Bank, N.A., 318 Pa.Super. 90, 464 A.2d 1243 (1983). Although the McDonalds may not have formed the Debtor with the intent to perpetrate a fraud, they are alleged to have misled participants and vendors with regard to the identity of the company with whom they did business. ( See, P-19.) The Trustee argues that potential participants and creditors were notified that Damenti’s ICE 4 U 2 C was hosting an exhibition run by Kevin McDonald through a letter written and mailed by Kevin McDonald. (P-21) [4] The Trustee argues that this solicitation demonstrated the ” confusion” created by Kevin McDonald as he organized the event. To the contrary, a review of this correspondence repeats, on multiple occasions, the statement that ICE 4 U 2 C will be the funding vehicle for the event. For example, it states, ” ICE 4 U 2 C has secured … [a facility].” ” ICE 4 U 2 C is willing to provide payment for travel expenses.” ” ICE 4 U 2 C will negotiate a daily rate with each carver.” ” ICE 4 U 2 C will turn this into a yearly ice carving convention….” Kevin McDonald testified at trial that he intended to garner support for this exhibition by using the names of Kevin McDonald and Damenti’s Restaurant. (Tr. of 8/707 at 182-83.)

Some vendors apparently were not told specifically who the recipient of their goods and services was and assumed that it was either Damenti’s or Kevin McDonald. I find that there may have been a lack of sufficient communication by Kevin McDonald or ICE 4 U 2 C volunteers as to billing information prior to delivery. Having said that, though, does not make the case for the Trustee. McDonald or Damenti’s could very well be liable for these obligations directly as the contracting party. Making the leap to the alter ego/piercing conclusion requires much more than is present on this record. LMcD did uphold its LLC form. It did have a membership agreement. It did register its fictitious name. It maintained separate books and filed tax returns. It had a bank account and did not deposit funds earmarked for personal use into that account. While the McDonalds may not have run their businesses strictly separate, these facts do not seem to overcome the strong presumption against piercing. See, for example, 718 Arch St. Assocs., Ltd. v. Blatstein (In re Blatstein), 192 F.3d 88, 100 (3d Cir.1999).

II. Reverse Piercing the McDonalds to Reach Damenti’s

Since the McDonalds have not been found to be personally liable for the debts of the Debtor, liability cannot be extended to Damenti’s by a reverse piercing of the corporate veil. ” In a ‘ reverse’ piercing, assets of the corporate entity are used to satisfy the debts of a corporate insider so that the corporate entity and the individual will be considered one and the same.” In re Mass, 178 B.R. 626, 627 (M.D.Pa.1995).

In order for this Court to reverse piercing the corporate veil of Damenti’s, the same elements required to pierce the corporate veil must be met including: undercapitalization, absence of corporate records, failure to follow corporate formalities, substantial intermingling of corporate and personal affairs, and the use of the corporate form to perpetrate a fraud. The Trustee did not present sufficient evidence to justify a reverse piercing of the corporate veil, even had he prevailed in establishing personal liability on the part of the McDonalds. First, no evidence was presented to show that Damenti’s failed to keep records or that it failed to follow corporate formalities. In fact, the only mention of Damenti’s records was received from Ms. Schreibmaier, the Debtor’s bookkeeper, who testified that she temporarily filled in for the Damenti’s bookkeeper prior to the formation of the Debtor. (Tr. of 8/7/07 at 129.) Additionally, except for the use of the personal credit card of the McDonalds, there was no evidence to indicate a substantial intermingling of Damenti’s corporate affairs and the McDonalds’ personal affairs or that there was a siphoning of funds. Although Damenti’s did pay portions of the McDonald’s credit card bills, it was established and undisputed at trial that they were paying for the purchases made for the restaurant and not the McDonalds’ personal expenses. Id. at 24-5. Finally, there is no evidence that the McDonalds used the corporate form to perpetrate a fraud. Damenti’s is, apparently, a highly successful and reputable business that has been operating for over thirty years. Id. at 160.

Given the strong presumption against piercing the corporate veil in Pennsylvania and the lack of evidence regarding the corporate practice of Damenti’s, this Court will not reverse piercing the corporate veil to extend the liability for Debtor’s debts to Damenti’s.

III. Single Entity Theory

Another way to extend liability to Damenti’s is via the single entity or enterprise entity theory. The single entity theory is applicable where ” two or more corporations share common ownership and are, in reality, operating as a corporate combine.” Miners Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa.Super.1998). The single entity theory has not yet been adopted by the Commonwealth of Pennsylvania. I don’t believe that fact bars me from attempting to determine how the Pennsylvania Supreme Court would address the issue should it hear such a case. The single entity theory is a theory of recovery. This type of topic has been reviewed by the federal court in an attempt to ascertain Pennsylvania law (In the area of tort law, see Habecker v. Clark Equipment Co., 36 F.3d 278, 284 (3d Cir.1994), cert. denied, 514 U.S. 1003, 115 S.Ct. 1313, 131 L.Ed.2d 195 (1995)). Since the Pennsylvania Supreme Court has not spoken on this issue, I believe it would be incumbent on this Court to predict how that court would resolve the issue. Dilworth v. Metro. Life Ins. Co., 418 F.3d 345, 349 (3d Cir.2005). The single entity theory is a theory of recovery which is the subject matter for such a review.

In making this analysis, this Court should examine the following criteria:

(1) what the Pennsylvania Supreme Court has said in related areas; (2) the ” decisional law” of the Pennsylvania intermediate courts; (3) opinions of federal courts of appeals and district courts applying state law; and (4) decisions from other jurisdictions that have discussed the issues we face here.

Dilworth, 418 F.3d at 349.

The only high state court to discuss the single entity theory, the Illinois Supreme Court, has set out a two prong test.[5] As stated in Main Bank of Chicago v. Baker, 86 Ill.2d 188, 205, 56 Ill.Dec. 14, 427 N.E.2d 94, 102 (1981), for the separate identity of the corporate entities to be disregarded, ” it must be shown that it is so controlled and its affairs so conducted that it is a mere instrumentality of another, and it must further appear that observance of the fiction of the separate existence would, under the circumstances, sanction a fraud or promote injustice.” See also, Las Palmas Assocs. v. Las Palmas Ctr. Assocs., 235 Cal.App.3d 1220, 1 Cal.Rptr.2d 301 (1991); In re New Orleans Train Car Leakage Fire Litig., 690 So.2d 255 (La.App. 4 Cir.1997)(discussing the elements required for a finding of a single enterprise).

The Pennsylvania Superior Court has also considered this issue, but made no ruling on the validity of this theory since the requisite elements were not met anyway. Miners, 722 A.2d at 695. Additionally, the District Court for the Eastern District of Pennsylvania has declined to apply the single entity theory because it has not yet been adopted by the Commonwealth. E-Time System, Inc. v. Voicestream Wireless Corp., 2002 WL 1917697, 2002 U.S. Dist. LEXIS 15568, Voicestream (E.D.Pa.2002).

The Supreme Court of Pennsylvania might be reluctant to adopt the single entity theory given that the Commonwealth is hesitant to pierce the corporate veil in any case. See, Lumax, 669 A.2d at 895. However, the fact that Pennsylvania courts do pierce the corporate veil on occasion, to prevent fraud or injustice, indicates that they may be open to adopting the ” single entity theory.” Like the ” alter ego theory” adopted by the Pennsylvania courts, the ” single entity theory” might be used only when upholding the separate identities would permit fraud or injustices. See, Main Bank of Chicago, 86 Ill.2d at 205, 56 Ill.Dec. 14, 427 N.E.2d 94. The Pennsylvania Supreme Court would likely adopt the ” single entity theory” for the same limited purpose it chose to adopt the ” alter ego theory,” -to prevent fraud or injustice. See, Village at Camelback Property Owners Assn. Inc., 371 Pa.Super. at 461, 538 A.2d 528.

Pennsylvania recognizes the theories of ” piercing.” Our Third Circuit Court of Appeals, applying Pennsylvania law, has considered ” reverse piercing.” In re DiLoreto, 266 Fed.Appx. 140, 142, 2008 WL 227655, *1 (C.A.3 (Pa., 2008)), In re Blatstein, 192 F.3d 88 (3d Cir.1999). Accordingly, the stage is set to embrace the single entity theory because the common corporation of two wholly owned affiliates is exposed, first to the parent by piercing, then back to the affiliate by reverse piercing. The very same theory would apply if the common owners were individuals. This has been identified as ” triangular piercing.” See PCORPVL 1:9 citing, Nursing Home Consultants, Inc. v. Quantum Health Services, Inc., 926 F.Supp. 835 (E.D.Ark.1996), aff’d 112 F.3d 513 (8th Cir.1997).

In order for this Court to disregard the corporate form, the Trustee must satisfy the elements of the ” single entity theory.” The first three elements of the ” single entity theory” are ” unity of ownership,” ” unified administrative control,” and ” insolvency of the company against which the claims lie.” Miners, 722 A.2d at 695. The Trustee has met his burden in satisfying all three of these elements. There is ” unity of ownership” because the McDonalds are the sole owners of both Damenti’s and the Debtor. (Tr. of 8/7/07 at 160.) See also, M-2. There is also ” unified administrative control” as the McDonalds are the officers/members of both companies. Id. Additionally, the Debtor, against which the claims lie, is clearly insolvent and unable to meet its debts. (P-11 through 14)

Next, the Trustee must satisfy the involuntary creditors element of the ” single entity theory.” Miners, 722 A.2d at 695. Involuntary creditors are defined as ” those who did not rely on anything when becoming creditors.” Mary Elisabeth Kors, Altered Egos: Deciphering Substantive Consolidation, 59 U. Pitt. L.Rev. 381, 419 (Winter 1998). Tort victims are classic examples. East End Memorial Ass’n v. Egerman, 514 So.2d 38, 44 (Ala.1987) (Voluntary creditors, on the other hand, are generally able to inspect the financial structure of a corporation and discover potential risks of loss before any transaction takes place.) The Debtor’s creditors are not involuntary creditors in this sense because they chose to extend a line of credit.

Finally, the Trustee must satisfy the similar or supplementary business function element of the ” single entity theory.” Miners, 722 A.2d at 695. There is no clear definition of what the Court would consider to be a similar or supplementary business function, only that this is an element to be considered. For years, Damenti’s, one economic entity, conducted both its restaurant business and the ice shows. (Tr. of 8/7/07 at 165.) The fragmentation of the one economic enterprise into two business entities to perform the functions previously conducted by one entity appears, on its face, to satisfy the ” similar or supplementary business function” element. Mary Elisabeth Kors, Altered Egos: Deciphering Substantive Consolidation, 59 U. Pitt. L.Rev. 381, 435-36 (Winter 1998). The Debtor took over one of the functions of the original economic entity thus fulfilling a ” similar or supplementary business function.”

On the other hand, the ice show may have borne the sponsorship name of ” Damenti’s,” but it was no longer located on premises adjoining Damenti’s Restaurant. Rather, the ice show was located approximately 13 miles from the restaurant.[6] While the ice show may have publicized the restaurant, attracting professional ice carvers or attendees to a location so removed could not have as direct an impact on patronage as would an adjoining attraction.

On a more direct note, the ice show has no supplemental value to a restaurant, such as food producer, winery, parking facility, entertainment facility, caterer, etc. Its linkage was remote, at best.

I find the Trustee has failed to satisfy all the elements of the single entity theory so that even if I were to predict that the Pennsylvania Supreme Court would embrace the single entity theory, the facts in this case would not be sufficient to hold Damenti’s liable.

IV. Quantum Meruit

The doctrine of quantum meruit states that ” a person who has been unjustly enriched at the expense of another is required to make restitution to the other.” The elements necessary to prove unjust enrichment are:

(1) benefits conferred on defendant by plaintiff; (2) appreciation of such benefits by defendant; and (3) acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.

Mitchell v. Moore, 729 A.2d 1200, 1203 (Pa.Super.1999) (citations omitted).

The Trustee argues that Damenti’s was unjustly enriched by the use of its name to promote the ice show. Damenti’s received free publicity for the restaurant through its affiliation with the exhibition.

