OWNERS LIABLE FOR COMPANY LIABILITIES   

            A recent Michigan Court of Appeals opinion should prompt all who rely on the protection and flexibility of limited liability companies to re-examine their business practices.

            Florence Cement Co. v Antonio Vettriano, et al. involved a dispute between Shelby Property Investors, LLC and its members, and Florence, a contractor that provided cement and asphalt services on Shelby's construction project.  Florence sought to pierce Shelby's corporate veil and hold the members personally liable for Shelby's debt.

In that regard Florence showed that to finance the project, both Shelby and its members obtained loans from a bank.  Shelby paid its members' loans directly to the bank, even though it had no direct obligation to do so.  Shelby also "reimbursed" its members for earnest money deposits on property purchased and pre-construction carrying costs for Shelby.  There were no promissory notes executed between Shelby and its members.

            In addition Florence showed that in order to obtain a final construction draw, one of Shelby's members submitted a sworn-statement of amounts owed to its contractors that fraudulently under-reported the amount owed by Shelby to Florence.  Florence was the only contractor on the project that was not paid in full and as a result lost more than $100,000 for work performed.

Finally, Shelby was undercapitalized at the time it contracted with Florence.  Shelby owed millions of dollars and reported capital contributions of only $2,000.  The members knew or should have known that when Shelby attempted to settle the Florence account, there would be insufficient funds to do so.

            Since Shelby's members treated their own liabilities as Shelby's liabilities and Shelby's liabilities as their own, intentionally undercapitalized Shelby, which resulted in Shelby being continuously insolvent, and falsified a sworn statement to the bank, Florence, having incurred true economic loss, satisfied all the elements for piercing the corporate veil. 

            This case provides a cautionary tale to those who test the boundaries of the flexibility of the limited liability company form.  If LLC members do not respect the separate form of its limited liability company, a Court may not either.  It is particularly important to execute promissory notes and other appropriate documents when loaning money to your LLC or transferring assets to your LLC.