Veil Piercing, Alter Ego and Reverse Piercing

Scope of the chapter. The liability shield examined in the preceding chapter protects members and managers from the debts of the LLC. This chapter examines the doctrines under which a court may set the shield aside. Veil piercing makes a member answer for the LLC's obligation. Alter ego is the name most courts give to the principal theory on which piercing rests. Enterprise liability treats affiliated entities as one. Reverse veil piercing runs in the opposite direction and makes the LLC answer for a member's obligation. Each doctrine is an exception to a statutory rule, and each is applied by courts with reluctance. Each also produces enough reported decisions that no planner can treat the shield as absolute.

Why the subject matters for LLCs. Veil piercing developed in corporate law, and the courts carried it into LLC law almost as soon as the first statutes were enacted. The transfer raised questions that corporate law had not faced. Corporate formalities, which figure in many corporate tests, are largely absent from LLC statutes. The single-member LLC, which is common, has no counterpart in the traditional close corporation case law in which most piercing decisions arose. And the disregarded tax status of a single-member LLC invites the argument that an entity the tax law ignores should be ignored by the courts as well. Legislatures have answered some of these questions by statute, most completely in Wyoming, and courts have answered others by adapting the corporate tests.

Organization. The chapter proceeds in nine parts:

1. the doctrine and its premises (¶ 2610);
2. the common-law tests, with particular attention to Delaware (¶ 2620);
3. statutes that regulate veil piercing of LLCs (¶ 2630);
4. Wyoming, the GreenHunter decision and the 2016 amendment (¶ 2640);
5. enterprise liability and parent-subsidiary claims (¶ 2650);
6. choice of law (¶ 2660);
7. reverse veil piercing (¶ 2670);
8. veil piercing in bankruptcy and substantive consolidation (¶ 2680); and
9. planning to preserve the shield (¶ 2690).

Relation to other chapters. The statutory shield is examined supra ch. 25. Personal liability that does not depend on piercing, such as liability for a member's own torts, guaranties and statutory responsible-person liability, is examined infra ch. 28. Creditor remedies against a member's interest, including the charging order, are examined infra ch. 27. The use of LLCs to protect assets from members' creditors and from the LLC's own creditors is examined infra ch. 55, and the single-member LLC supra ch. 9.