Defendant Damenti’s argues that there is nothing unjust about the use of the Damenti’s name in advertising ICE 4 U 2 C’s exhibition. In support of this theory, the Defendant points to the college football bowl games that use corporate sponsorships. The Defendant argues that advertising Damenti’s ICE 4 U 2 C is essentially the same as advertising the Tostito’s Fiesta Bowl, the AllState Sugar Bowl, or the FedEx Orange Bowl. ( See, Post Trial Memorandum of Law of Defendants at 8, n6 (Doc. # 18).)

Although there would be nothing wrong with Damenti’s sponsoring the event, the Defense failed to acknowledge the primary difference between Damenti’s ” sponsorship” of the ice show and the sponsors of the numerous bowl games: the Defendants admitted that Damenti’s never paid anything or provided any comparable service to the Debtor in return for the publicity it received. (Tr. of 8/7/07 at 183.) Unlike Damenti’s, the college bowl game sponsors pay a seven figure fee, which is included in the multi-million dollar payout received by the winning schools, in exchange for the millions of publicity the sponsor receives. See generally, The History of the Orange Bowl (visited July, 7, 2008)< // www. orangebowl. org/ ViewArticle.dbml?DB-OEM-ID=11800 & KEY= & ATCLID=695751> .

Since Damenti’s did not reimburse the Debtor for the benefit conferred, all the elements required for a remedy in quantum meruit are met. First, the Debtor provided Damenti’s the benefit of the additional publicity that comes with a corporate sponsorship. Historically, Kevin McDonald admitted that Damenti’s enjoyed the perk of increased patronage and notoriety from being associated with the ice show. (Tr. of 8/7/07 at 196.) Finally, Damenti’s retained the free corporate ” sponsorship” even though it was clear the Debtor was having difficulty meeting its financial burdens. It was unjust for Damenti’s to continue to accept the benefits of the sponsorship and expect a failing company to pay for both its own advertising costs and those of Damenti’s without compensation.

Damenti’s was unjustly enriched by the free publicity it received from its sponsorship of the Debtor’s exhibition. However, the burden falls on the Trustee to prove the reasonable value of this benefit. See, Pulli v. Warren Nat’l Bank, 488 Pa. 194, 412 A.2d 464 (1979). At no point did the Debtor offer any proof or evidence with regard to the reasonable value of a ” corporate sponsorship.” The only mention of a value appears in the Trustee’s brief, which only alleges that Damenti’s should compensate the Debtor for the entire amount of the debt and does not mention the reasonable value of the services. (Plaintiff Trustee’s Post-Trial Brief at 19 (Doc. # 19).) Since the Trustee has failed to establish the reasonable value of this sponsorship, he is unable to recover on the basis of quantum meruit.

V. Individual Exposure

The general rule is that an agent who enters into a contract in his or her own name for an undisclosed principal, may be held personally liable by the other person to that contract. 3A Fletcher Cyc. Corp. § 1120, Personal liability as undisclosed agent for corporate principal (2008).

Regardless of the Trustee’s efforts to pierce the Debtor LLC, Kevin McDonald’s failure to sign in a representative capacity may moot the issue. Pursuant to Pennsylvania law, the use of an individual signature, without indication that it is being signed in a representative manner, imports a personal liability. See, e.g., Watters v. DeMilio, 390 Pa. 155, 159, 134 A.2d 671, 674 (1957); Strauss v. Berman, 297 Pa. 432, 435, 147 A. 85, 86 (1929); Flexlume Corp. v. Norris, 98 Pa.Super. 530, 532 (1929). Furthermore, the Trustee points to the fact that this principle has been recognized and codified by the Uniform Commercial Code:

Except as otherwise established the name of an organization preceded or followed by the name and office of an authorized individual is a signature made in a representative capacity.

12A P.S. § 3-403(3).

See also, Trenton Trust Company v. Klausman, 222 Pa.Super. 400, 403, 296 A.2d 275, 277 (1972). The burden falls on the agent to disclose that he is acting in a representative capacity and not on the other party to discover it. Flexlume Corp., 98 Pa.Super. at 532.

In this case there are instances of Kevin McDonald’s failure to obligate the LLC in a representative capacity. Although most of the McDonalds’ departures from corporate formalities were harmless and would not justify piercing the corporate veil, Kevin McDonald’s dealing with creditors without identifying his agency relationship with LMcD or ICE 4 U 2 C warrants making him personally liable for certain debts of the Debtor.

Herein lies the fundamental fact in this case, i.e., the willingness of Kevin McDonald to extend his personal credit for the benefit of his varied enterprises. Just as Kevin McDonald was willing to use his personal credit card to fund Damenti’s and LMcD, and his willingness to individually bind himself on written obligations to Eastern Penn Supply Company and A & R Building Supply Company, (M-26 and 27), I find that he extended his own personal credit to purchase trade goods and services as may be established regarding the various tradesman that dealt with LMcD. To the extent that these tradesman can establish McDonalds’ or Damenti’s liability for these debts, the tradesman are likely not creditors of the Debtor, LMcD.

VI. Conclusion

For the foregoing reasons, this Court finds in favor of the Defendants on the alter ego and single entity theories of piercing the corporate veil. Moreover, the Court declines to grant relief on the theory of reverse piercing the corporate veil due to insufficient evidence, and on the theory of quantum meruit because the Trustee failed to prove the reasonable value of the sponsorship.

———

Notes:

[1] ” Under that theory, two or more corporations are treated as one because of identity of ownership, unified administrative control, similar or supplementary business functions, involuntary creditors, and insolvency of the corporation against which the claim lies.” Miners, Inc. v. Alpine Equipment Corp., 722 A.2d 691, 695 (Pa.Super.1998).

[2] Bankruptcy Schedule F identifies unsecured liabilities of $303,076.69.

[3] Admittedly predating the registration of the fictitious name.

[4] Erroneously referred to as Plaintiff’s Exhibit 20 in Transcript of 7/31/07 at 150.

[5] A Texas intermediate court has suggested that there are a myriad of considerations to be weighed before liability attaches, i.e., ” (1) common employees; (2) common offices; (3) centralized accounting; (4) payment of wages by one corporation to another corporation’s employees; (5) common business name; (6) services rendered by the employees of one corporation on behalf of another corporation; (7) undocumented transfers of funds between corporations; and (8) unclear allocation of profits and losses between corporations.” I view these factors as nonexclusive elements of the ” two prong” test. Hoffmann v. Dandurand, 180 S.W.3d 340, 348 (Tex.App.-Dallas, 2005).

[6] The Court takes judicial notice of the driving distance from Mountaintop, Pennsylvania, the location of Damenti’s Restaurant, and ICE 4 U 2 C, Forty Fort, Pennsylvania. Fed.R.Evid. 201.

———

Gregg Stone et al.

v.

Frederick Hobby Associates II et al.

CV 00 0181620 S

Superior Court of Connecticut, Stamford

July 10, 2001

Caption Date: July 10, 2001

Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Mintz, J.

Opinion Title: MEMORANDUM OF DECISION RE: APPLICATION FOR PREJUDGMENT REMEDY

In this home construction and warranty action, the plaintiffs, Dr. Gregg W. Stone and Dr. Amy Stone, filed a prejudgment remedy application pursuant to Connecticut General Statutes 52-278c, requesting an attachment on the property of the defendants, Frederick L. Hobby, III, Sally M. Leiendecker, Frederick Hobby Associates, LLC (Hobby I) and Frederick Hobby Associates II, LLC (Hobby II).1 In conjunction with their application and pursuant to Connecticut General Statutes 52-279n, the plaintiffs filed a motion requesting that the defendants be ordered to disclose assets or property in which they have an interest or debts owing to them sufficient to satisfy the prejudgment remedy sought, in the amount of $300,000.

In the plaintiffs’ proposed nine-count complaint and affidavit filed with their prejudgment remedy application, they allege the following facts: the plaintiffs reside in a newly constructed home located in Greenwich (the premises) with their minor child. The plaintiff, Gregg W. Stone, is the owner of the premises by virtue of a statutory form warranty deed dated January 25, 2000, and the plaintiffs paid $3,300,000 for the premises. The plaintiffs are the first purchasers of the premises and took possession thereof on or about January 25, 2000.

Furthermore, the plaintiffs allege that: they purchased the premises from the defendant, Hobby II. Hobby II had previously purchased the land and built the premises thereon. In order to purchase the premises, the plaintiffs entered into a sales agreement (the sales agreement) with Hobby II dated December 23, 1999. (Plaintiffs’ Application, Exh. A, sales agreement; see also Plaintiffs’ Exh. 2.) At the time the sales agreement was executed, the premises were not completed. Hobby II undertook to complete the premises and deliver the same to the plaintiffs at a closing contemplated by the sales agreement. In the sales agreement, Hobby II made certain express warranties regarding the condition of the basement (footnote 2) as well as the improvements, fixtures, systems, materials and workmanship existing on the premises at closing.3 Additionally, in paragraph twenty of the sales agreement, Hobby II warranted “the dwelling to the extent mandated and required by [the new home warranty provisions of] Connecticut General Statutes Chapter 827.”4 Pursuant to the sales agreement, the plaintiff, Gregg W. Stone, took title to the land and the premises on January 25, 2000, upon delivery of the deed by Hobby II.

Moreover, the plaintiffs allege that: they took title to the premises prior to the completion of certain items set forth in the sales agreement. In order to induce the plaintiffs to close on the premises prior to completion of such items, Hobby II entered into a completion agreement (the completion agreement) with the plaintiffs dated January 25, 2000. The completion agreement provides for the completion of certain “punch list” items within sixty days of the date of the agreement and further provides that if the work is not completed within the specified time frame, Hobby II “shall be deemed in breach of [the completion] agreement entitling [the plaintiffs] to all remedies due to [them] in law or in equity.” (Plaintiffs’ Application, Exh. B, completion agreement; see also Plaintiffs’ Exh. 2.)

The plaintiffs further allege that: subsequent to the closing, the plaintiffs determined that the improvements, fixtures, systems, materials and workmanship existing on the premises suffered from a myriad of substantial defects in design, materials and workmanship,5 in violation of the warranties contained in the sales agreement. Moreover, despite demand, Hobby II failed to complete all of the punch list work described in the completion agreement6 within the specified sixty day period following January 25, 2000, that is, by March 25, 2000.

Finally, the plaintiffs allege that: on or near the January 25, 2000, closing date, Hobby II transferred substantially all of its assets, including the proceeds of the closing, to Hobby I, Frederick L. Hobby, III and Sally M. Leiendecker. The plaintiffs allege that Hobby II made the transfer under improper circumstances, in that Hobby II: (1) had actual intent to hinder, delay or defraud the plaintiffs and/or any creditor of Hobby II, without receiving a reasonably equivalent value in exchange; (2) was engaged or about to engage in business for which the remainder of its assets were unreasonably and disproportionately small; (3) intended or reasonably should have believed that it would incur debts in excess of its ability to pay them as they became due; (4) made the transfer at a time when it was insolvent or became insolvent as a result of the transfer; and (5) made the transfer to one or more insiders for an antecedent debt at a time when Hobby II was insolvent and said insiders had reasonable cause to believe that Hobby II was insolvent.

The plaintiffs’ proposed complaint asserts the following nine counts against the various defendants in this action: (1) breach of express warranty as to Hobby II; (2) breach of agreement or contract as to Hobby II, (3) breach of implied new home warranty pursuant to General Statutes 47-118 and 47-121 as to Hobby II; (4) piercing the corporate veil as to Hobby I, Frederick L. Hobby, Ill and Sally M. Leiendecker; (5) violation of the Uniform Fraudulent Transfer Act, General Statutes 52-552a et seq. as to Hobby I, Hobby II, Frederick L. Hobby, III and Sally M. Leiendecker; (6) reckless endangerment as to Frederick L. Hobby, III; (7) intentional infliction of emotional distress as to Frederick L. Hobby, III; (8) negligence as to Frederick L. Hobby, III; and (9) violation of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes 42-110a et seq., as to Hobby I, Hobby II, Frederick L. Hobby, III and Sally M. Leiendecker.

On February 26th and March 13th through 16th of 2001, this court held a hearing in which the parties were provided with an opportunity to present evidence and to examine witnesses. Subsequently, the plaintiffs filed a post-hearing memorandum in support of their application for a prejudgment remedy and motion for disclosure of the defendants’ assets and the defendants filed a memorandum in opposition thereto.

