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Preserving LLC Veil Piercing: A Response to Bainbridge

Geoffrey Christopher Rapp
ABSTRACT ............................................................................................................. 1063
I. INTRODUCTION ...................................................................................................... 1064
II. A SHORT EMPIRICAL HISTORY OF THE LLC AND PIERCING THE COMPANY VEIL .. 1068
III. RESPONDING TO THE CASE AGAINST LLC VEIL PIERCING .................................... 1077
A. Statutory Critique ............................................................................................. 1077
B. Policy Concerns................................................................................................ 1080
1. Indeterminacys Last Stand? ....................................................................... 1080
a. Indeterminacys Limited Costs in the LLC Context ................................. 1081
2. Reversing Tort Reform................................................................................. 1085
IV. THE EFFICIENCY CASE FOR LLC VEIL PIERCING ................................................... 1087
A. Safety Valve Efficiency ..................................................................................... 1088
B. Settlement-Forcing Effects................................................................................ 1090
C. Limited Liabilitys Few Advantages in an LLC Context................................... 1093
V. CONCLUSION ......................................................................................................... 1095
ABSTRACT
Veil piercing is the most litigated area of American corporate law. Corporate laws
most dramatic revolution of the last quarter-century has been the emergence of the
Limited Liability Company (LLC) as the dominant business form for small businesses.
Veil piercing has now been widely recognized in the LLC context, but has recently come
under attack from prominent business law scholars. This Article offers the first thorough
theoretical and policy defense of veil piercing in the LLC context. First, the Article
attempts to provide a short quantitative analysis of the actual record of courts regarding
LLC veil piercing litigation. The record so far indicates that courts are not applying veil
piercing in the LLC context in a substantially different way than they apply it in the
Assistant Professor, University of Toledo College of Law; A.B. (Economics), Harvard College; J.D,
Yale Law School. Excellent comments were provided by John Tehranian, Associate Professor at the University
of Utahs S.J. Quinney School of Law and Howard Friedman and Bill Richman, Distinguished University
Professors at the University of Toledo College of Law. I am also indebted to three reviewers who evaluated this
piece as part of the renewal process at the University of Toledo: Larry Ribstein, Richard W. and Marie L.
Corman Professor of Law at the University of Illinois at Urbana-Champaign; George Dent, Schott-van den
Eynden Professor of Business Organizations Law at Case Western Reserve University School of Law; and
Gordon Smith, Professor of Law at the University of Wisconsin. These readers provided invaluable criticism on
an early draft of this Article.
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The Journal of Corporation Law
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corporate context. Second, the Article takes up the arguments of LLC veil piercing
critics. While many LLC statutes are indeed silent regarding whether the corporate veil
piercing doctrine applies in the LLC context, evidence from the foreign antecedents of
the LLC, on which some LLC statutes were explicitly based, provides a hint of legislative
intent on the matter. Moreover, while veil piercing no doubt introduces some
indeterminacies to the small business environment, abolishing the well-established
doctrine in the LLC context would have the perverse effect of creating even greater
indeterminacies. Finally, the Article provides two novel efficiency justifications for LLC
veil piercing. LLC veil piercing helps avoid exposing litigants to unjust laws and thus
reduces their likelihood to flout other legal and regulatory regimes. LLC veil piercing
also helps align properly settlement incentives for at-times recalcitrant defendants.
I. INTRODUCTION
Scholars and business law practitioners are now widely familiar with the most
important organizational form revolution of the post-World War II era: the Limited
Liability Company.2 Limited Liability Companies (LLCs) sprang into existence twentyfive years ago but leapt to the forefront of small business law in America only in the last
fifteen, with the resolution of their tax status. While adoption of the new form in the
practitioner community has been widespread,3 numerous questions remain about the legal
ramifications of this organizational form.4 Questions persist about the dissolution of
LLCs, the scope of fiduciary duties owed by LLC members and managers, the status of
LLCs under the federal securities laws, and the transferability of member interests.5
Scholars have often neglected LLC issues;6 courts have not shown the same sort of
studied lack of inquiry, but because of the nature of the litigation process, have been slow
to answer all of the questions LLCs pose.7
2. See Robert B. Thompson, The Taming of Limited Liability Companies, 66 U. COLO. L. REV. 921, 921
(1995) (Limited liability company statutes have swept the country . . . . Given this rapid spread of statutes and
the large number of business enterprises that are using this form of business in some states, commentators have
predicted the end of close corporations, S corporations, partnerships, or other forms of closely held business
entities.).
