LLC Owners: How to Avoid Personal Liability

A. The LLC Veil.

Limited liability companies (“LLCs”) are entities separate from their owners (called “members”).  Generally speaking, an LLC is solely responsible for its debts and liabilities and members are not.  RCW 25.15.125(1).  The liability shield an LLC provides its members is commonly called the “LLC’s veil.”

B. Piercing The LLC Veil To Hold LLC Owners Liable For LLC Debts.

In certain circumstances an LLC’s veil can be “pierced” to hold members personally liable for LLC debts.  RCW 25.15.060.  But doing so is not easy, and creditors carry a heavy evidentiary burden.  In Washington, the creditor must prove (1) the LLC was used to violate or evade a duty, and (2) the LLC must be disregarded to prevent loss to the innocent creditor.  Landstar Inway, Inc. v. Samrow, 181 Wn. App. 109, 123 (Div. 2 2014).  Under the first element, the creditor must show the member abused the LLC’s form–typically by way of a fraudulent misrepresentation or manipulation of the LLC to the member’s benefit and creditor’s detriment.  Id.  Under the second element, the creditor must show that holding the member liable for the LLC’s debt is necessary to avoid the consequences of intentional misconduct harmful to the creditor.  Id.

C.  Some Practical, Concrete Advice.

So what can be done to reduce the likelihood than your LLC’s veil is pierced?

For starters LLC members need to comply with Washington’s LLC Act and the LLC’s operating agreement (assuming there is one), and follow corporate formalities so the LLC is not seen as the alter-ego of its members.  For example:

  • If the LLC’s operating agreement requires annual meetings, then annual meetings should be held.  See RCW 25.15.060.
  • Personal funds should not be commingled with LLC funds.
  • LLC money should not be used to pay personal expenses, and vice versa.
  • Contracts should be signed in a member’s capacity as member or manager of the LLC, not in his or her individual capacity.  For example, a contract entered into by a manager-managed LLC should be signed like this:

ABC Services, LLC

/s/ John Doe
Its manager

  • LLC accounting and other records should be kept and properly maintained.  See RCW 25.15.135 for recordkeeping requirements.
  • Business decisions, particularly important ones, should be captured in writing via meeting minutes and a resolution.  See RCW 25.15.120.
  • Member contributions should be evidenced in the LLC’s records.
  • Similarly, member loans to the LLC should be evidenced by appropriate loan documents – like a promissory note.
  • Distributions from the LLC to members (which are different than wages) should not be made unless (1) the LLC has enough money to pay its debts as they come due, and (2) the fair value of the LLC’s assets exceeds the LLC’s liabilities.  See RCW 25.15.235.

D.  Factors Courts Consider When Deciding Whether To Pierce The LLC Veil.

Here is a non-exhaustive list of factors that weigh in favor of piercing an LLC’s veil and holding its members personally liable:

  • The LLC is undercapitalized.
  • Failure to follow corporate formalities.
  • Keeping no or very few corporate records.
  • Siphoning LLC assets or comingling LLC funds with personal funds.
  • Using the LLC to perpetrate a fraud.
  • Ownership of the LLC by one or very few owners.
  • Complete control of the LLC by an individual who treats the LLC as an extension of him or herself.

E.  Conclusion.

Piercing an LLC’s veil is difficult.  Whether a court does so is very fact specific.  LLC owners should consult with an attorney when forming an LLC and throughout the LLC’s life to make sure the business is properly managed, minimizing the risk the owners are held personally liable for the LLC’s debts.  For these and other business-related questions, please feel free to call the attorneys at Zeno Bakalian P.S., at 425-822-1511.

When “Secondhand” Personal Service of Process is Effective

The Issue.  A plaintiff starts a lawsuit by filing a complaint in court and serving the defendant with the summons and complaint within 90 days of the filing date.  For the court to have jurisdiction over the defendant, the defendant must be properly served with the summons and complaint, either personally or by substitute service.  Substitute service typically occurs when a process server serves the defendant by handing the summons and complaint to someone 18 years old or older who lives with the defendant.  Personal service typically occurs when a process server personally hands the summons and complaint to the defendant.  In Scanlan v. Townsend, No. 89853-7 (Nov. 2014), the Washington Supreme Court decided an interesting issue: whether a process server serving a defendant by handing the summons and complaint to her father at his home, where the daughter did not live, was effective service when the father and daughter admit the father handed the daughter the summons and complaint within 90 days of the date the complaint was filed in court.

The Facts.  Scanlan and Townsend were in a car accident on 10/28/08.  On 10/27/11 Scanlan filed the complaint.  A process server tried to serve Townsend at a home in Puyallup on 12/8/11 but the person who answered the door said he did not know Townsend.  On 12/21/11 at a Vancouver, Washington home, the process server served Townsend by handing a man who identified himself as Townsend’s father the summons and complaint.  The process server testified that the father said Townsend lived with the father.  But the father denied making that statement.  Nonetheless, the father and Townsend both admitted that days later the father handed the summons and complaint to Townsend.  Relying on RCW 4.28.080(15), Townsend moved to dismiss the lawsuit for lack of service because she did not live in her father’s home.  Scanlan, on the other hand, argued Townsend did not need to live with her father for service to be effective–as the father was qualified to serve the documents on Townsend.  The trial court agreed with Townsend and dismissed the lawsuit for lack of service.  The Court of Appeals agreed with Scanlan and reversed the trial court.  Townsend appealed.