The plaintiffs argue that during the several days of testimony heard by this court, they established probable cause for the court to grant their application in full and to order all of the defendants to disclose assets sufficient to satisfy the application. Moreover, the plaintiffs contend that: (1) they have proven damages of $373,983.66; (2) they have established liability on all nine counts of their proposed complaint; and (3) any defenses raised by the defendants are without merit. In opposition, the defendants argue that the plaintiffs: (1) have the burden of proving probable cause to obtain a judgment; (2) have failed to sustain their burden of proof as to any of their nine counts; and (3) have failed to sustain their burden of establishing probable cause that they will obtain a judgment in a particular amount. The defendants conclude, therefore, that the court should deny the plaintiffs’ application for a prejudgment remedy.

A “prejudgment remedy” is any “remedy that enables a person by way of attachment, foreign attachment, garnishment or replevin to deprive a defendant in a civil action of, or affect the use, possession or enjoyment by such defendant of, his property prior to final judgment.” Fermont Division v. Smith 178 Conn. 393, 398, 423 A.2d 80 (1979), quoting General Statutes 52-278a(d). “The purpose of a prejudgment remedy is to preserve the asset while the matter is being litigated.” DSP Software Engineering v. NCT Group, Inc., Superior Court, judicial district of Fairfield at Bridgeport, Docket No. 370062 (August 10, 2000) (Melville, J.).

The standard for the granting of an attachment is well known. “[I]f the court, upon consideration of the facts before it and taking into account any defenses, counterclaims or set-offs, claims of exemption and claims of adequate insurance, finds that the plaintiff has shown probable cause that such a judgment will be rendered in the matter in the plaintiff’s favor in the amount of the prejudgment remedy sought and finds that a prejudgment remedy securing the judgment should be granted, the prejudgment remedy applied for shall be granted as requested or as modified by the court” General Statutes 52-278d(a)(4).

It is also axiomatic that “[p]rejudgment remedy proceedings do not address the merits of the action; they concern only whether and to what extent the plaintiff is entitled to have property of the defendant held in the custody of the law pending adjudication of the merits of that action . . . [T]he trial court, vested with broad discretion, need determine only the likely success of the plaintiff’s claim by weighing probabilities . . . Civil probable cause constitutes a bona fide belief in the existence of the facts essential under the law for the action and such as would warrant a person of ordinary caution, prudence and judgment, under the circumstances, in advancing the action . . . The plaintiff does not have to establish that he will prevail, only that there is probable cause to sustain the validity of the claim.” (Citations omitted; internal quotation marks omitted.) Tyler v. Schnabel, 34 Conn.App. 216, 219-20, 641 A.2d 388 (1994); accord East Lyme v. Wood, 54 Conn.App. 394, 397, 735 A.2d 843 (1999). Civil probable cause “is a flexible common sense standard that does not demand that a belief be correct or more likely true than false.” Fischel v. TKPK, Ltd, 34 Conn.App. 22, 24, 640 A.2d 125 (1994).

The first two counts of the plaintiffs’ proposed complaint, in essence, assert causes of action for breach of contract against Hobby II.7 “The key elements of a breach of contract action are: (1) the formation of an agreement; (2) performance by one party; (3) breach of the agreement by the other party and (4) damages.” Calvanese & Kastner, LLC v. Jones, Superior Court, judicial district of New Britain, Docket No. 503069 (February 6, 2001) (Swords, J.). “The general rule of damages in a breach of contract action is that the award should place the injured party in the same position as he would have been in had the contract been performed.” Gazo v. City of Stamford, 255 Conn. 245, 264, 765 A.2d 505 (2001).

In order to meet their burden of showing probable cause for the validity of their breach of contract claims, the plaintiffs must at least establish the existence of a contract or contracts. DSP Software Engineering v. NCT Group, supra, Superior Court, Docket No. 370062. Of course, discovery and a full trial on the merits will provide the parties ample opportunity to develop their claims more fully. Swaim v. Kovacs, Superior Court, judicial district of Stamford/Norwalk at Stamford, Docket No. 157759 (May 27, 1998) (Lewis, J.).

This court finds that the plaintiffs have established the existence of both the written sales agreement and completion agreement between themselves and Hobby II. (Plaintiffs’ Application: Exh. A, sales agreement; Exh. B, completion agreement; see also Plaintiffs’ Exh. 2.) The plaintiffs have demonstrated probable cause for this court to conclude that the plaintiffs performed their obligations under the agreements in that they took title to and possession of the premises, and paid Hobby II the requisite amounts for the premises. (footnote 8)

Moreover, the plaintiffs have established probable cause that Hobby II breached or failed to perform in accordance with either the express warranties contained in the sales agreement,9 or with the terms of the completion agreement. The plaintiffs’ witness, Robert Randall (Randall), a licensed engineer who was qualified as an expert witness on construction, credibly testified and the court finds that in March of 2001, he observed, investigated and analyzed the conditions on the premises and determined the presence and severity of any faulty materials, unsound engineering standards, unworkmanlike construction, conditions unfit for habitation, design defects and water infiltration.10 (Hearing Transcript (Transcript): (3/15/01) pp. 150-68; (3/16/01) pp. 1-69.) Additionally, Randall took photographs of the premises and prepared an estimate of the cost to complete the basement and other areas of the premises in accordance with the specifications in the agreements, excluding the cost of any “extras.” (Transcript, (3/15/01) pp. 156-64. See also Plaintiffs’ Exh. 55, Randall report dated March 1, 2001; Exh. 56, Randall supplemental report dated March 14, 2001; Exh. 53 (a-i), photos; Exh. 54 (a-v), enlarged photos.)

Randall testified at length regarding the “Exterior Installation and Finish System” (EIFS)11 used on the cladding system and the entire exterior of the premises, and the unsound manner in which EIFS was integrated into the premises. (Transcript: (3/15/01) pp. 164-68; (3/16/01) pp. 1-35.) Randall credibly opined and the court finds that EIFS remediation or replacement was necessary, at an estimated cost of $167,302.60, in order to eliminate defects on the premises such as chronic water intrusion and retention, and related decay and discoloration caused by fungi, mold and mildews. (Transcript: (3/16/01) pp. 34, 1-35; see also Plaintiffs’ Exh. 55, Randall portfolio dated March 1, 2001, p. 2.) Regarding the cost to complete the basement, the credible evidence suggests and the court finds that the work will cost, at minimum, an estimated $68,844.56.12 Additionally, the plaintiffs demonstrated, through testimony and documentary exhibits, that various items on the premises needed to be repaired within one year of the closing date and as a result, the plaintiffs incurred out of pocket expenses in the amount of $35,274.17 to pay for such repairs.13 Furthermore, the plaintiffs established that approximately $45,562.33 worth of repairs are still needed on the premises.14 Accordingly, this court finds that the plaintiffs have established probable cause that a judgment will be rendered in their favor on their breach of contract claims in the amount of the prejudgment remedy sought. In ruling on a prejudgment remedy, however, the court must evaluate not only the plaintiffs’ claim, but also any defenses raised by the defendants, since a good defense will be sufficient to negate the existence of probable cause that a judgment will be rendered in favor of the plaintiffs. See General Statutes 52-278d(a)(4).

As a defense to the breach of contract claims, the defendants assert that the plaintiffs defaulted on their contractual obligations in that they failed to pay Hobby II for its post-closing work on the premises. The defendants contend, therefore, that Hobby II was justified in refusing to continue its work on the premises until the plaintiffs made appropriate payments to Hobby II. In support of this defense, the defendants point to a clause in the sales agreement furnishing Hobby II with the right to suspend performance if the plaintiffs failed to make payments when initially due, provided however, that Hobby II was not at that time in material default under the agreement. (Plaintiffs’ Exh. 2, sales agreement, p. 15-16, 3[g].) The defendants claim that an April 4, 2000, invoice sent to the plaintiffs, instructing the plaintiffs to remit a $14,170.43 payment15 to Hobby II, remains unpaid and therefore, any suspended performance by Hobby II was justified. (Plaintiffs’ Exh. 24; Defendants’ Exh. E, invoice.)

In opposition, the plaintiffs argue that the April 4, 2000 invoice is dated several days after the completion agreement’s March 25, 2000 deadline had passed and as such, the invoice represents the defendants’ belated attempt to invent a breach by the plaintiffs in order to justify Hobby II’s failure to complete the work on the premises in a timely manner. Additionally, the plaintiffs contend that the defendants cannot cure their own default by billing the plaintiffs for false or improper items.

This court finds that the defendants’ defense is insufficient to defeat the plaintiffs’ showing of probable cause. The defendants cite no authority to support their contention that it is a valid defense to a breach of contract claim to allege a subsequent “breach” or “default” by the other party to the contract. It is unclear to this court how Hobby II’s failure to complete its obligations by the time specified in either the sales agreement or the completion agreement may nonetheless be excused or justified by the plaintiffs’ failure to pay an invoice dated thereafter.

Moreover, the invoice itself is questionable in nature. The first item listed on the invoice is for carpentry work done in preparation for the installation of a light fixture that had been selected by the plaintiffs. The sales agreement, however, provides in two separate places that lights were to be installed by Hobby II at no extra charge to the plaintiffs beyond the $3,300,000 already called for under the agreement.16 The second item listed on the invoice is for expenses incurred by Hobby II in emptying the plaintiffs’ personal trash from a dumpster that was placed on the premises for the collection of construction debris. While the defendants assert that Hobby II properly charged the plaintiffs for the emptying of the dumpster, this court is persuaded by the credible testimony of Gregg W. Stone. Stone stated and the court finds that after the plaintiffs requested the removal of the dumpster from the premises, instead Hobby II gave the plaintiffs permission to share in the use of the dumpster and did not notify the plaintiffs that they would be billed for such use. (Transcript (3/16/01), p. 106.) The remainder of the invoice lists similarly questionable items.

Consequently, this court finds that the defendants’ defense is insufficient to defeat the plaintiffs’ showing of probable cause and accordingly, this court finds probable cause that a judgment will be rendered in the plaintiffs’ favor on their breach of contract claims in the amount of the prejudgment remedy sought, $300,000. Because the court has found probable cause to believe the plaintiffs would prevail on these counts against Hobby II and that prejudgment remedies ought to issue, the court ordinarily would not need to address the plaintiffs’ remaining counts. Message Center Management, Inc. v. Getchell, Superior Court, judicial district of Tolland at Rockyille, Docket No. 073738 (December 18, 2000) (Sferrazza, J.).

In this case, however, the bulk of the arguments presented in the parties’ respective post-hearing memoranda focus on the plaintiffs’ fourth count, specifically, on whether an appropriate basis exists for the court to pierce the corporate veil of the limited liability company defendant, Hobby II. Disregard of a corporate entity or limited liability company for the purpose of imposing liability upon individual shareholders or members for acts of the corporation or company is commonly referred to as “piercing the corporate veil.” In the present case, the plaintiffs seek to pierce the corporate veil of Hobby II for the purpose of reaching the assets of the individual defendants, Frederick L. Hobby, III and Sally M. Leiendecker, as well the assets of the other named limited liability company defendant, Hobby I. (footnote 17)

The plaintiffs argue that Hobby II’s veil may be pierced by this court under the instrumentality theory or the identity theory, or both. The plaintiffs argue that the actions of defendants Frederick L. Hobby, III, Sally M. Leiendecker and Hobby I have thwarted the plaintiffs’ ability to rely on the express warranties in the sales agreement and the warranties created by statute. Moreover, the plaintiffs argue that these defendants and their agents and attorneys, have frustrated the plaintiffs’ ability to enforce the sales agreement and the completion agreement by warning the plaintiffs that in any attempt to enforce their rights, the plaintiffs will be unable to collect against Hobby II, because Hobby II is a shell company with no assets and no ability to pay any potential damage award. The plaintiffs conclude that Frederick L. Hobby, III, Sally M. Leiendecker and Hobby I may be held liable as the agents, mere departments, alter egos and/or controllers responsible for the conduct of Hobby II. The defendants, in turn, argue that the plaintiffs have failed to sustain their burden of establishing the requisite elements under either the instrumentality or identity theory.

At the outset, this court notes that Hobby II was formed as a Connecticut limited liability company in February of 1998. (Defendants’ Exh. V, documents evidencing formation.)