3. See MELVIN ARON EISENBERG, AN INTRODUCTION TO AGENCY, PARTNERSHIPS, AND LLCS 162
(2005); Howard M. Friedman, The Silent LLC RevolutionThe Social Cost of Academic Neglect, 38
CREIGHTON L. REV. 35, 35 (2004) (stating that over 45% of new businesses are LLCs).
4. EISENBERG, supra note 3, at 157-62 (summarizing legal issues in emerging LLC case law).
5. Id. at 160-61. See also David L. Cohen, Theories of the Corporation and the Limited Liability
Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility
and Securities Regulation for the Limited Liability Company?, 51 OKLA. L. REV. 427, 453 (1998).
6. See Friedman, supra note 3, at 35.
The [LLC] has become the dominant form for newly-created small businesses in a clear majority
of states . . . . Yet reading the legal literature, one would never suspect this . . . . Law schools, law
professors, law publishers, bar examiners and others usually responsible for disseminating cutting
edge developments have been surprisingly absent from the playing field much of the time.
Id. But see Leigh A. Bacon, Note, Freedom of or Freedom From? The Enforceability of Contracts and the
Integrity of the LLC, 50 DUKE L.J. 1087, 1087 (2001) (The sudden growth of limited liability company (LLC)
legislation in the past ten years has been accompanied by a [direct] corresponding amount of scholarship
dedicated to the logistics, concerns, and implications of the limited liability company.).
7. See Chad Brigham, Comment, Just How Limited is the Illinois Limited Liability Company?, 26 S. ILL.
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Preserving LLC Veil Piercing
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One of the apparently answered questions8 is the degree to which LLCs will be
subject to the traditional corporate law doctrine of veil piercing.9 Some business
entitiesin particular, the corporation, the LLC,10 and, to a lesser degree, the Limited
Partnership11provide that investors will only be liable to the extent of their investment
for the debts of the business entity.12 That is to say, the liability of such investors is
limited. However, a plaintiff creditor may ask that the veil of such an entity be lifted
to permit the owners separate assets to be used to satisfy a judgment against the entity.
Courts were initially forced to determine whether veil piercing would be permitted in the
LLC context. That answer, given unanimously by the courts addressing this question,
appears to be yes.13
Veil piercing has been one of the most hotly debated concepts in business law.14
Unlike many concepts in American corporate law, there are strong, even moralistic
arguments on both sides of the veil piercing debate, and thus it has become a lightning
rod for academic dispute.
Influential UCLA business law scholar Stephen Bainbridge15 recently returned16 to
the veil piercing debate in the pages of the University of Illinois Law Review, this time
U. L.J. 53, 63 (2001); Fredric J. Bendremer, Delaware LLCs and Veil Piercing: Limited Liability Has its
Limitations, 10 FORDHAM J. CORP. & FIN. L. 385, 395-97 (2005).
8. Initially, commentators were forced to speculate about the likelihood of veil piercing based on
statutory interpretation and analogy. See, e.g., Brigham, supra note 7, at 63; see also Thompson, supra note 2,
at 939-40 (LLCs do extend limited liability, but it is unlikely that this insulation will reach beyond what is
available in the corporate form.); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 GEO.
WASH. L. REV. 1143, 1144 (1994) (It is widely assumed that the common law doctrine of piercing the
corporate veil is applicable to LLCs, but this is not a certainty. No court has pierced the veil of a domestic
LLC.); Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company, From Sure Bet to Long
Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd., 22 J. CORP. L. 131 (1996).
9. Veil piercing is the most litigated issue of corporate law. See Robert B. Thompson, Piercing the
Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1036 (1991).
10. LARRY E. RIBSTEIN & ROBERT R. KEATINGE, 2 RIBSTEIN & KEATINGE ON LIMITED LIABILITY
COMPANIES 12:1 (2004) (All the LLC statutes explicitly provide that neither the members nor managers of
an LLC are liable for debts, obligations, or other liabilities of the LLC.); Gelinas v. Fuss, Civ. A. No.
