McCarthy v. Wani Venture, A.S.
2007 WL 1845088, 251 S.W.3d 573 (2007)
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Rule of Law:
The common law doctrine of piercing the corporate veil applies to a Limited Liability Company (LLC), allowing a member to be held personally liable for the LLC's contractual debts if the member caused the LLC to be used to perpetrate an actual fraud for their own direct personal benefit.
Facts:
- Marcie McCarthy, Michael Moschella, and Anthony Moschella formed Triple M Supply, LLC, a wallboard distributor, with McCarthy providing an initial contribution of $391,000.
- Norgips, a wallboard manufacturer, agreed to make Triple M Supply its exclusive distributor in the East Texas market and shipped approximately $1.8 million of wallboard to them based on a purchase order.
- Triple M Supply was consistently late with payments to Norgips, and in October 2000, its $108,000 check to Norgips was returned for insufficient funds.
- The owners of Triple M Supply created a web of interrelated companies, including Triple M Operating, which, without Norgips's knowledge, began invoicing customers and collecting payments for the sale of Norgips's wallboard.
- Anthony Moschella informed Norgips that he had diverted $150,000 collected from sales of Norgips's wallboard to another one of his business ventures in Mexico.
- Triple M Supply's owners represented to Norgips that the company's accounts receivable would be pledged to Norgips, despite these assets having already been pledged to other creditors.
- While Norgips remained unpaid, Triple M Operating took out a $600,000 loan, of which $391,000 was used to fully reimburse McCarthy for her initial contribution to Triple M Supply.
- Triple M Supply ultimately failed to pay Norgips for $541,850.32 worth of wallboard it had received and sold.
Procedural Posture:
- Wani Venture, A.S. (as successor to Norgips) sued Triple M Supply, Marcie McCarthy, and several other related entities and individuals in a Texas state trial court, alleging fraud and seeking to pierce the corporate veil.
- Prior to trial, all defendants except Marcie McCarthy were removed from the case due to bankruptcy, severance, or non-suiting.
- The case against McCarthy proceeded to a jury trial.
- The jury found that McCarthy caused Triple M Supply to be used to perpetrate an actual fraud on Norgips for her own direct personal benefit.
- The trial court rendered a final judgment against McCarthy, holding her personally liable for $669,957.
- McCarthy, as appellant, appealed the trial court's judgment to the Court of Appeals of Texas, First District.
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Issue:
Can the veil of a limited liability company (LLC) be pierced to hold a member personally liable for the company's contractual debt when a jury finds that the member caused the LLC to be used to perpetrate an actual fraud for their own direct personal benefit?
Opinions:
Majority - Justice George C. Hanks, Jr.
Yes. The veil of an LLC can be pierced to hold a member personally liable under these circumstances. Although the Texas Limited Liability Company Act (TLLCA) is silent on the issue of piercing the veil, Texas courts apply the same common law principles used for corporations to LLCs. The court disregarded the LLC's limited liability protection because the jury found sufficient evidence that McCarthy caused Triple M Supply to be used as a sham to perpetrate a fraud. This fraud was primarily for her own direct personal benefit, as evidenced by her being repaid her initial $391,000 contribution at the expense of Norgips and other creditors, her awareness of the commingling of funds, and her funding which made the entire fraudulent scheme possible.
Dissenting - Justice Terry Jennings
No. The evidence was legally insufficient to pierce the LLC veil and hold McCarthy personally liable. The dissent argues that there is no evidence McCarthy caused Triple M Supply to be used to defraud Norgips, nor that any alleged fraud was primarily for her direct personal benefit. While McCarthy provided initial funding and was aware of some questionable business practices, there is no proof she knew about the specific fraudulent scheme against Norgips or that she was a substantial factor in bringing about Norgips's injury. The dissent concludes that Norgips presented many disconnected facts but failed to build a coherent case proving McCarthy's direct involvement in the fraud.
Analysis:
This case is significant for establishing that the equitable remedy of piercing the corporate veil is applicable to Texas Limited Liability Companies, even in the absence of an express statutory provision. It affirms that the limited liability shield, a key feature of LLCs, is not absolute and will be disregarded by courts to prevent fraud or injustice. The decision solidifies the legal principle that individuals cannot use the LLC structure as a sham to defraud creditors for personal gain and escape liability, thereby aligning the treatment of LLCs with that of traditional corporations in alter ego and fraud cases.