General Statutes 34-133(a) provides, with certain exceptions, that: “a person who is a member or manager of a limited liability company is not liable, solely by reason of being a member or manager, under a judgment, decree or order of a court, or in any other manner, for a debt, obligation or liability of the limited liability company, whether arising in contract, tort or otherwise or for the acts or omissions of any other member, manager, agent or employee of the limited liability company.” Thus, “[o]ne of the principal reasons to use an LLC is that the owners and managers, if the owners so elect, have limited liability from contract and tort claims of third parties. M. Pruner, A Guide to Connecticut Limited Liability Companies, 3.1.1, p. 9 (1995).”Litchfield Asset Management v. Howell, Superior Court, judicial district of Litchfield at Litchfield, Docket No. 076827 (November 14, 2000) (Gill, J.). This is not unlike the protection from liability afforded by incorporation. See General Statutes 33-673.

The limitation on liability provided by incorporation or the formation of a limited liability company is not, however, without boundaries. “When [a] corporation is the mere alter ego, or business conduit of a person, it may be disregarded.” De Leonardis v. Subway Sandwich Shops, Inc., 35 Conn.App. 353, 358, 646 A.2d 230, cert. denied, 231 Conn. 925, 648 A.2d 162 (1994). “Courts will . . . disregard the fiction of a separate legal entity to pierce the shield of immunity afforded by the corporate structure in a situation in which the corporate entity, has been so controlled and dominated that justice requires liability to be imposed on the real actor.” Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 552, 447 A.2d 406 (1982). “The rationale behind [piercing the corporate veil] is that if the shareholders themselves, or the corporations themselves, disregard the legal separation, distinct properties, or proper formalities of the different corporate enterprises, then the law will likewise disregard them so far as is necessary to protect individual and corporate creditors.” 1 W. Fletcher, Cyclopedia of the Law of Private Corporations (1990) 41.10, p. 614. The same rationale applies in the case of a limited liability company. See, e.g., Litchfield AssetManagement v. Howell, supra, Superior Court, Docket No. 076827; New England National, LLC v. Kabro, Superior Court, judicial district of New London, Docket No. 550014 (February 16, 2000) (Martin, J.); see also M. Pruner, supra, 3.1.1.4, 7.14, pp. 10, 106-07.

Ordinarily, “a corporate veil is pierced by a creditor suing an individual who has used a corporation as an instrument of fraud.” Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 555. The burden of proving that the corporate veil should be pierced is on the plaintiff. Season-All Industries Inc. v. R.J. Gross, Inc., 213 Conn. 486, 492, 569 A.2d 32 (1990). The usual result of piercing the corporate veil is that the controlling shareholders, directors, officers or members become liable for corporate or company liabilities. Litchfield Asset Management v. Howell, supra, Superior Court, Docket No. 076827. The veil should, however, only be pierced under extraordinary circumstances. Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 557.

Piercing the corporate veil, or alternatively the alter ego theory, may be proven through the instrumentality rule or the identity rule. See Toshiba America Medical Systems v. Mobile Medical Systems, 53 Conn.App. 484, 489, 730 A.2d 1219, cert. denied, 249 Conn. 930, 733 A.2d 851 (1999). The instrumentality and identity rules may be applied in order to “pierce the corporate veil” of a limited liability company. See generally, Litchfield Asset Management v. Howell, supra, Superior Court, Docket No. 076827; Leisure Resort Technology, Inc. v. Trading Cove Associates, Superior Court, judicial district of Middlesex at Middletown, Docket No. 091180 (October 13, 2000) (Gordon, J.); New England National. LLC v. Kabro, supra, Superior Court, Docket No. 550014.

“The instrumentality rule requires . . . proof of three elements: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff’s legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.” (Emphasis omitted; internal quotation marks omitted.) Toshiba America Medical Systems v. Mobile Medical Systems, supra, 53 Conn.App. 489-90. The second element addresses the kind of misconduct that will impose personal liability upon individuals who have exercised complete domination over a corporation in total disregard of its existence as a separate entity. Campisaro v. Nardi, 212 Conn. 282, 292, 562 A.2d 1 (1989). Such misconduct has been found, even in the absence of fraud or illegality, when the individual in control has, for example, used a corporate instrumentality to avoid personal liability that he had previously assumed. Id., 292-93. Whether each element is satisfied depends on the facts of the case. Id.

The identity rule is generally employed in a situation where two corporations or companies are, in reality, controlled as one entity because of common owners, officers, directors, members or shareholders, and because of a lack of observance of corporate or company formalities between the two entities. See Falcone v. Night Watchman, Inc., 11 Conn.App. 218, 221, 526 A.2d 550 (1987). In an appropriate case, however, the rule may also be employed to hold one or more individuals liable. Id. “The identity rule has been stated as follows: [i]f plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.” Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 554. The Connecticut Supreme Court cautions, however: “that stock ownership, while important, is not a prerequisite to piercing the corporate veil but is merely one factor to be considered in evaluating the entire situation . . . It is clear that the key factor in any decision to disregard the separate corporate entity is the element of control or influence exercised by the individual sought to be held liable.” Id., 556. Of paramount concern is how the control was used, not that it existed.

The court finds the following pertinent facts: Frederick L. Hobby, III is one of two members of Hobby II and Sally M. Leiendecker is the other. (Transcript (3/14/01), pp. 67-68, testimony of Frederick L. Hobby, III.) Each member has a fifty percent ownership interest in Hobby II, as well as full authority to manage and control the company’s business. (Defendants’ Exh. V, documents evidencing Hobby II’s formation, membership, ownership and control.) Hobby II’s office is located in Frederick L. Hobby, III’s private home, owned by him in his individual capacity, and Hobby II pays no rent and has no lease with him. (Transcript (3/14/01), pp. 72-73, testimony of Frederick L. Hobby, III.) Furthermore, Hobby II currently has no assets and it never had any assets other than the premises now owned by the plaintiffs. (Transcript (3/14/01), p. 67, testimony of Frederick L. Hobby, III.) Attorney Gold, the attorney who formed Hobby II as a limited liability company, created Hobby II to enable the development of the subject premises and to shield and protect Frederick L. Hobby, III and Sally M. Leiendecker, the principals of Hobby II, from personal liability. (Transcript (3/16/01), pp. 103-04, 118-19, testimony of Attorney Gold.) Moreover, during a meeting between the parties in May of 2000, Attorney Gold, while acting on behalf of Hobby II, told the plaintiffs to “go ahead and sue us [Hobby II]. There is no money in [Hobby II]. Why do you think we set it up as an LLC in the first place?”18 (Transcript (3/13/01), pp. 112-15, testimony of Gregg W. Stone.) This last statement evidences an intent on the part of the individual defendants, Frederick L. Hobby III and Sally M. Leiendecker, to use the limited liability company as a shield in order to avoid responsibility for contractual obligations owed to the plaintiffs.

Furthermore, the court notes that a number of documents used by Hobby II in connection with the subject premises list entities other than Hobby II as the operative actor. The names of these other entities or actors are similar to, and may easily be confused with, the name Hobby II.19 The defendants argue that many of these documents were prepared by third parties who simply address, or refer to Hobby II, in shorthand fashion and as such, the documents do not reflect actions attributable to Hobby II or its members. The defendants maintain that Hobby II observed company formalities, pointing to evidence indicating that Hobby II paid for items relating to construction on the subject premises from an account maintained in the name of Hobby II. (Defendants’ Exh. Y, account statement p. 6; Defendants’ Exh. AA, check.) The plaintiffs, in turn, argue and the court finds that the defendants themselves have affirmatively acted with disregard for Hobby II’s existence as an entity that is separate and distinct%both from its individual members as well as from other entities. The court finds a Connecticut real estate conveyance tax return (the return) executed by Frederick L. Hobby, III to be an illustrative example.20 (Defendants’ Exh. O, return.) The third and tenth lines of the return name the limited liability company, Hobby II, as the grantor-seller of the premises and Gregg W. Stone as the grantee-buyer. On the seventh line, however, in response to the question of whether the grantor is a limited liability company, the answer box labeled “NO” has been checked. Moreover, the middle portion of the return seeks a signed declaration of the accuracy of statements made in the return, to be signed either by the grantor, the grantor’s attorney or authorized agent. Significantly, the individual defendant, Frederick L. Hobby, III, signed this declaration as the “[g]rantor” of the premises in his individual capacity, rather than in his capacity as an authorized agent or member of the limited liability company defendant, Hobby II.

Based on the totality of the evidence described above, the definition of probable cause and the criteria for the imposition of the instrumentality and identity rules, this court finds that the plaintiffs have satisfied their burden of demonstrating that there is probable cause to sustain the validity of their claim to pierce the corporate veil of Hobby II. Regarding the instrumentality rule, the first element of complete control is certainly present, as would be the case for most limited liability companies having only two members who are also the only two owners and managers. Secondly, probable cause supports the belief that the control was used by the defendants to commit a wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiffs’ legal rights, as they may have misused the limited liability company form as a cloak to evade contractual obligations to the plaintiffs.21 Thirdly, the requirement of proximate cause is satisfied because there is probable cause to believe that the plaintiffs’ losses emanate, at least in part, from acts of self-dealing or self-interest on the part of the defendants in their exercise of control over Hobby II. The plaintiffs have demonstrated that Frederick L. Hobby, III and Sally M. Leiendecker exercised such domination over Hobby II that in essence, the limited liability company had no mind, will or existence of its own.

Moreover, the evidence described above, when viewed in the aggregate, provides probable cause for this court to apply the identity rule. The plaintiffs have demonstrated that Frederick L. Hobby, III and Sally M. Leiendecker used Hobby II interchangeably with their own personal identities and with identities of other entities under their control, and failed to observe formalities for the limited liability company. The names of these other entities, whether real or fictitious, represent entities which are, in reality, controlled as one entity because of common owners or members and because of a lack of observance of formalities between the entities. Furthermore, when viewed in the aggregate, the evidence shows such a unity of interest and ownership that Hobby II’s independence as a limited liability company had in effect ceased or had never begun, and an adherence to the fiction of Hobby II’s separate identity would serve only to defeat justice and equity by permitting the individual defendants to escape liability arising out of a “shell” operation conducted for their benefit. This situation is characteristically appropriate for implementation of the identity rule. See Falcone v. Night Watchman, Inc., supra, 11 Conn.App. 221. Thus, the plaintiffs have sustained their burden of demonstrating that there is probable cause to sustain the validity of their claim to pierce Hobby H’s corporate veil under both the instrumentality and the identity rules.

In summary, this court finds that the plaintiffs have established that there is probable cause to substantiate the validity of their breach of contract claims against Hobby II, as well as their claim to pierce the corporate veil of Hobby II in order to reach the assets of Frederick L. Hobby, III, Sally M. Leiendecker, and Hobby I. The court notes that while there are numerous questions remaining to be resolved at trial with respect to the efficacy of the plaintiffs’ claims, these questions do not militate against a finding of probable cause. Three S. Development Co. v. Santore, 193 Conn. 174, 178-79, 474 A.2d 795 (1984). This court has taken into account all revelant defenses,22 set-offs,23 and claims of adequate insurance24 pursuant to General Statutes 52-278d(a)(4). The court hereby grants the plaintiffs’ application for prejudgment remedy as requested, in the amount of $300,000. Accordingly, this court grants the plaintiffs’ Motion for Disclosure of Assets, said disclosure to be completed on or before August 10, 2001.

MINTZ, J.

FOOTNOTES:

1 – The individual defendants, Frederick L. Hobby, III and Sally M. Leiendecker, are members of the Connecticut limited liability company defendant, Frederick Hobby Associates II, LLC (Hobby II). (Defendants’ Exh. V, Hobby II’s formation documents; Hearing Transcript (Transcript) (3/14/01), pp. 67-68, testimony of Frederick L. Hobby, III.)

2 – Paragraph twenty-one of the sales agreement is a “[w]arranty [a]gainst [w]ater,” in which Hobby II expressly “agrees to remedy . . . the penetration of any water entering the basement of the dwelling during the five [5] year period following the closing,” subject to certain terms and conditions described thereafter. (Plaintiffs’ Exh. 2, sales agreement, p. 7.)