CV030070629, 2004 WL 728536, at *3 (Conn. Super. Ct. Mar. 19, 2004) ([A]n hallmark of the limited
liability company is its corporate-styled liability shield.).
11. See RIBSTEIN & KEATINGE, supra note 10, 12:6.
12. See Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L.
REV. 89, 89-90 (1985).
13. See Filo Am. v. Olhoss Trading Co., LLC, 321 F. Supp. 2d 1266, 1269 (M.D. Ala. 2004) (collecting
cases). Some courts, however, have avoided explicitly ruling that veil piercing is available in the LLC context
even as they discussed and ruled on arguments regarding veil piercing. See, e.g., Imperial Trading Co., Inc. v.
Uter, 837 So. 2d 663, 670 n.10 (La. Ct. App. 2003) (In so ruling, we render no opinion as to whether veil
piercing is available in the case of limited liability companies as it is in the case of corporations.). While no
court has denied that veil piercing is available in the LLC context, that is not to say that courts have always
found the factual predicate upon which to pierce a particular LLCs veil. See infra Part II.
14. See Bendremer, supra note 7, at 385 (The doctrine of veil piercing has been the subject of numerous
judicial decisions and scholarly commentary.).
15. Bainbridges influence extends beyond his actual scholarly work on the issue of LLC veil piercing. He
is the author of one of the leading books on unincorporated associations, see STEPHEN M. BAINBRIDGE,
AGENCY, PARTNERSHIP & LIMITED LIABILITY COMPANIES (2004), as well as a web log dealing with law,
business and economics, Catholicism, politics and current events, http://www.professorbainbridge.com.
16. Bainbridge originally directed his criticism towards veil piercing in the corporations context in the
pages of this journal. See Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479 (2001).
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directing his attention to the use (and in his view, abuse) of veil piercing in the LLC
context. In a scathing attack, Bainbridge argues that veil piercing has no place in the
developing case law of the LLC.17
While courts have universally embraced veil piercing in the LLC context,18 no
recent scholarship has offered a convincing theoretical justification for preserving the
doctrine as applied to LLCs.19 This Article attempts to fill that gap in the literature. The
primary thrust of my argument is that veil piercing is not only appropriate in the LLC
context, but also that company veil piercing is, when compared to corporate veil piercing,
perhaps even more efficiency enhancing. This conclusion arises from a consideration of
the particular role that LLCs have come to play in the modern American economy.
An LLC is frequently described as a hybrid entity meant to achieve the limited
liability advantages of a corporation with the management flexibility and favorable tax
treatment of a partnership.20 If the LLC is a hybrid in any meaningful sense, it would
seem logical that its legal treatment would fall somewhere in between the partnership and
the corporation21closer to whichever forbearer is more relevant on a particular issue.
On the issue of limited liability, the LLC would be expected to fall between a corporation
and a partnership, closer to the corporation, since the LLC draws its limited liability
characteristic from the corporation.22 Calls to abolish LLC veil piercing would up-end the
common sense location of LLCs on the spectrum between corporations and
partnerships.23 LLCs would lose their hybrid nature (at least with respect to this issue)
and become a form of super-limited liability entity. That odd result cannot be what the
framers of LLC statutes intended, and it would not be good policy.24
17. Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. ILL. L. REV. 77 (2005). Bainbridges
critique was anticipated nearly a decade ago by Robert B. Thompson: It will not be long before lawyers argue
that the LLC should give greater liability protection to active participants than is available to officers and
directors within the corporate form. Thompson, supra note 2, at 941.
18. Of course, some jurisdictions have yet to address LLC veil piercing. Bendremer, supra note 7, at 39697.
19. Bainbridge, supra note 17, at 93 (It is surprisingly difficult to find coherent explanations of the policy
justifications for piercing the LLC veil, as opposed to mere assertions by fiat that such reasons exist.); see also
Fox, supra note 8, at 1167 ([N]o thorough analysis of the applicability of the veil piercing doctrine to LLCs
exists.).
