The Supreme Court of Wyoming recently addressed whether a limited liability company ("LLC") controlled by GreenHunter Energy, Inc. (“GreenHunter”) could be held liable for debts owed to Western Ecosystems Technology, Inc. (“Western”).
The court in GreenHunter acknowledged that limited liability is the general rule, and piercing is the rare exception to be applied only in exceptional circumstances. However, this case presented exceptional circumstances in the form of undercapitalization, intermingling of businesses and finances, and fraud.
The court found that the LLC was undercapitalized because of manipulation by its members (a publicly traded corporation) and that GreenHunter used its position to control the amount of money that was transferred to the LLC and to decide which bills of the LLC would be paid. In other words, the LLC was consistently undercapitalized by strategic choice, not by external forces.
The court found that the businesses and finances of GreenHunter, Inc. were intermingled because (1) the same accountants managed the finances of both the LLC and GreenHunter; (2) the two entities had the same business address; (3) creditors of the LLC mailed their invoices to GreenHunter for processing; (4) the LLC did not have any employees independent of GreenHunter; (5) the LLC had no revenue separate from GreenHunter and all funds were commingled because GreenHunter paid the LLC's bills; and (6) the LLC’s tax returns were consolidated with the tax returns of GreenHunter. And although tax consolidation is allowed under federal tax law for a single-member limited liability company, the court found it was still proper to use it as one of many factors in the analysis. In sum, the court focused on the fact that GreenHunter manipulated assets and debts in a way that reaped all the LLC's benefits while burdening it with all of the LLC’s losses and liabilities.
Accordingly, the court found that the LLC had ceased to be a separate entity due to GreenHunter's misuse of it, and adherence to the fiction of the LLC’s separate existence would lead to injustice so that the LLC’s veil can be pierced to impose liability on Greenhunter's debt to Western.