3 – In paragraph nine of the rider to the sales agreement, Hobby II “warrants that the improvements, fixtures, systems, materials and workmanship existing on the premises at closing shall be free from defects in design, materials and workmanship for a period of one (1) year from the delivery of the deed. If within said period any defects in improvements, fixtures, systems, materials or workmanship shall occur, and [the plaintiffs] give [Hobby II] written notice thereof, [Hobby II] agrees to repair any such defect and any damage to the premises caused thereby, at its expense, to the original condition intended by the parties, but it is understood that the method of such repairs shall be at the reasonable discretion of [Hobby II], provided that the improvements shall be restored to the same or better condition than that which existed prior to the occurrence of the defect. Hairline cracks resulting from normal shrinkage and settling, and any deterioration resulting from wear and tear shall not constitute defects in workmanship or materials. The basement is warranted to be free from water for a period of five (5) years in accordance with the terms of paragraph 21 hereinbefore. The provisions of this paragraph shall survive delivery of the deed. Nothing set forth in this paragraph shall be deemed to limit or negate any statutory warranties protecting [the plaintiffs] . . . For a period of one (1) year following the date of closing, [Hobby II] guarantees that the heating system will heat the interior of the dwelling to 70 [degrees] F when the exterior temperature is 0 [degrees], and that the air conditioning system will cool the interior of the dwelling to 70 [degrees] when the exterior temperature is 90 [degrees]. The provisions of this paragraph shall survive delivery of the deed.” (Plaintiffs’ Exh. 2, rider to sales agreement, p. 30-31.)

4 – Chapter 827 of the General Statutes contains express and implied new home warranty provisions and encompasses 47-116 through 47-199.

5 – The alleged substantial defects in design, materials and workmanship existing on the premises include, inter alia: domestic water supply and delivery system contaminated and tainted with dangerous chemical and other constituents; domestic water and air supply and delivery and filtration systems contaminated with radon, a cancer-causing poisonous gas; inadequate, defective and non-functional plumbing system and fixtures associated therewith, including non-functional sinks, toilets and bathtubs; central vacuum system defectively designed, installed and/or non-functional; electronic garage doors which do not close properly and do not guard against accidental closure and crushing of objects or beings that may become located thereunder; cracked, broken and damaged floor tiles and limestone details; and damaged, incomplete and defective painting, furnishings, cabinetry, grouting and trim items built, designed and/or installed by Hobby II. Furthermore, the basement allegedly suffers from water pooling, infiltration, damage and seepage.

6 – The punch list work that allegedly was not completed, in violation of the completion agreement, includes, inter alia: radon remediation equipment; hanging lights; light switches; mailbox; ceiling fans and light covers; limestone shelving; utility hooks; door bells; completion of the finished basement, including specialty items; cleaned gutters; landscaping; gravel installation; ceiling; specialty bathroom fixtures and installations; decorative columns; sauna plumbing and electrical; entertainment center electrical work; electrical conduits and jacks; wall and floor damage due to Hobby II’s changes in work; specialty window trim; and numerous other matters set forth in the sales agreement and schedule D thereof

7 – The plaintiffs characterize their first count as a claim for breach of the express warranties set forth in the sales agreement dated December 23, 1999, and the second count as a claim for breach of the completion agreement dated January 25, 2000. (See Plaintiffs’ Application: Exh. A, sales agreement; Exh. B, completion agreement; se also Plaintiffs’ Exh. 2.)

8 – In addition to the plaintiffs’ statement in their affidavit that they paid Hobby II $3,300,000 for the premises, the closing documents, received as defendants’ exhibits M through U, indicate that the plaintiffs performed their payment obligations, including, inter alia: the statutory form warranty deed for the premises, dated January 25, 2000, reciting Hobby II’s receipt of $3,300,000 in exchange for the premises; (Defendants’ Exh. N.); and the state of Connecticut real estate conveyance tax return executed by Hobby II and/or Frederick L. Hobby, III on January 25, 2000, similarly reciting a payment in the amount of $3,300,000 from the buyer, plaintiff Gregg W. Stone, in consideration for the premises conveyed. (Defendants’ Exh. O.)

9 – The express warranties contained in the sales agreement are described supra, notes 2 and 3.

10 – Additionally, Randall made determinations as to whether the conditions he observed on the premises were pre-existing, meaning in existence prior to January 25, 2001 (within one year of the closing date), or whether the conditions resulted from deterioration or other occurrences after construction. (Transcript, (3/15/01) pp. 157-58.)

11 – Randall described EIFS as a synthetic stucco product which is applied over the exterior of a building and looks like masonry, but is much lighter in weight. Furthermore, Randall testified that while it is possible for EIFS to be successfully integrated into a structure through proper design and workmanship, EIFS is prone to problems including, inter alia, water intrusion, typically resulting from rain falling on the exterior of a structure and penetrating into the interior, as well as the tendency of EIFS to retain moisture emanating from within a structure such as from showers or damp basements, and resulting in the growth of fungi and the decay of wooden structures. (Transcript, (3/15/01) pp. 164-66.)

12 – This estimate derives from Randall’s testimony that it would cost either $92,358.25 or $84,674.13 to complete bath and fireplace items in the basement, depending on the court’s interpretation of the applicable basement specifications. (Transcript, (3/16/01) pp. 35-40.) The plaintiffs state in their memorandum, however, that they claim only the lesser amount of $84,674.13 and furthermore, they concede that they have already received $15,829.57 from escrow funds. (Plaintiffs’ memorandum, p. 5.) Therefore, the remaining cost to complete the basement is approximately $68,844.56.

13 – The plaintiffs explained that while their gross out of pocket expenses were $37,074. 17, an amount of $1,800.00 was paid by an insurer. (Transcript (3/16/01), pp. 72-73, testimony of Amy Stone.) Thus, the plaintiffs’ net out of pocket expenses for repairs were $35,274.17. The plaintiffs demonstrated both the nature and cost of various items of repair through invoices and billing statements. (Plaintiffs’ Exh. 5-15, 17-21, 25, 26, 36, 37.) The plaintiffs evidenced their payment for these items through copies of their checks and a credit card statement. (Plaintiffs’ Exh. 35, checks; Exh. 36, credit card statement.)

14 – The necessary repairs comprising the $45,562.33 amount were described by Randall in his testimony before this court, as well as in the report he authored following his inspection of the premises. (Transcript, (3/16/01) pp. 42-52, Randall’s testimony; see also Plaintiffs’ Exh. 55, Randall report dated March 1, 2001.)

15 – The amount of $14,170.43 encompasses $4,170.43 for expenses purportedly incurred by Hobby II for work done on the premises on or before March 25, 2000%within the sixty day time frame permitted for the completion of work under the completion agreement%plus a request for a $10,000 deposit as a condition precedent to Hobby II’s willingness to provide certain items of work deemed to be “extras” by Hobby II. (Plaintiffs’ Exh. 24; Defendants’ Exh. E, invoice.)

16 – Paragraph 14 of Schedule A to the sales agreement, entitled “[e]lectrical,” provides that existing light fixtures are included, and that “[a]dditional light fixtures to be supplied and paid for by the [plaintiffs] with installation at pre-wired locations included.” (Emphasis added.) (Plaintiffs’ Exh. 2, sales agreement, p. 19.) Additionally, paragraph 47 of Schedule D to the sales agreement provides that “[c]eiling light fixtures, chandeliers and wall sconces where existing electric service provided” will be “installed by [Hobby II] at no extra charge.” (Emphasis added.) (Plaintiffs’ Exh. 2, sales agreement, p. 27.) The defendants concede in their memorandum that the April 4, 2000 invoice seeks payment for the installation of a light fixture supplied by the plaintiffs, and not for the installation of any new wiring. (Defendants’ memorandum, p. 23-24.)

17 – The issue of whether the assets of Frederick L. Hobby, III, Sally M. Leiendecker and Hobby I may be reached upon the theory of piercing Hobby II’s corporate veil is critical to the plaintiffs’ application, especially in light of Frederick L. Hobby, III’s testimony at the prejudgment application hearing indicating that Hobby II currently has no assets. (Transcript (3/14/01), p. 67.)

18 – This court is mindful of the rule “that evidence of settlement negotiations is not admissible at trial . . . based upon the public policy of promoting the settlement of disputes.” Tomasso Bros., Inc., v. October Twenty-Four, Inc., 221 Conn. 194, 198, 602 A.2d 1011 (1992). At the time of the meeting between the parties in May of 2000, however, the plaintiffs had not yet instituted or threatened to institute any legal proceeding against any of the defendants in this action. In fact, both the plaintiffs’ and the defendants’ witnesses testified that the original purpose of the meeting was for the parties to resolve their differences and continue their working relationship on the premises, not to settle any existing or imminent legal claims. (Transcript: (3/13/01.) pp. 111-13; (3/16/01), pp. 107-11.) Accordingly, this meeting may not properly be considered a settlement negotiation and therefore, the parties’ communications during the meeting are not privileged or protected from disclosure.

19 – It is important to recall that the legal name for the limited liability company defendant referred to throughout this decision as Hobby II is actually “Frederick Hobby Associates II, LLC.” (Defendants’ Exh. V, formation documents.) However, the listing or advertising information for the subject premises describes “Frederick Hobby II Associates” as the owner. (Plaintiffs’ Exh. 1, home listing.) A brochure displaying a photograph of the subject premises on its cover describes “Frederick Hobby II Associates” as “owner” on the third page, while the name “Rick Hobby Associates, LLC” is printed on the sixth page. (Plaintiffs’ Exh. 3, brochure of home.) Various statements, invoices and proposals sent from third parties to Hobby II regarding construction on the subject premises are addressed to “Frederick L. Hobby Associates,” “Frederick Hobby Associates II,” or “Frederick Hobby Associates.” (Defendants’ Exh. G, K.) A letter from a water system supply company is addressed to “Frederick Hobby & Associates.” (Defendants’ Exh. H.)

20 – Other examples relied upon by the plaintiffs which the court finds credible include: a proposal by Connecticut Basement Systems Inc. to perform radon remediation services on the premises, submitted to and signed by Frederick L. Hobby, III in his individual capacity; (Defendants’ Exh. G, p 6.); a liability and casualty insurance policy insuring Frederick L. Hobby, III, Sally M. Leindecker, Hobby I and Hobby II all under the same policy, and naming yet another entity, FLH Inc. d/b/a FLH Builders, as the policyholder; (Plaintiffs’ Exh. 44, insurance policy; see also Plaintiffs’ Exh. 47, insurer’s reservation letter); an application for a permit to build a new structure on the subject premises dated June 19, 1998, listing, on its front side, FLH Inc. as the “[a]uthorized agent and permittee (builder),” Hobby II as the “[o]wner of land and building,” Frederick L. Hobby, III as “assum[ing] responsibility for supervision and compliance with . . . specifications, this application, and laws and ordinances,” and on its reverse side, bearing the notarized signature of Frederick L. Hobby, III as the “[a]uthorized agent and permittee (builder);” (Defendants’ Exh. A, application for building permit; see also Defendants’ Exh. B, building permit issued by the town of Greenwich); Sally M. Leiendecker’s letter to the plaintiffs dated March 9, 2000, bearing the name “Frederick Hobby Associates” on its letterhead, identifying Leiendecker as a “partner” of the named entity%an apparent partnership, and listing an office address identical to that of Hobby II, located in the personal home of Frederick L. Hobby, III; (Plaintiffs’ Exh. 23A, letter; see also Transcript (3/14/01), pp. 72-73.); and Frederick L. Hobby, III’s letter to the plaintiffs dated March 29, 2000, printed on the same letterhead, although this letter bears the characters “II, LLC,” handwritten on the letterhead just after the printed name of “Frederick Hobby Associates.” (Plaintiffs’ Exh. 23B.)