20. See, e.g., Robinson v. Glynn, 349 F.3d 166, 174 (4th Cir. 2003) ([LLCs] are hybrid business entities
that combine features of corporations, general partnerships, and limited partnerships.); Bendremer, supra note
7, at 386 (LLCs represent a hybrid between corporations and partnerships.); Friedman, supra note 3, at 47
(The LLC is a hybrid, embodying some elements of the partnership form and other elements that are normally
aspects of the corporation.); Charles W. Murdock, Fairness and Good Faith as a Precept in the Law of
Corporations and Other Business Organizations, 36 LOY. U. CHI. L.J. 551, 558 (2005) ([A]n LLC is a hybrid
form of organization, having both partnership and corporate characteristics.); Jeffrey K. Vandervoort, Piercing
the Veil of Limited Liability Companies: The Need for a Better Standard, 3 DEPAUL BUS. & COM. L.J. 51, 51
(2004) ([T]he LLC is essentially a hybrid, combining characteristics of both partnerships and corporations.).
21. See Thompson, supra note 2, at 922 ([T]he originality of the LLC form is not as great as it first might
seem. Courts are going to be confronted with business entity problems within their common experience from
deciding other business association issues.).
22. See Bendremer, supra note 7, at 405 ([G]eneral partnership law has little bearing on LLC veil
piercing because there is no veil or shield in the first instance.).
23. Even critics of veil piercing in the LLC context acknowledge its intuitive logic. Bainbridge, supra
note 17, at 90.
24. Interestingly, the Massachusetts Business Trust, or modern business trust, is a possible super-limited
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Central to the argument advanced in this Article is the fact that LLCs are used
largely in small business settings.25 While LLCs can be publicly held,26 and therefore
could come to replace corporations as the organizational form of choice for large
businesses, they have not done so, and there is no indication that they will.27 LLCs are
most attractive for small businesses because of the informality and flexibility which they
offer.28
Part II offers a short empirical history of LLCs and veil piercing jurisprudence in
that context. In Part III, I take up Bainbridges critique of LLC veil piercing and respond
to each of the criticisms made. I begin with the statutory critique, and point out that even
if LLC statutes leave the fate of veil piercing unresolved, useful insights can be gained
from analyzing the role of veil piercing in the foreign antecedents of the LLC. I also
address Bainbridges primary criticism of LLC veil piercing, namely its potential to
increase transaction costs for small businesses by introducing indeterminate legal rules
into the LLC environment. I suggest that abolishing veil piercing would perversely
introduce the same sort of indeterminacies. Part IV offers several substantial efficiency
justifications for veil piercing in the LLC context. This Part attempts to frame, for the
first time, certain long-standing justifications for veil piercing in terms of their economic
efficiency. In addition, I offer a never-before analyzed justification for veil piercing as a
settlement-forcing device to counteract informational asymmetries between plaintiffs and
defendants and the strategic inefficiencies they produce. Part IV also explores how the
primary justifications for limited liability, ease of ownership transfer and capital
accumulation, are largely irrelevant in the real-world LLC environment. Finally, in Part
V, I suggest avenues for policy reform and further research.
One might wonder why this Article targets LLC veil piercing for defense, rather
than the broader concept of limited liability entity veil piercing. Many of the arguments
articulated in this Article could be applied, with equal force, to a defense of corporate veil
piercing. The reason for my focus on LLCs, rather than corporations and LLCs, is
straightforward. While corporate veil piercing is well-established in the common law, and
is unlikely to face abolition in the near future, LLC veil piercing is not. The courts
liability form. While there is very little case law on the issue, courts appear to be reluctant to pierce the veil of
these trusts in spite of their similarity to corporate entities. See, e.g., Inside Scoop, Inc. v. Curry, 755 F. Supp.
426, 430 (D.D.C. 1989) (After extensive research, the Court was unable to locate caselaw that would support
[veil piercing] against a business trust. While it is arguable that the characteristics of a business trust may lend
themselves to a similar analysis, the Court is unwilling to extend the doctrine in this manner.). However, the
holders of trust certificates may be liable when they instruct a trustee to commit a tortious act. See Piff v.
Berresheim, 92 N.E.2d 113 (Ill. 1950) (noting same). This is a form of individual liability, not of veil piercing.
