Sky Cable, LLC v. DirecTV, Inc.
886 F.3d 375 (2018)
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Rule of Law:
Under Delaware law, a court may apply the remedy of 'outsider reverse veil piercing' to hold a single-member limited liability company (LLC) liable for the debts of its sole member when the LLC is found to be the member's alter ego. The Delaware LLC charging statute does not provide the exclusive remedy in such circumstances, as alter ego piercing is a distinct equitable remedy not barred by the statute.
Facts:
- In 2000, Randy Coley, through his company East Coast Cablevision (ECC), contracted with DIRECTV to provide programming to 168 rooms at the Massanutten Resort.
- By May 2011, Coley was providing DIRECTV programming to over 2,500 units at the resort but continued to pay DIRECTV only for the original 168 units, fraudulently retaining the excess revenue.
- Coley was the sole member of a Delaware LLC named Its Thundertime, LLC (ITT), which was formed in 2008 to hold title to various real properties.
- Coley was also the sole member of two other LLCs, East Coast Sales and South Raleigh Air, which managed the properties owned by ITT.
- Coley continuously commingled his personal funds with those of his three LLCs, failing to observe corporate formalities or maintain complete records of transfers.
- Funds from Coley's LLCs were used to pay personal expenses, including mortgage payments on properties for which Coley and his wife, Kimberli Coley, were the personal mortgagors.
- During pre-judgment proceedings, both Randy Coley and Kimberli Coley testified under oath that he was the sole member of ITT and she had no ownership interest in any of his companies.
Procedural Posture:
- Sky Cable, LLC sued Randy Coley, Kimberli Coley, and DIRECTV in the U.S. District Court for the Western District of Virginia.
- DIRECTV filed cross-claims against Mr. Coley, Mrs. Coley, and their company, ECC, for unauthorized distribution of its programming.
- The district court entered a judgment exceeding $2.3 million in favor of DIRECTV against Mr. Coley and ECC.
- Based on representations that she had no ownership interest in Mr. Coley's companies, DIRECTV stipulated to the dismissal of its claims against Mrs. Coley with prejudice.
- After being unable to collect on the judgment from Mr. Coley, DIRECTV filed a post-judgment motion in the same district court to 'reverse pierce the corporate veil' of three of Mr. Coley's LLCs, including Its Thundertime, LLC (ITT).
- The district court granted DIRECTV's motion, entering an amended judgment that rendered the LLCs co-judgment debtors with Mr. Coley.
- Mr. Coley, Mrs. Coley, and ITT (the appellants) appealed the district court's post-judgment order to the U.S. Court of Appeals for the Fourth Circuit.
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Issue:
Does Delaware law permit a court to 'reverse pierce the corporate veil' of a single-member limited liability company (LLC) to satisfy a judgment against its sole member when the LLC is determined to be the member's alter ego?
Opinions:
Majority - Judge Keenan
Yes, Delaware law would permit outsider reverse piercing of an LLC's veil when the LLC is the alter ego of its sole member. The court predicted that Delaware courts would adopt this remedy because it follows logically from the premises of traditional veil piercing, which is an established equitable remedy in Delaware used to prevent fraud and injustice. The court reasoned that reverse piercing is particularly appropriate for a single-member LLC, as it obviates any concern about harming innocent members. Furthermore, Delaware has a strong interest in preventing entities it charters from being used as vehicles for fraud, and allowing a member to hide assets in an alter ego LLC would undermine this interest. The court also held that Delaware’s LLC charging statute, 6 Del. Code § 18-703, does not provide the exclusive remedy for a judgment creditor. Applying the canon of ejusdem generis, the court determined that reverse piercing under an alter ego theory is a fundamentally different equitable remedy than the enumerated legal remedies of 'attachment, garnishment, [and] foreclosure,' and is therefore not prohibited by the statute's exclusivity clause. Finally, the court affirmed the factual finding that ITT was Coley's alter ego due to the overwhelming evidence of commingled funds, lack of corporate formalities, and Coley's complete domination and control over the LLC, which created an 'overall element of injustice or unfairness'.
Analysis:
This decision establishes a significant precedent in the Fourth Circuit for creditors seeking to enforce judgments against individuals who use single-member LLCs to shield personal assets. By predicting that Delaware would recognize 'outsider reverse veil piercing,' the court provides a powerful tool to combat fraud and prevent judgment debtors from hiding assets in plain sight. The ruling clarifies that statutory remedies like charging orders do not preempt traditional equitable doctrines, preserving judicial flexibility to achieve justice in exceptional cases. This holding will likely influence future litigation by encouraging creditors to pursue alter ego theories against single-member LLCs and discouraging individuals from using such entities as personal piggy banks to evade their debts.