21 – The defendants argue that absent evidence of fraud or some wrong or injustice, even if the plaintiffs establish their first and second counts, specifically, that Hobby II breached a contract with the plaintiffs, the defendants insist that a mere breach of contract cannot support an application of the instrumentality rule in order to pierce the corporate veil of an entity. A similar argument was rejected, however, by the Appellate Court in Toshiba America Medical Systems v. Mobile Medical Systems, 53 Conn.App. 484, 730 A.2d 1219, cert. denied, 249 Conn. 930, 733 A.2d 851 (1999). In Toshiba, the appellant claimed that the trial court improperly pierced the corporate veil under the instrumentality rule and found him liable as the sole shareholder of a corporation despite finding that the predicate breaches of contracts did not rise to the level of deceptive, unethical or immoral acts to constitute a CUTPA violation. Id., 491-92. The Appellate Court rejected the appellant’s argument, stating: “The instrumentality rule merely requires the trial court to find that the defendants committed an unjust act in contravention of the plaintiff’s legal rights . . . When the statutory privilege of doing business in the corporate form is employed as a cloak for the evasion of obligations, as a mask behind which to do injustice, or invoked to subvert equity, the separate personality of the corporation will be disregarded.” (Citation omitted; internal quotation marks omitted.) Id. In this case, probable cause supports the finding that Hobby II committed an unjust act in contravention of the plaintiff’s legal rights by using the privilege of doing business in the limited liability company form as a cloak to evade contractual obligations to the plaintiffs.

Furthermore, the defendants argue that the plaintiffs knew they were dealing with the limited liability company Hobby II and, since the plaintiffs did not allege that they were fraudulently induced to enter into the contracts with the limited liability company, this court may not properly reach the individual defendants. Again, a similar argument was raised in and rejected by the Appellate Court in Toshiba, and this court is similarly unpersuaded in this case. See id., 493-94.

22 – This court need not address the defendants’ defense regarding the plaintiffs’ own negligence, because contributory or comparative negligence is not an applicable defense to those counts of the plaintiffs’ application relied upon by this court in its decision to grant the prejudgment remedy.

23 – See supra, note 12.

24 – See supra, note 13, regarding the plaintiffs’ insurance coverage. Additionally, the court notes that the defendants’ insurers are defending under a reservation of rights.

YORK AMATEUR SOFTBALL ASSOCIATION, Plaintiff,

v.

VIRGINIA LEGENDS ELITE SOFTBALL ORGANIZATION, LLC, and JEFFREY STANDISH, Defendants.

Civil Action No. 2:12cv475

United States District Court, E.D. Virginia, Norfolk Division.

October 31, 2012

MEMORANDUM ORDER

REBECCA BEACH SMITH, Chief District Judge.

This matter comes before the court on the Motion to Dismiss of Defendant Jeffrey Standish (“Motion to Dismiss”), pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendant’s Motion to Dismiss is ripe for review, and, for the reasons below, it is DENIED.

I. Factual and Procedural Background

The Plaintiff, York Amateur Softball Association (“York”), brings claims of trademark infringement and unfair competition against Virginia Legends Elite Softball Organization, LLC (“VLESO”) and Jeffrey Standish (“Standish”). Compl. 22-33. (ECF No. 1.) York claims to be the owner of the service marks ‘VIRGINIA LEGENDS FASTPITCH AND DESIGN” and “VIRGINIA LEGENDS; it has also filed an application for the “VIRGINIA LEGENDS LOGO” mark. Id. 8-11. In its Complaint, York alleges that the Defendants have copied York’s service marks and the color scheme of York’s uniforms and equipment. Id. 17-18. York makes several allegations about Standish’s and VLESO’s conduct, including that Standish is the alter ego of VLESO and that Standish makes all business decisions surrounding VLESO’s operations. Id. 3, 14-21.

On August 22, 2012, Plaintiff filed its Complaint. (ECF No. 1.) Standish filed the instant Motion to Dismiss and an accompanying Memorandum in Support on September 19, 2012, and York filed its Memorandum in Opposition on October 3, 2012. (ECF Nos. 6, 7, & 9.) Standish requested a hearing on October 5, 2012,[1] and filed his Reply on October 9, 2012. (ECF Nos. 12 & 13.)

II. Standard of Review

Federal Rule of Civil Procedure 8(a) provides, in pertinent part, “[a] pleading that states a claim for relief must contain… a short and plain statement of the claim showing that the pleader is entitled to relief.” The complaint need not have detailed factual allegations, but Rule 8 “requires more than labels and conclusions…. [A] formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570). Facial plausibility means that a “plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). It is, therefore, not enough for a plaintiff to allege facts demonstrating a “sheer possibility” or “mere[] consist[ency]” with unlawful conduct. Id. (citing Twombly, 550 U.S. at 557).

The Supreme Court, in Twombly and Iqbal, offered guidance to courts evaluating motions to dismiss:

In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.

Iqbal, 129 S.Ct. at 1950. That is, the court accepts facts alleged in the complaint as true and views those facts in the light most favorable to the plaintiff. Venkatraman v. REI Sys., 417 F.3d 418, 420 (4th Cir. 2005). Overall, “[d]etermining whether a complaint states a plausible claim for relief will… be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 129 S.Ct. at 1950.

III. Analysis

Standish argues that York has not alleged facts sufficient to support piercing VLESO’s corporate veil and that, therefore, Standish should be dismissed from this action. Def.’s Mem. Supp. at 4. (ECF No. 7.)

Under Virginia law, a court may pierce the veil of a business entity when it finds (i) “a unity of interest and ownership” between the individual and the entity, and (ii) that the individual used the entity “to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.” Newport News Holdings Corp. v. Virtual City Vision, Inc., 650 F.3d 423, 434 (4th Cir. 2011) cert. denied, 132 S.Ct. 575 (2011) (citing C.F. Trust, Inc. v. First Flight Ltd., 306 F.3d 126, 132 (4th Cir. 2002)). The decision to pierce a corporate veil “is to be taken reluctantly and cautiously.” In re County Green Ltd., 604 F.2d 289, 292 (4th Cir. 1979) (citing DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681, 685 (4th Cir. 1976)). No single factor is determinative when analyzing unity of interest and ownership, but the Supreme Court of Virginia has held that the following considerations are relevant: “(i) whether personal and business assets were commingled, (ii) whether the individual siphoned [business] assets into their own pockets,’ (iii) whether the business entity was undercapitalized, or (iv) whether business formalities were observed.'” C.F. Trust, Inc. v. First Flight Ltd., 140 F.Supp.2d 628, 643 (E.D. Va. 2001) aff’d, 338 F.3d 316 (4th Cir. 2003) (quoting Cheatle v. Rudd’s Swimming Pool Supply Co., 234 Va. 207, 213 (1987)).

Standish argues that York has not sufficiently pled facts to show that he and VLESO are united by interest and ownership. Def.’s Reply at 2-4. (ECF No. 13.) Standish acknowledges that York characterizes Standish as the alter ego of VLESO, but Standish argues that more is required. Id. Standish is correct that an allegation that he is the alter ego of VLESO would not be sufficient, without further factual allegations, to survive a motion to dismiss. See S.E.C. v. Woolf, 835 F.Supp.2d 111, 124 (E.D. Va. 2011). The wealth of other facts York offers, however, when assumed true and viewed in the light most favorable to York, paints a picture of Standish as the primary, if not sole, force behind VLESO. For example, York alleges that Standish makes all decisions regarding VLESO’s business operations, that Standish incorporated VLESO, that Standish filed an abandonment of VLESO’s application to the United States Patent and Trademark Office, along with several other allegations as to VLESO’s and Standish’s joint conduct. Compl. 3, 14, 16-21. The ultimate decision of whether to pierce the corporate veil will largely turn on the resolution of questions of fact, In re County Green, 604 F.2d at 292, and the court will not require York to allege more about VLESO’s corporate structure and relationship with Standish at this early, pre-discovery juncture.

Standish also argues that York has not pled facts to support the second prong of the veil-piercing inquiry. Def.’s Mem. Supp. at 4. (ECF No. 7.) To survive a motion to dismiss, York must allege that Standish used VLESO “to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.” Newport News, 650 F.3d at 434. York has done so here. Courts have allowed trademark infringement to satisfy the second prong in the inquiry into piercing the corporate veil. See, e.g., id.; Sea-Roy Corp. v. Parts R Parts, Inc., 173 F.3d 851, at *4 (4th Cir. 1999) (unpublished table opinion). Because York has alleged that Standish and VLESO committed trademark infringement and unfair competition, along with supporting factual allegations, dismissal is not appropriate at this juncture.[2]

IV. Conclusion

For the reasons set forth above, Defendant’s Motion to Dismiss is DENIED. The Clerk is DIRECTED to forward a copy of this Order to counsel for all parties.

IT IS SO ORDERED.

———

Notes:

[1] After full examination of the briefs and the record, the court has determined that a hearing is unnecessary, as the facts and legal arguments are adequately presented, and the decisional process would not be aided significantly by oral argument. See Fed.R.Civ.P. 78(b); E.D. Va. Loc. Civ. R. 7 (J).

[2] The determination of whether to pierce VLESO’s corporate veil may ultimately be moot since it is “well-established that an individual corporate officer or director can be held personally liable for trademark infringement.” Stafford Urgent Care, Inc. v. Garrisonville Urgent Care, P.C., 224 F.Supp.2d 1062, 1065-66 (E.D. Va. 2002) {discussing Donsco, Inc. v. Casper Corp., 587 F.2d 602, 606 (3d Cir. 1978)).

———

108 Conn.App. 633 (Conn.App. 2008)

950 A.2d 522

CONNECTICUT LIGHT AND POWER COMPANY

v.

WESTVIEW CARLTON GROUP, LLC, et al.

No. 28470.

Court of Appeals of Connecticut

June 24, 2008

Argued March 20, 2008.

[950 A.2d 523] Dov Braunstein, Watertown, with whom was Lawrence S. Dressler, New Haven, for the appellant-appellee (defendants).

[950 A.2d 524] Jeanine M. Dumont, East Hartford, for the appellee-appellant (plaintiff).

BISHOP, GRUENDEL and BORDEN, Js.

BORDEN, J.

The defendants, Westview Carlton Group, LLC (Westview), and Howard S. Sousa, Westview’s sole shareholder, appeal from the judgment of the trial court, finding them both liable for electrical services supplied by the plaintiff, Connecticut Light & Power Company, to two buildings owned by Westview. The defendants claim that the court improperly (1) pierced the corporate veil as to Sousa, (2) concluded that the plaintiff was not required to mitigate its damages by applying for a receiver of rents and (3) awarded prejudgment interest to the plaintiff. The plaintiff cross appeals from the judgment, claiming that the court improperly rejected its claim that was based on the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq. We affirm the judgment of the trial court in all respects.

The plaintiff brought this action in three counts. In the first count, the plaintiff claimed a written contract with Westview and, as to Sousa, that he was personally liable to the plaintiff on a theory of piercing the corporate veil. In the second count, the plaintiff alleged unjust enrichment. In the third count, the plaintiff sought damages under CUTPA. After a trial to the court, the court found in favor of the plaintiff against both defendants on the first count. On this count, the court rendered judgment in the total amount of $109,160.19. This amount consisted of the following: (1) $46,086.66 as the principal amount of the debt; (2) prejudgment interest of $11,544.34; (3) costs of $3128.19; (4) attorney’s fees as allowed by the contract for electrical services in the amount of $39,960; (5) and an offer of judgment interest award of $7878, along with $350 for attorney’s fees and $213 for costs. The court found in favor of the defendants on the second count because of its determination on the first count and found in favor of the defendants on the third count because it determined that the defendants’ conduct did not rise to the level of a CUTPA violation.[1] These appeals followed.

The court found the following facts. The plaintiff is engaged in the business of selling electrical utility services to the public. Westview is a Connecticut limited liability corporation with its principal place of business at 45 East 89th Street, suite 10B, New York, New York. Sousa was the “sole owner, operator and member of Westview,” and he resided at Westview’s principal place of business.

Before moving to the United States, Sousa was an accountant in England, the qualifications for which were similar to those in the United States. After coming to the United States, Sousa worked in the accounting department of MCI Telecommunications Corporation, was a vice president of a semiconductor business in California and was a consultant in general business expansion to MCI Telecommunications Corporation in the late 1980s.

On April 25, 2000, Sousa formed Westview for the purpose of buying two buildings, consisting of 146 rental apartment units, located at 120 and 170 Hillside Avenue, Waterbury. Westview bought the properties on May 4, 2000, and at Westview’s request, made by Sousa, the plaintiff began supplying electricity to the common [950 A.2d 525] areas of the apartment complex and any apartments owned by Westview.[2]

The court further found that state statutes and regulations require electrical companies such as the plaintiff to provide electric services to owners of apartment buildings such as those owned by Westview. Further, such companies are prohibited from requiring the owner of such properties to post a security deposit, from eliciting a personal guarantee or from terminating service to the owner in the event of nonpayment of the bills for such service.

