The Single Business Enterprise Theory of Louisiana s First Circuit: An Erroneous Application of Traditional Veil- Piercing

• Author: Kyle M. Bacon
• Pages: 75-110

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The author is extremely grateful to Professor Glenn G. Morris, Vice Chancellor and Class of 1950 Professor of Law, Paul M. Hebert Law Center, Louisiana State University, for sharing his insight and knowledge. Without his guidance, this article would not have been possible. Special thanks to my family and friends for their support. To my wife, Amy, immeasurable appreciation for her encouragement, assistance, and, most of all, her selfless patience throughout this endeavor and all of my law school career.

I Introduction

Millions of American entrepreneurs have formed a corporation or limited liability company ("LLC").¹ One of the most advantageous aspects of these two business forms and the most widespread reason for choosing the corporation² is the attached privilege of limited liability. The legislative grant of limited liability provides that no other person³ shall be liable for the debts of the corporation or LLC.⁴Therefore, shareholders of a corporation are not liable for the debts of their corporation,⁵ members of a LLC are not liable for the debts of their LLC,⁶ and all other natural and juridical persons, including affiliated businesses,⁷ are not liable for the debts of a corporation or LLC.⁸ According to Professors Morris and Holmes,⁹ "the underlying Page 76 theory for [limited liability] is that the corporation is itself considered a juridical entity, possessing its own legal personality, separate and distinct from that of its shareholders (or of any other person for that matter)."¹⁰ By granting limited liability to corporations and LLCs, the legislature encourages business development.¹¹

A jurisprudential theory created and recently expanded by Louisiana's first circuit poses four new threats to the limited liability of Louisiana business. The first circuit's single business enterprise theory provides authority for first circuit courts to disregard the separate identity of corporations and LLCs in a dangerous fashion. Under this theory, the first circuit is eroding the protection of limited liability in ways that would shock most business owners and seem unbelievable to most commercial lawyers.

These novel threats to the limited liability of Louisiana businesses should not exist because they are the result of a bad jurisprudential theory. The first circuit's single business enterprise theory is a poor theory for two main reasons. First, the theory has been developed through poor legal methodology.¹² Second, the theory promotes a bad policy.¹³

These two major problems can be resolved and the legitimate objectives of the first circuit's single business enterprise theory can be accomplished.¹⁴ The first circuit should take actions similar to the North Carolina Supreme Court.¹⁵ It should slightly alter the doctrine associated with traditional veil-piercing so that traditional veil- piercing can be applied both vertically as well as laterally.¹⁶

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Part II of this article describes the threats posed by the first circuit's single business enterprise theory. Next, the article explains the theory's development. The fourth section analyzes the legal methodology and policy associated with the first circuit's theory. Finally, Part V explains a simple resolution to the problems associated with the theory.

II Four Novel Threats To Limited Liability

The single business enterprise theory of Louisiana's first circuit discourages business development by posing four new threats to the limited liability of Louisiana businesses. These threats exist because of the manner in which the first circuit has applied the theory in the past as well as the theory's potential applications. All businesses in Louisiana should be aware of the following new threats to limited liability.

First, the first circuit's theory seemingly requires courts to disregard the separate identity of a corporation or LLC if it is "controlled" by another entity. Specifically, the first circuit states, "[i]f one corporation is wholly under the control of another, the fact that it is a separate entity does not relieve the latter from liability."¹⁷Most, if not all, parent companies dominate or control their subsidiary corporations or LLCs.¹⁸ Therefore, if taken literally, the court's language means that parent companies would almost always be liable for the debts of their subsidiaries. Similarly, many companies dominate or control sister corporations or LLCs. Therefore, if taken literally, the court's language also means that dominant companies would almost always be liable for the debts of their sister corporations or LLCs. Although this language has been recited in other Louisiana circuits, the other circuits accompany this language with a consideration of whether dominance by one company has caused an inequity.¹⁹ If no inequity exists, the other Louisiana Page 78 circuits respect the separate identity of the two companies.²⁰ How- ever, the first circuit has seemingly applied this language literally, without any consideration of whether dominance by one company has caused an inequity.²¹ These applications indicate that the first circuit seemingly requires courts to disregard the separate identity of a corporation or LLC if it is "controlled" by another business.²²

The second new threat to limited liability of Louisiana businesses is that the first circuit's single business enterprise theory permits "lateral veil-piercing."²³ Although vertical veil-piercing is supported Page 79 by well-accepted doctrine, the first circuit is the only circuit in Louisiana that allows lateral piercing.²⁴ A few courts in Texas and North Carolina have invoked lateral piercing; however, unlike the first circuit, these courts require the existence of an inequity.²⁵Lateral veil-piercing applied by the first circuit's single business enterprise theory, therefore, is a new threat to the limited liability of Louisiana businesses.

The third and most alarming way in which the first circuit's single business enterprise theory threatens limited liability is by allowing courts to disregard the separate identity of a corporation or LLC without considering whether an inequity exists. The first circuit's single business enterprise theory is almost entirely composed of an eighteen-factor test.²⁶ None of the eighteen factors considers whether an inequity exists.²⁷ In fact, most of the eighteen factors are characteristic of most closely-affiliated corporations and LLCs.²⁸ For nearly a decade, the first circuit applied its single business enterprise theory only in cases involving inequitable situations.²⁹ Recently, however, the first circuit applied its theory in cases in which there was no indication of an inequity.³⁰ This new application is novel because courts consistently consider whether inequity exists when applying traditional veil-piercing.³¹ Therefore, Louisiana's first circuit is apparently the only court in the United States that disregards the separate identity of a corporation or LLC without considering whether an inequity exists.³²

The fourth and final new threat on limited liability is that the theory effectively alters traditional veil-piercing by permitting vertical veil-piercing even if there is no inequity.³³ Nothing stated by the first circuit when applying its single business enterprise theory Page 80 limits the theory's application to a lateral piercing situation. In other words, it is conceivable that a parent company could be held liable for the debts of a subsidiary corporation or LLC, a shareholder could be held liable for the debts of its corporation, and a member could be held liable for the debts of its LLC, even if there is no fraud or inequity. This is a novel threat because for decades courts have consistently required fraud or inequity to pierce the veil vertically.³⁴

III The First Circuit's Single Business Enterprise Theory Is Unique

In order to understand why these four threats are novel, it is important to understand how and why the first circuit's theory is unique. An explanation of the development of the theory is now warranted.

A Traditional Veil-Piercing

Veil-piercing is traditionally used to overcome limited liability through vertical piercing.³⁵ In other words, veil-piercing traditionally imposes personal liability on shareholders for the debts of their corporation or on members for the debts of their LLC. Accordingly, parent companies, as shareholders of their subsidiary corporations or members of their subsidiary LLCs, have traditionally been held liable for the debts of their subsidiary companies through traditional veil- piercing.³⁶ However, Louisiana courts, including the first circuit, apply traditional veil-piercing only after carefully considering the principle that "veil-piercing is an extraordinary remedy, to be granted only rarely."³⁷ Considering that the...