25. Statistics on LLC incorporation indicate that the average LLC had four members as of 2002,
suggesting LLCs are not used in the formation of large, diversified companies but predominantly for closely
held entities. See EISENBERG, supra note 3, at 162. The fact that LLCs are largely small business entities is
further substantiated by the fact that the net income of general partnerships and limited partnership exceeds the
net income of LLCs. Id.; see also Bainbridge, supra note 17, at 102.
26. Bainbridge, supra note 17, at 99.
27. Id.
28. Friedman, supra note 3, at 54. The LLC offers small businesses the management flexibility and
favorable tax treatment of a partnership along with the limited liability characteristics of a corporation. See
generally id. Because LLCs can be organized along whatever lines their founders choose, cumbersome
requirements from corporate law, such as the need for shareholder voting for corporate boards and the need for
regular meetings, can be avoided.
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currently confronting the issue of whether to allow veil piercing in LLCs, or whether to
pierce the veil in a particular LLC case, are often addressing a matter of first impression.
Opponents of veil piercing are far more likely to have success in the LLC area than in the
corporate law area in convincing courts to walk away from veil piercing as an option.
Therefore, this Article concentrates on building an affirmative defense of LLC veil
piercing in particular. This Article responds to Bainbridges piece precisely because that
piece is so well argued and could prove influential.
II. A SHORT EMPIRICAL HISTORY OF THE LLC AND PIERCING THE COMPANY VEIL
While it is safe to assume that most readers are generally familiar with the
emergence of the LLC and that history has been largely explored elsewhere,29 a short
background discussion of the organizational form and early veil piercing cases in this
context may nevertheless be helpful to the uninitiated. Indeed, only recently has the true
extent of the silent LLC revolution become clear.30
Wyoming enacted the first LLC statute in 1977,31 but it was not until 1988 that
LLCs received considerable attention following an IRS ruling clarifying that they could
be taxed like partnerships in spite of their limited liability status.32 After that, LLC
statutes quickly spread. As of 2002, 946,000 LLCs had been formed under these new
laws.33 During the period 1996-2002, the number of LLCs increased by more than 400%
(there were only 221,000 in 1996).34 During the same period, the number of general
partnerships fell by 25%.35 By 2002, there were more LLCs than general partnerships;36
while there remain more corporations than LLCs, LLCs dominate new filings in a
number of states.37 Nationwide, 45% of new business filings are LLCs.38
The first reported case in which a plaintiff sought to pierce the veil of an American39
Limited Liability Company was the 1997 case Ditty v. CheckRite, Ltd., Inc.40 Between
that date and August 5, 2005, there have been sixty-one additional rulings on substantive
LLC veil piercing.41
29. See, e.g., Friedman, supra note 3, at 44-49. See generally Carol R. Goforth, The Rise of the Limited
Liability Company: Evidence of a Race Between the States, But Heading Where?, 45 SYRACUSE L. REV. 1193
(1995).
30. See generally Friedman, supra note 3.
31. See infra notes 108-109 and accompanying text.
32. See Carol R. Goforth, Continuing Obstacles to Freedom of Choice for Management Structure in LLCs,
1 J. SMALL & EMERGING BUS. L. 165, 171 (1997).
33. See EISENBERG, supra note 3, at 162.
34. Id.
35. Id.
36. Id.
37. See generally Friedman, supra note 3.
38. Id. at 35.
39. There are prior cases involving efforts to pierce foreign LLC veils. See, e.g., Hestern Intl Corp. v.
Fed. Republic of Nig., 879 F.2d 170 (5th Cir. 1989) (Nigerian LLC); Abu-Nassar v. Elders Futures, Inc., No. 88
Civ. 7906, 1991 WL 45062 (S.D.N.Y. Mar. 28, 1991) (Lebanese LLC).
40. 973 F. Supp. 1320 (D. Utah 1997) (denying plaintiffs motion for directed verdict on LLC veil
piercing claim).
41. Hollowell v. Orleans Regl Hosp. LLC, 217 F.3d 379 (5th Cir. 2000); Hudson United Bank v. Pena,
No. Civ.A 03-0158, 2005 WL 736603 (E.D. Pa. Mar. 30, 2005); Morgan v. Powe Timber Co., 367 F. Supp. 2d
1032 (S.D. Miss. 2005); United States v. Mountzoures, No. C.A. 03-12188-JLT, 2005 WL 1405502 (D. Mass.