The only statutory remedy available to the plaintiff in the event of nonpayment for electrical service by an owner of an apartment building is to apply to the Superior Court for the appointment of a receiver of rents pursuant to General Statutes § 16-262f. The court noted that companies such as the plaintiff are reluctant to do so, however, because it is “expensive, time-consuming, confusing to the tenants, causes tenants to stop paying rent to anyone and can result in the electric utility becoming in effect the manager of the building.”

Accordingly, companies such as the plaintiff, when dealing with a nonpaying owner, use the receivership process only as a last resort.

Westview’s meters were located in a locked basement, requiring estimated bills to be sent until the plaintiff was able to gain access to them. From the outset of its ownership in May, 2000, Westview was delinquent in paying the monthly bills. It made no payment until August 11, 2000, and by September, 2000, the balance was more than $11,000. It made no further payments until March, 2001. Westview’s history on its account was replete with demands for payment, unfulfilled promises of payment by Sousa and threats by the plaintiff of receivership.

Eventually, the plaintiff turned the account over for collection to its counsel, who notified Westview on May 20, 2002, that unless payment in full was received by June 4, 2002, an application for receiver of rents would be filed. Sousa received this letter but did not contact the plaintiff. Several days after June 4, 2002, the plaintiff served Westview with an application for receivership; the plaintiff was then informed that the property had been sold on June 3, 2002.

The court found that the plaintiff had proven a breach of contract by Westview and that as of September 3, 2002, the balance owed by Westview was $46,086.66. The court then turned to the plaintiff’s claim that Sousa was personally liable for Westview’s obligation to the plaintiff.

Specifically invoking the instrumentality test for piercing the corporate veil; see Hersey v. Lonrho, 73 Conn.App. 78, 87, 807 A.2d 1009 (2002); the court made the following findings. First, the court found that Sousa was not a credible witness; his testimony was inconsistent, evasive and contradicted by much other evidence, including his deposition. The court further found that he was the sole owner, member and manager of Westview, which he formed for the sole purpose of owning the two buildings in question. His residence was Westview’s principal place of business. He was in total control of all of Westview’s operations and made all the decisions involving finances, policy and business practices. No state or federal tax returns were filed by Westview for the three tax years that Westview owned the buildings, and he intentionally failed to preserve Westview’s financial records so that there [950 A.2d 526] was inadequate documentary support for his claim that Westview was a losing venture. Sousa’s control and domination of all of Westview’s affairs was such that as to the obligation to the plaintiff, Westview had no separate mind, will or existence of its own.

In addition, the court found that Sousa was aware of the governmental restrictions imposed on the plaintiff in doing business with owners of apartment buildings, such as Westview, and that the plaintiff could not refuse service, demand a personal guarantee from him or disconnect the meters in the event of nonpayment, and that the only action the plaintiff could take would be to apply for a receiver of rents. The court found that Sousa knew that the plaintiff was reluctant to do so and that he could stall the plaintiff from so applying by making partial payments and false promises of payment schedules. Sousa also began negotiating to sell the property while he was continuing to make promises of payment, he knew that the plaintiff was going to apply for a receiver on June 4, 2002, and he sold the property on June 3, 2002, without notifying the plaintiff or making any payment on the outstanding bill of $46,086.66. The effect of the sale was to leave Westview with no assets; there were funds available at the closing to pay the plaintiff’s bill, and Sousa personally received approximately $74,000 from the proceeds of the sale. The court further found that “Sousa used his total control of the affairs of Westview to perpetrate an unjust act in contravention of the plaintiff’s legal rights, and that said control and conduct caused the plaintiff a loss of $46,086.66.”

The court awarded the plaintiff prejudgment interest on this amount, pursuant to General Statutes § 37a-3, at the rate of 6 percent per year, commencing on November 1, 2002, to the date of judgment. It also awarded the plaintiff costs and attorney’s fees on the basis of the application for service. See footnote 2.

Because it found in favor of the plaintiff against both defendants on the first count based on the contract, the court found in favor of the defendants on the second count, which was based on unjust enrichment. On the third count, which was based on CUTPA, the court found that “the conduct underlying the breach of contract by Westview, and the conduct of Sousa which the court has found sufficient to pierce Westview’s corporate veil and hold Sousa personally liable for said breach of contract, does not rise to the level of a CUTPA violation.” Accordingly, the court found in favor of the defendants on this count.

I

THE DEFENDANTS’ APPEAL

A

Piercing the Corporate Veil

The defendants first claim that the court improperly concluded that Sousa was personally liable for Westview’s breach of contract.[3] We disagree.

Whether the corporate veil should be pierced presents a question of fact, which we review under the clearly erroneous standard.

[950 A.2d 527]Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 148, 799 A.2d 298,cert. denied, 261 Conn. 911, 806 A.2d 49 (2002). The instrumentality test for piercing the corporate veil, which the court applied in the present case, “requires, in any case but an express agency, proof of three elements: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff’s legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.” (Emphasis in original; internal quotation marks omitted.) Id., at 152, 799 A.2d 298.

“Courts, in assessing whether an entity is dominated or controlled, have looked for the presence of a number of factors. Those include: (1) the absence of corporate formalities; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlapping ownership, officers, directors, personnel; (5) common office space, address, phones; (6) the amount of business discretion by the allegedly dominated corporation; (7) whether the corporations dealt with each other at arm’s length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of debts of the dominated corporation; and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own.” (Internal quotation marks omitted.) Id., at 152-53, 799 A.2d 298.

There was more than ample evidence to support the court’s determination that under the instrumentality test, the corporate veil should be pierced in this case. In addition to, and in support of, the numerous specific factual findings made by the trial court, there was evidence that Westview lacked an agent for service as required by General Statutes § 34-121 and 34-104, filed no annual reports with the secretary of the state as required by General Statutes § 34-106 and lacked any of the documentation required for a limited liability corporation, as required by General Statutes § 34-144. In addition, there was evidence that Westview failed to maintain any business records for the property, failed to file tax returns for any of the years involved and was undercapitalized. There was also evidence that Sousa commingled Westview funds for his own benefit, by transferring funds from Westview to a different entity controlled by him, namely, the Clyde Group, for purported payment of undocumented and unsubstantiated loans. Finally, there was evidence that when Westview sold the property, Sousa, not the plaintiff, Westview’s creditor, was the beneficiary of the $74,000 net proceeds of the sale.

Thus, we reject the defendants’ suggestion that this was simply a case of a single shareholder being charged with a corporate debt solely because of his ownership status. There was ample evidence that Westview had no separate existence, that Sousa treated it as such and that Sousa used it to perpetrate an unjust act in contravention of the plaintiff’s legal rights. The evidence in this case amply supports the court’s determination that the corporate veil should be pierced.

[950 A.2d 528]

B

Mitigation of Damages

The defendants next claim that the court improperly concluded that the plaintiff was not obligated to mitigate its damages by promptly applying for a receiver of rents pursuant to § 16-262f.[4] Specifically, the defendants claim that because Westview breached the contract within the first two months of their relationship, and because by June, 2001, it was clear that Westview was not making its payments in full, the plaintiff should have mitigated its damages by applying for a receivership at that time.[5] We disagree.

The defendants’ claim requires little discussion. A party being damaged has an obligation to make reasonable efforts to mitigate its damages, and the question of what constitutes such efforts is a question of fact that is subject to the clearly erroneous scope of review. Vanliner Ins. Co. v. Fay, 98 Conn.App. 125, 145, 907 A.2d 1220 (2006). The breaching party has the burden of proof on this issue. Id.

We agree with the court and the plaintiff that although § 16-262f affords an electric utility a means of mitigating its damages, it does not mandate that it do so regardless of the circumstances. The court’s findings, which are amply supported by the evidence, support its determination that the plaintiff was not obligated to mitigate its damages by resorting to a rent receivership, which would have itself been expensive, time-consuming, and might well have resulted in tenants declining to pay rent at all. Furthermore, there was evidence that Sousa misrepresented to the plaintiff that he was working on a long-term solution that would have afforded payment to the plaintiff. Instead, he sold the property without notifying the plaintiff and pocketed the net proceeds of the sale for himself.

C

Prejudgment Interest

The defendants’ final claim is that the court improperly awarded prejudgment interest pursuant to § 37-3a (a).[6] This claim also requires little discussion. The trial court’s award of interest pursuant to the statute for money wrongfully withheld was amply supported by the evidence and was not an abuse of discretion. See McCullough v. Waterside Associates, 102 Conn.App. 23, 33, 925 A.2d 352,cert. denied, 284 Conn. 905, 931 A.2d 264 (2007).

II

THE PLAINTIFF’S CROSS APPEAL

The plaintiff, in its cross appeal, claims that the court improperly declined to find [950 A.2d 529] the defendants liable under CUTPA. Specifically, the plaintiff claims that the overwhelming evidence established that the defendants’ conduct violated some or all of the three parts of the familiar “cigarette rule.” See Angiolillo v. Buckmiller, 102 Conn.App. 697, 709, 927 A.2d 312,cert. denied, 284 Conn. 927, 934 A.2d 243 (2007). We reject this claim.

Whether conduct violates CUTPA is an issue of fact for the trial court. De La Concha of Hartford, Inc. v. Aetna Life Ins. Co., 269 Conn. 424, 433-34, 849 A.2d 382 (2004). A reviewing court will direct a judgment for the plaintiff on a CUTPA claim only when the trial court could not have reasonably reached its conclusion that there was no CUTPA violation. See id., at 442, 849 A.2d 382; see also Smith v. Greenwich, 278 Conn. 428, 441, 899 A.2d 563 (2006).

In the present case, the court stated only that “the conduct underlying the breach of contract by Westview, and the conduct of Sousa, which the court has found sufficient to pierce the corporate veil and hold Sousa personally liable for said breach of contract, does not rise to the level of a CUTPA violation.” The plaintiff did not ask the court to articulate its reasoning underlying this finding. On this state of the record, although the court could have found otherwise, we cannot say that the court acted unreasonably and in abuse of its discretion in concluding as it did. Put another way, it cannot be said that on this state of the record, a CUTPA violation was established as a matter of law.

The judgment is affirmed.

In this opinion the other Judges concurred.

———

Notes:

[1] Technically, the court “dismissed” the second and third counts. We read this as essentially finding in favor of the defendants on those counts, as if the court had rendered judgment in favor of the defendants on those counts.

[2] The written application for electrical service, submitted by Westview and signed by Sousa, provides for payment of all charges for such services, including costs and a reasonable attorney’s fee incurred in collecting sums owed for the service.

[3] The defendants separate this claim into two arguments: (1) the court improperly found Sousa liable for Westview’s breach of contract and (2) the court improperly found Sousa liable under the contract for attorney’s fees, interest and costs because Sousa signed the contract as president of Westview, and not as an individual. We consider both these arguments together because, contrary to the defendants’ suggestion that they are severable, the same legal principles and factual findings govern both.

[4] General Statutes § 16-262f provides in relevant part: “(a) (1) Upon default of the owner, agent, lessor or manager of a residential dwelling who is billed directly by an electric, electric distribution, gas or telephone company or by a municipal utility for electric or gas utility service furnished to such building, such company or municipal utility or electric supplier providing electric generation services may petition the Superior Court or a judge thereof, for appointment of a receiver of the rents or payments for use and occupancy or common expenses … for any dwelling for which the owner, agent, lessor or manager is in default….”

[5] As with their first claim, the defendants separate this claim into two parts. Also as with that claim, we treat both parts in one analysis because the same legal principles and facts govern both.

[6] General Statutes § 37-3a(a) provides in relevant part: “Except as provided in sections 37-3b, 37-3c and 52-192a, interest at the rate of ten per cent a year, and no more, may be recovered and allowed in civil actions … as damages for the detention of money after it becomes payable….”

Courts have slowly eroded Asset Protection and Single Member LLC’s by allowing creditors to reach past the LLC to the owner or owners. An LLC, by itself is probably not enough protection for the average business owner.