The Law.  Under RCW 4.28.080(15), service of process can be made “to the defendant personally, or by leaving a copy of the summons at the house of his or her usual abode with some person of suitable age and discretion then resident therein.”  Under CR 4(c), “any person over 18 years of age who is competent to be a witness in the action, other than a party” may serve process.

The Court’s Decision.  The Washington Supreme Court identified the issue as one about personal service, not substitute service.  RCW 4.28.080(15) is clear: substitute service was not effective here because Townsend did not live with her father.  Scanlan got around this by framing the issue as whether “secondhand” personal service was effective–e.g., the father admittedly handing the documents to Townsend a few days after he received them from the process server.  Because the father was over 18 years of age, competent, and not a party to the lawsuit, the Court held he was qualified to serve his daughter (albeit unknowingly) by “secondhand” personal service; affirming the Court of Appeals.

The Take-Away.  If you serve a defendant by substitute service shortly before the statute of limitations expires and the defendant moves to dismiss the case because he or she didn’t live at the home where the documents were delivered: (1) don’t assume you’re out of luck, (2) consider deposing the person who was given the summons and complaint by the process server, and (3) if you discover that person handed the documents to the defendant, then frame the issue as the effectiveness of personal “secondhand” service, not substitute service.

HOA Rental Caps – The Need For 90% Owner Approval & The Risks Of Not Getting It

SUMMARY: Due to a September 2, 2014 court decision, condominium and homeowner associations need to consult with their attorney to determine the enforceability of their rental cap restriction, or face the risk of a lawsuit for violating the Washington Condominium Act and the association’s declaration.  See, Filmore LLLP v. Unit Owners Association of Centre Pointe Condominium (Wash. Ct. App. Div. 1, Sept. 2, 2014).

BACKGROUND: The Court invalidated the association’s amended declaration–which contained its rental cap restrictions–because the amendment was not approved by 90% of the unit owners.  In May 2011 Filmore LLLP, an investor, purchased Unit D-3.  In October 2011 the association adopted (with a 67% approval vote based on RCW 64.34.264(1)) and recorded an amended declaration that restricted leasing to 30% of the condo units.  In September 2012 documents were recorded to divide Unit D-3 into 35 separate units.  Filmore LLLP obtained a $3.6 million commercial loan to finance the construction project.  In October 2012 Filmore sued the association, alleging the association violated the Condominium Act and the association’s own declaration by enforcing the rental restriction without obtaining the 90% approval vote required by RCW 64.34.264(4) (“no amendment may … change … the uses to which any unit is restricted, in the absence of the vote or agreement of the owner of each unit particularly affected and the owners of units to which at least ninety percent of the votes in the association are allocated …”).

THE PARTIES’ ARGUMENTS: The Association argued only 67% approval was required, not 90%, because the word “uses” in the phrase “the uses to which any unit is restricted” in RCW 64.34.264(4) only applies when the association tries to change use from a residential to a nonresidential use; and the rental cap did not change the use to a nonresidential use.  Filmore LLLP, on the other hand, argued “use” is defined broadly to include restrictions on leasing.

THE COURTS’ DECISIONS: The trial court, on summary judgment, sided with Flmore LLLP and concluded “uses” in “uses to which any unit is restricted” includes leasing, not just changes from residential to nonresidential use.  Accordingly, the trial court invalidated the rental cap amendment because the association did not get the required 90% approval.  The association appealed, but lost again before the Court of Appeals.

PLAN OF ACTION: Condominium and homeowner associations should call their attorney to determine if their rental caps are enforceable.  This is especially true considering the potential for a lawsuit and the chance that an association is ordered to pay a unit owner’s costs and attorneys’ fees (based on attorney fee provisions in associations’ governing documents) for enforcing an invalid rental cap restriction.

Do you want your family to have access to your online accounts when you die?

Have you ever wondered what happens to your Facebook, Twitter, or email account–or any online account for that matter–when you die? As this AP article explains, states are beginning to pass laws that grant family members access to their loved one’s online accounts at death. Is this what you would want? You may, so your family can obtain your sentimental photos, videos, emails, posts, etc. Or you may want no part of it – valuing privacy over access. The best option is to clearly clarify your intent in a “digital assets” provision in your will. If you do not have a will, or if it has been a while since you reviewed your will, feel free to call us at 425-822-1511.

http://www.denverpost.com/business/ci_26158347/bill-ensures-emails-photos-wont-die-you

2013 – April 2014 Real Estate Court Cases in Washington

2013-2014 REAL ESTATE CASES IN WA

Click on the above link for a summary of Washington case law from 2013 through April 2014 on topics such as residential and commercial foreclosures, condominium and homeowner associations, construction disputes, easements, adverse possession, residential and commercial landlord-tenant disputes, title insurance, and various other real estate related topics. If you have any questions about these or other legal issues, please do not hesitate to call Zeno Bakalian at 425-822-1511.

Environmental Real Estate Considerations

Environmental Real Estate Considerations

Have you ever wondered what your liability exposure is based on environmental concerns related to your land? Or how about the purchase and sale of potentially contaminated land? The above link leads to a document authored by experienced environmental law attorney Allan Bakalian that addresses these and other questions. The document identifies the pertinent laws and the environmental liability risks faced by owners, buyers and sellers of real estate. It also contains useful tips. If you own property with environmental issues, or are considering buying or selling such a property, do not hesitate to contact Mr. Bakalian by phone at 425-822-1511 x224, or by email at abakalian@zenobakalian.com.