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The first state supreme court to address whether an LLCs veil could be pierced was,
fittingly, Wyomings, which ruled in 2002 in the Kaycee Livestock case that an LLCs
2005); Tony Jones Apparel, Inc. v. Indigo USA LLC, No. 03 C 0280, 2005 WL 1667789 (N.D. Ill. July 11,
2005); Manos v. Geissler, No. 02 Civ. 9760, 2005 WL 1676740 (S.D.N.Y. July 18, 2005); Hunter v.
Youthstream Media Networks, Inc., 241 F. Supp. 2d 52 (D. Mass. 2002); Essex Real E Group v. River Works,
LLC, No. 01 C 5285, 2002 WL 1822913 (N.D. Ill. Aug. 7, 2002); Zeke N' Zoe Corp. v. Zeke N' Zoe LLC, No.
01 Civ. 4780, 2002 WL 72947 (S.D.N.Y. Jan. 18, 2002); Andrews v. Kerr McGee Corp., No. 1:00CV158-D-A,
2001 WL 1704144 (N.D. Miss. Dec. 5, 2001); Lincoln Diversified Sys., Inc. v. Mas Plus, Inc., No. 98 Civ.
5593, 2000 WL 1880338 (S.D.N.Y. Dec. 27, 2000); Bunch v. Centeon, LLC, No. 99 C 3511, 2000 WL
1741905 (N.D. Ill. Nov. 24, 2000); In re Crowe Rope Indus., LLC, 307 B.R. 1 (Bankr. D. Me. 2004); Indus.
Controls of Okla., Inc. v. Am. Renewable Res., LLC, No. 03-00655R, 2004 WL 2952664 (Bankr. N.D. Okla.
2004); In re Giampiertro, 317 B.R. 841 (Bankr. D. Nev. 2004); In re BHB Enters., LLC, No. C/A 97-01975-W,
1998 WL 2016846 (Bankr. D.S.C. Sept. 30, 1998); In re Sanner, 218 B.R. 941 (Bankr. D. Ariz. 1998); In re
Multimedia Commcns Group Wireless Assn of Liberty County, Georgia, L.C., 212 B.R. 1006 (Bankr. M.D.
Fla. 1997); Marina, LLC v. Burton, No. CA 97-1013, 1998 WL 240364 (Ark. Ct. App. May 6, 1998); Triple
"R" Serv. v. Watson, No. G033798, 2005 WL 1023236 (Cal. Ct. App. May 3, 2005); City & County of San
Francisco v. Boyd Hotel LLC, No. A105625, 2005 WL 958222 (Cal. Ct. App. Apr. 26, 2005); Sunscript Pharm.
Corp. v. Cassidy, No. A105483, 2005 WL 605709 (Cal. Ct. App. Mar. 16, 2005); Stinky Love, Inc. v. Lacy, No.
B163377, 2004 WL 1803273 (Cal. Ct. App. Aug. 13, 2004); Allison v. Danilovic, No. B163363, 2004 WL
2797988 (Cal. Ct. App. Dec. 7, 2004); Kalashian v. Krebs, No. G032397, 2004 WL 2700618 (Cal. Ct. App.
Nov. 29, 2004); Peinado v. Barnett, No. A093923, 2001 WL 1380441 (Cal. Ct. App. Nov. 6, 2001); Great Neck
Plaza, L.P. v. Le Peep Rests., LLC, 37 P.3d 485 (Colo. Ct. App. 2001); Morris v. Cee Dee, LLC, No. 25279,
2005 WL 1691496 (Conn. App. Ct. July 26, 2005); KLM Indus. v. Tylutki, 815 A.2d 688 (Conn. App. Ct.
2003); Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298 (Conn. App. Ct. 2002); McKeon v. Rinaldi, No.
CV044001110S, 2005 WL 1331641 (Conn. Super. Ct. May 11, 2005); Pompilli v. Pro-Line Painting, No.
CV044001774, 2005 WL 1433185 (Conn. Super. Ct. May 13, 2005); Bowen v. 707 on Main, No.
