Greenhunter Energy, Inc. v. Western Ecosystems Technology, Inc.
337 P.3d 454, 2014 WY 144, 2014 Wyo. LEXIS 165 (2014)
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Rule of Law:
The veil of a limited liability company (LLC) may be pierced when the company's separateness has ceased to exist due to misuse by its member, and adherence to the fiction of a separate entity would lead to injustice, fundamental unfairness, or inequity.
Facts:
- GreenHunter Energy, Inc. was the sole member and manager of GreenHunter Wind Energy, LLC (LLC).
- In 2009, the LLC entered into a contract with Western Ecosystems Technology, Inc. (Western) for consulting services related to a wind farm project.
- Western fully performed its services under the contract, but the LLC failed to pay any of Western's invoices, which totaled over $43,000.
- The LLC had no employees of its own; its operations were conducted by employees of GreenHunter Energy, and the two entities shared the same business address and general counsel.
- The LLC was consistently undercapitalized, often having a zero balance in its operating account.
- GreenHunter Energy made periodic capital infusions to the LLC's bank account, deciding which specific creditors would be paid, but it never transferred funds to pay Western.
- GreenHunter Energy consolidated the LLC's finances on its federal tax returns, treating the LLC as a disregarded entity to claim over $884,000 in expenses and a $61,000 loss from the LLC's activities.
Procedural Posture:
- Western Ecosystems Technology, Inc. first sued GreenHunter Wind Energy, LLC in a Wyoming district court (court of first instance) for breach of contract.
- The district court entered a judgment in favor of Western for $43,646.10, plus attorney's fees.
- Western was unable to collect the judgment because the LLC had no assets.
- Western then filed a new lawsuit in a Wyoming district court against GreenHunter Energy, Inc., the LLC's sole member, seeking to pierce the corporate veil.
- Following a bench trial, the district court found in favor of Western, piercing the LLC's veil and holding GreenHunter Energy, Inc. liable for the judgment.
- GreenHunter Energy, Inc., as appellant, appealed the district court's decision to the Supreme Court of Wyoming.
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Issue:
Under Wyoming law, may a court pierce the veil of a single-member limited liability company (LLC) to hold its sole member liable for the LLC's contractual debts when the member controls the LLC's finances, keeps it perpetually undercapitalized, intermingles operations, and concentrates benefits in itself while leaving liabilities with the LLC?
Opinions:
Majority - Davis, Justice
Yes, a court may pierce the LLC's veil under these exceptional circumstances. The veil of a limited liability company may be pierced when the entity is not only controlled by its member but has lost its separateness due to misuse, and adherence to its separate existence would lead to injustice or fundamental unfairness. The court established a new two-prong test, moving away from a rigid focus on corporate formalities which the Wyoming LLC Act states are not grounds for piercing. Here, GreenHunter Energy misused the LLC by keeping it perpetually undercapitalized by choice, not by circumstance. It completely intermingled finances and operations, using its own employees and address for the LLC's business and controlling the LLC's bank account to pay only the creditors it selected. Most significantly, GreenHunter Energy manipulated the corporate form to concentrate all benefits (the consulting services and substantial tax deductions) in itself while saddling the assetless LLC with the corresponding liabilities. This combination of undercapitalization and self-serving intermingling created a fundamental unfairness, justifying the piercing of the LLC's veil to prevent an inequitable result.
Analysis:
This decision clarifies and modernizes the doctrine of piercing the veil for LLCs in Wyoming, particularly for single-member LLCs, in light of the 2010 Wyoming LLC Act. The court deliberately moves away from traditional corporate piercing factors, such as failure to observe formalities, which are less relevant to the flexible structure of an LLC. Instead, it establishes a more equitable, fact-driven test focused on substantive misuse and fundamental unfairness. This provides a clearer framework for creditors seeking to hold members liable while warning members that they cannot abuse the LLC structure to reap benefits while externalizing liabilities, even if they comply with tax laws and minimal statutory requirements.
