Document Type

Article

Publication Title

Touro Law Review

Publication Date

2015

Abstract

Twenty years ago, the New York Limited Liability Company Law was enacted, including § 609(a), which explicitly disclaims liability of members, managers, and agents for the debts and obligations of the LLC. However, New York courts have held that this limitation on liability is not absolute, and certain conduct on the part of the owners can erode the liability shield. The statute provides that the members will not have personal liability for LLC debts solely because of their role as owners in the LLC. The statute does not say that members will never have liability, just that any liability will not be as a result of their owner status, leaving open the question of when members will be liable for debts of the LLC.

Neither the language of § 609(a) itself or its legislative history offer any guidance on what factors a court should use to determine whether to pierce an LLC. Since LLCs are a blend of partnerships and corporation, the relevant inquiry is to determine whether, for purposes of owner liability, an LLC is more like a corporation, with its default rule of limited liability, or more like a partnership, where partners have unlimited personal liability for all partnership debts. Unlike the Model Business Corporation Act, and the states that have adopted it, New York’s Business Corporation Law has no statutory limitation on liability equivalent to § 609. However, New York has a well-established body of case law permitting courts to disregard shareholder limited liability based on shareholder conduct. New York courts, like others across the country, began by applying corporate principals of piercing the corporate veil when evaluating claims to pierce an LLC. The complete lack of statutory guidance on the factors necessary to pierce LLCs leaves judges with tremendous discretion, resulting in some uneven and sometimes insupportable results.

This Article explores the history of LLC veil piercing doctrine, starting with an exploration of the approach set out in the Revised Uniform Limited Liability Company Act RULLCA and a brief look at the approaches states take to piercing the LLC veil, with a close examination of the NYLLCA. The Article then reviews the New York case law on piercing the corporate veil and the evolution of this doctrine by state and federal courts in the context of LLCs. The Article concludes with some suggestions for refining the continuing development of the LLC piercing doctrine in New York in a thoughtful and deliberate manner so as to avoid inconsistent and arbitrary results.

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