CV020282643S, 2004 WL 424501 (Conn. Super. Ct. Feb. 24, 2004); Strouch v. 72 Degrees Heating & Air
Cond., LLC, No. 568119, 2004 WL 2397279 (Conn. Super. Ct. Sept. 24, 2004); Law Offices of Gary Oberst,
PC v. Omerta, LLC, No. CV030197379, 2004 WL 2757633 (Conn. Super. Ct. Nov. 4, 2004); Ackerman v.
Sobol Family Pship, LLP, No. CV030826123, 2004 WL 1194067 (Conn. Super. Ct. May 12, 2004); McGovern
Capital, LLC v. Ed Papic, No. CV020190931S, 2003 WL 21267436 (Conn. Super. Ct. May 21, 2003); Handy v.
Home Funding Res., LLC, No. X01CV020172219S, 2003 WL 22905137 (Conn. Super. Ct. Nov. 21, 2003);
Dornfried v. Granquist, No. CV000502628, 2003 WL 1996024 (Conn. Super. Ct. Mar. 27, 2003); Jackson v.
Carlos Supermkt., LLC, No. CV000599734, 2002 WL 378317 (Conn. Super. Ct. Feb. 14, 2002); Harold Cohn
& Co., Inc. v. Harco Intl, LLC, No. CV990089169, 2001 WL 523540 (Conn. Super. Ct. May 2, 2001); Stone v.
Frederick Hobby Assocs. II, No. CV000181620S, 2001 WL 861822 (Conn. Super. Ct. July 10, 2001); Tyree v.
Wellfleet Nat. Mortg., LLC, No. CV 950147103, 1998 WL 422134 (Conn. Super. Ct. July 10, 1998); Trs. of
Vill. of Arden v. Unity Constr. Co., No. C.A. 15025, 2000 WL 130627 (Del. Ch. Jan. 26, 2000); S. Land Title,
Inc. v. N. Georgia Title, Inc., 606 S.E.2d 43 (Ga. Ct. App. 2004); Bonner v. Brunson, 585 S.E.2d 917 (Ga. Ct.
App. 2003); Estate of Countryman v. Farmers Co-op. Ass'n, 679 N.W.2d 598 (Iowa 2004); Imperial Trading
Co., Inc. v. Uter, 837 So.2d 663 (La. Ct. App. 2003); F.G. Bruschweiler (Antiques) Ltd. v. GBA Great British
Antiques, LLC, 860 So.2d 644 (La. Ct. App. 2003); Hamilton v. AAI Ventures, LLC, 768 So.2d 298 (La. Ct.
App. 2000); Mowles v. Predictive Control Sys., Inc., No. Civ.A. CV-02-355, 2003 WL 23109994 (Me. Super.
Ct. Dec. 4, 2003); Lily Transp. Corp. v. Royal Institutl Servs., Inc., No. 03-P-1263, 2005 WL 1836905 (Mass.
App. Ct. Aug. 5, 2005); Shoaff v. Baldwin, No. 248606, 2005 WL 267796 (Mich. Ct. App. Feb. 3, 2005); Tom
Thumb Food Mkts., Inc. v. TLH Props., LLC, No. C9-98-1277, 1999 WL 31168 (Minn. Ct. App. Jan. 26,
1999); Milistar (NY) Inc. v. Natasha Diamond Jewelry Mfrg., LLC, 18 A.D.3d 402 (N.Y. App. Div. 2005);
Retropolis, Inc. v. 14th St. Dev. LLC, 17 A.D.3d 209 (N.Y. App. Div. 2005); Chalk & Vermillion, LLC v.
Thomas F. McKnight, LLC, 303 A.D.2d 225 (N.Y. App. Div. 2003); Vidal, Reylds & Mora, Inc. v. Mountain
Springs Co., LLC, 248 A.D.2d 247 (N.Y. App. Div. 1998); Advanced Tel. Sys., Inc. v. Com-Net Profl Mobile
Radio, LLC, 846 A.2d 1264 (Pa. Super. Ct. 2004); Chopra v. U.S. Profls LLC, No. W2004-01189-COA-R3CV, 2005 WL 280346 (Tenn. Ct. App. Feb. 2, 2005); Pinebrook Props., Ltd. v. Brookhaven Lake Prop. Owners
Assn, 77 S.W.3d 487 (Tex. Ct. App. 2002).