Asset Protection and Single Member LLC’s are very rarely synonymous in the real world despite what one hears from marketers in theory. LLC’s are great for many things, but most business owners that think that paying a few hundred dollars to designate their business as an LLC, corporation, or LLP will adequately separate business assets from personal ones. They could be gravely mistaken. In fact, unless one follows the LLC rules to the letter, chances are that personal assets are on the table in the event of a lawsuit or bankruptcy; with a single-member LLC or even sometimes with a multi-member LLC. How many LLC owners log meeting minutes for every major business decision or never pay for personal items with the company checkbook? Either one of these can form a crack in the wall in which a good attorney can drive a wedge and allow the courts access to personal assets.

What can crack the walls of an LLC? Well, lets start out with the obvious. If a person were to set up an LLC for criminal, wrongful or fraudulent purposes, that person could be held liable for debts of the LLC. A little less obvious and more confusing is that courts have also looked passed LLC’s to personal assets by calling them “alter egos.” Basically, the court is saying that the LLC is just a business in name but actually just the owner in disguise. If the LLC is actually the owner, collecting debt from the LLC is also collecting debt from the person’s college fund for their children. Here’s one that perplexes. If the LLC is not adequately funded, then the court can go after personal assets. Most business owners start out with almost nothing and grow their business. Are the courts saying that someone is not protected while their business is growing? Maybe the courts are urging business owners not to protect their businesses with an LLC until they are larger? Either way, the current state doesn’t encourage startups or risk taking and the LLC doesn’t seem to be the answer, at least on its own.

If a business doesn’t hold up to a court’s scrutiny, the owner and the owner’s family could lose everything. In fact, here are some examples of just that:

In this case, young girl drowned in a public swimming pool owned by an LLC. The father of the deceased sued the LLC and asked the court to set aside the LLC for a judgment against the single-member of the LLC. The Supreme Court of California found a way around the LLC by determining that the LLC did not have enough assets to conduct a public swimming pool. The owner of the LLC, became personally responsible for the award in the lawsuit. Sometimes a horrible event happens like this and often courts will try to right the wrong, even when it takes a little bending of the law.

Another single-member LLC falls. Even after the LLC was essentially dissolved, the court could still go after the owner. In this case, Tradewinds group, a single-member LLC, contracted to have Martin construct an airplane hanger. Tradewinds eventually sued Martin for breach of contract and won. Martin appealed and the case was sent back to the court where the decision was reversed and Martin was awarded substantial litigation costs. Tradewinds had sold its assets to Freeman, the owner of Tradewinds. Martin went to court to disregard the LLC to collect from Freeman personally. The court found that Freeman was an “alter ego” of Tradewinds so they were one in the same. Freeman was held personally accountable for the judgment.

Even a multi-member LLC that fails could hide threats to one’s personal assets. Do you think personal assets are safe after an LLC files bankruptcy? This case involves a multi-member, closely held, LLC that declared Chapter 7 Bankruptcy. The trustee of the bankruptcy estate attempted to hold the members of the LLC personally responsible for debts. The court found that the members were personally responsible for several debts as they had “dealt with creditors personally” (How else would one do it?) and did not explicitly identify themselves as an agent of the LLC.

In this case, a single-member LLC entered into an agreement with the purchasers of a home to finish the home in certain amount of time. The LLC failed to do so. The purchasers successfully sued the LLC. The purchasers then targeted their sights on the assets of the owners. The court ruled that the LLC was intermingled with other entities and personal assets and is therefore to be disregarded and the owners were personally liable for any court awards. This illustrates that when the owner of an LLC neglects to follow the strict separation rules between personal and business assets, they can also endanger their personal assets.

In this case, an amateur softball association sued a single-member LLC over trademark infringement also naming the owner in the suit. The court ruled that the owner was personally liable because trademark infringement was simply enough to warrant it as a fraudulent act! This illustrates that sometimes courts will even make rulings that are so broad that one wonders why bother with an LLC at all.

In this case, a power company sued a single-member LLC. The power company attempted to collect from the owners of the LLC under a by piercing the veil of the LLC. The court found that since there was not enough funding, spaces were used for personal and business uses, they did not file annual reports, they did not file property records, or file tax returns, that the owners were liable for the award from the court. This illustrates that when an LLC is determined by the court to be “underfunded,” the court may find that that the LLC was just a front for the owner.

All of these cases illustrate a single powerful point. When something bad happens, an LLC by itself may not protect personal assets. A good lawyer will pour over all of the LLC documentation and generally will find something to start that crack in the wall. Even if they don’t succeed, they can use that crack to scare an owner or owners into a larger settlement. An LLC or LLP is a good thing, but, one wrapped in an UltraTrust can stop that crack before it even starts.

A business in New Jersey, if organized correctly, can offer asset protection. A limited liability corporation (“LLC”) is ideal, but generally not considered complete asset protection. An LLC takes a business that is generally a sole proprietorship (owned and operated by one person) and, by filing with the New Jersey State Treasury, turns it into a corporation. The idea being that the corporation is now a separate entity from the person and as such, is responsible for its own debt, taxes and lawsuits. Shares of an LLC can be owned by one person or several, but a solely owned LLC may not share full asset protection.

The LLC that is owned by multiple partners gets its main asset protection advantage from what is known as “charging orders” [Title 42. Chapter 2C. Revised Uniform Limited Liability Company Act, 1-94 – C.42:2C-1 to 42:2C-94, (March 18, 2013). A single owner of an LLC may or may not take advantage of charging orders because they are meant to protect other owners from creditors attempting to liquidate the LLC. A charging order is a court order, in favor of a creditor of one of the LLCs members, stating that the stocks or shares of the LLC are responsible for the amount owed. This means that the creditor does not have any control over the LLC and can only collect from the distributions to that single debtor. In other words, it protects the other LLC partners from having to deal with a new partner. This allows the other partners not to be subject to any financial loss stemming from one partner’s financial distress.

Although this is a good method to protect a business and separate the business from one’s personal assets, it may fall short. There are many cases where an LLC officer is held personally liable for acts, such as consumer fraud [Root Jewelers v. JDR Contracting, 233 N.J. Super. 125 (App. Div. 1989)], misappropriation and conversion [Hirsch v. Philly, 4 N.J. 408, 416 (1950)], negligence [Duffy v. Bates, 91 N.J.L. 243 (E & A 1918)], negligence of omission [Francis v. United Jersey Bank, 87 N.J. 15 (1981)], and negligent contracting [Saltiel v. GSI Consultants, Inc., 170 N.J. 297 (2002)]. The best way to ensure that personal assets are separate from business assets are through the use of a well crafted irrevocable trust, such as the UltraTrust®.

The use of irrevocable trusts can be a two level shield against would be attackers. First, placing the LLC into a trust can add another layer of protection. Anyone trying to get through the protection of the LLC will run into the issue that a trust owns the business, not the individual. Also, when an owner is sued and the creditor attempts to attach a charging order against the business, they will likely be unsuccessful, as the trust owns the business, not the individual. A creditor cannot collect something that the debtor does not own. A well written trust, such as the UltraTrust®, includes language allowing the trustee to withhold funds in the event of a lawsuit. This trust, being irrevocable is out of the control of the debtor, so the creditor cannot force payment.

The second level of protection involves placing the bulk of one’s personal assets in an irrevocable trust. Again, when a creditor or successful lawsuit plaintiff attempts to collect, they will not be able to collect from the irrevocable trust. The assets and property in the trust will be safe and able to be used for the benefit of the family or other beneficiaries. A creditor cannot collect from someone who doesn’t own anything. This is the same strategy that can be used to protect assets from medicaid and nursing homes.

Putting all of or a significant amount of countable assets into an irrevocable trust more than five years before entering a nursing home, saves the assets from the astronomical cost of nursing home care. In New Jersey, a one may still retain the use of various assets, including $2000, a car, a home (if they intend to return) and various burial assets, among other minor assets. Any countable items or assets (those items or assets not carved out by medicaid as non-countable such as the one’s listed below) will be subject to a “spend down” until the person qualifies for medicaid.

So, if a person has $102,000 in countable assets when entering a nursing home, the nursing home will collect until there is only $2000 left (less than 1 year of nursing home care). These funds will be lost and not passed on to the family. In fact they can’t even be gifted. If one were to take that $102,000 and place it in an UltraTrust® more than five years before entering a nursing home, those assets would be owned solely by the trust and would not count towards the medicaid spend down. All $102,000 would be passed on to the beneficiaries.

Another method, which may work much closer to the time someone is to enter a nursing facility, is the purchase of an actuarially sound annuity. Although this method does not protect as many of the assets as an irrevocable trust, it will protect more than simply doing nothing. An annuity is a contract, bought and paid for, where the entity selling the agreement agrees to pay out sums of money as income over a period of time. New Jersey, in particular, makes an effort to make sure that the payment is actuarially sound, meaning that the payments are consistent with life expectancy. By making sure they are actuarially sound, New Jersey is attempting to thwart people from abusing these annuities solely to qualify for medicaid.

The methods outlined above, although relatively simple to explain, may be quite complicated. One should contact an expert in LLCs, irrevocable trusts and medicaid annuities, such as those at Estate Street Partners. If the annuities, LLC and/or irrevocable trusts do not contain the correct language, one may not be afforded the protection that they expect. Estate Street Partners and the UltraTrust® can help meet and exceed expectations for asset protection in New Jersey.

Asset protection for physicians and medical professionals should be taught in medical school. So many lawsuits are filed against physicians and the payouts are so high that name “medical malpractice” is synonymous big paydays and there are attorneys that only take these cases.

In fact, every year, physicians run about a 5% chance of being sued every year – so in a 20 year career you are guaranteed, on average, to be sued at least once (Medical Liability Claim Frequency: A 2007-2008 Snapshot of Physicians, Kane, 2010). That’s not even the scary part. These statistics only cover medical malpractice, but personal lawsuits also are ten times more likely for doctors because most people assume doctors are wealthy.

If you are physician reading this, chances are that you are being sued, expecting to get sued, and/or afraid of being sued. The medical profession has become almost more focused on litigation than medicine resulting in the birth of what people call “defensive medicine.” Some physicians reading this may believe that they won’t make a mistake or that their patients like them and would never sue them. These physicians would be wrong. Physicians make mistakes like everyone else. Here is the chilling part though… a physician need not make a mistake to be sued. People generally have the perception that physicians have deep pockets and that most cases are settled and everyone gets paid. In fact, 65% of cases are dropped, dismissed or withdrawn (Kane, 2010). That means that in 65% of the cases, there was probably not enough evidence of wrongdoing to move forward. 65% of cases may be frivolous lawsuits against unsuspecting physicians.

How about the cost? Well, even if the claims were dropped, physicians were subject to $22,000-100,000 in legal fees on average. That’s only if claims that were dropped!! The cost to a physician could go as high as $500,000 if a case goes to trial and the patient prevails. That number can go even higher in states that don’t have caps on the medical malpractice lawsuits. One can see why asset protection for physicians is a must!

Like any other business owner, the secret to protecting a physician’s assets is simply to not own them directly at all. Sure, carrying insurance is a must, but when insurance ends, no physician wants his or her personal assets at risk. So the best way for a physician to protect his or her personal assets is to not own them. A properly drafted, implemented, and funded irrevocable trust like the Ultra Trust can be a physician’s family’s best protection. The Ultra Trust can act as a safe deposit box for the physician’s personal property and assets. The protection stems from the fact that items in the trust are not owned by the physician, therefore someone suing the physician cannot attach these assets just like they couldn’t touch the assets of the physician’s friends.

A properly drafted, implemented, and funded irrevocable trust is specifically designed for all the protection to start immediately, assets can be placed out of harms way, but still benefit the people the physician wants them to benefit. Not only can the it move these assets out of harms way now, the trust will protect them for years to come, from such notorious asset reducers such as the children’s wild teens and 20’s, the children’s ex-spouses, bankruptcy, and finally frivolous and non-frivolous lawsuits.

The Ultra Trust includes language that protects against anyone that is not a beneficiary taking possession of the assets. It includes language that allows the physician to specify when, how, and why funds can be dispersed to children, long after they have passed. The Ultra Trust uses a trust protector who keeps a watchful eye on the manager of the trust to make sure the trust is administered the way the physician wants it administered. Lastly, and most importantly, the Ultra Trust gets the physicians personal savings, real estate, possessions and investments away from the hands of potential court orders. Don’t take our word for it, see what others have said:

1. Laws and Cases Supporting the Ultra Trust
2. Company Testimonials
3. BBB Testimonials