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veil could be pierced.42 Plaintiff Kaycee Livestock had leased land it owed to the now
defunct Flahive Oil and Gas Co., an LLC registered in Wyoming.43 The plaintiff sought
to recover from the now-defunct LLCs sole owner, Roger Flahive.44 Flahive argued that
the legislature intended to abolish veil piercing for LLCs.45 The court rejected this
contention.46 It reasoned that the legislature would have made that clear if abrogating a
well-established legal doctrine was its aspiration.47 There was simply no reason in either
law or policy, to treat LLCs differently than we treat corporations.48 The Kaycee case
did not actually order the veil pierced, since the matter came to the supreme court as a
certified question from the district court.49 However, the opinion has been widely cited50
and has freed other courts to pierce the veil of LLCs in appropriate circumstances.
To date, no scholar has attempted to analyze the actual results of veil piercing
litigation in the LLC context from a quantitative perspective along the lines of Robert
Thompsons exceptional study of veil piercing in the corporate context.51 While any such
quantitative effort suffers from both the general selection bias confronting analysis of
published legal decisions52 and the small sample size problem posed by the relatively
recent emergence of LLCs,53 making abstract suppositions that LLCs will face the same
treatment as corporations in veil piercing litigation is not particularly helpful.54 Nor is
analyzing the text of judicial opinions in selected LLC veil piercing cases particularly
useful, since veil piercing is inherently fact-specific and what a court says about a
particular case has little influence on what courts will do in other cases. Only by some
effort at tracing patterns and trends can veil piercing in the LLC context be understood
properly. Therefore, mindful of the severe limitations on interpreting the results, this Part
attempts to replicate Thompsons study of corporate law veil piercing in the context of
LLC veil piercing.
To construct a data set, Thompsons Westlaw search methodology was followed
using terms such as pierc! w/s veil and LLC.55 Only cases in which the veil piercing
issue was resolved were included (thus excluding published decisions where a plaintiff
survived a motion for summary judgment or dismissal but did not finally win the
42. Kaycee Land & Livestock v. Flahive, 46 P.3d 323 (Wyo. 2002).
43. Id. at 324.
44. Id.
45. Id.
46. Id.
47. Kaycee Land & Livestock, 46 P.3d at 324.
48. Id. at 327-28.
49. Id. at 324.
50. See, e.g., Nelson v. Morris, No. 03 C 7174, 2004 WL 868398, at *3 (N.D. Ill. Apr. 22, 2004).
51. See Thompson, supra note 9.
52. Id. at 1045-47.
53. Prior to 1998, there were only eight cases dealing with the extent liability of members or managers in
an LLC, and only one of those cases arrived at a definitive ruling. Brigham, supra note 7, at 63-64.
54. See Bainbridge, supra note 17, at 96 (Assuming comparable results for LLCs [to Thompsons study],
the members of a LLC have a far greater chance of being struck by lightning than being held personally liable
for their firms debts and other obligations.).
55. The actual search string used was: ("llc" "limited liability company" "l.l.c.") & ((veil /s pierc!)
(disregard /s entity)). This effort produced 1041 cases, which were reviewed to compile the data set discussed in
this part.
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claim).56
Thompson found with respect to corporate veil piercing cases that courts pierce less
often in tort than in contract contexts (contrary to the predictions of other scholars),57 and
pierce more frequently as the number of corporate shareholders decreases (in accordance
with scholarly predictions).58
The data generated in this effort is detailed in Figures One and Two and Tables One
through Seven. The first possibly surprising thing is how many LLC veil piercing cases
there were during the period of observation. Thompsons study produced slightly fewer
than 1600 corporate veil piercing cases based on a time frame that spanned many
decades;59 in less than one decade, there were 61 LLC veil piercing cases.60 Figure 1
shows the frequency of LLC veil piercing cases in each of the years for which there were
cases. While it may be too early to attempt to divine a trend, the number of LLC veil
piercing cases does seem to be increasingthe largest number appearing in just the first
seven months of 2005.
Table One reports the number of cases in total and the rate of piercing. This table
yields a second surprising result. While Thompson found that corporate veil piercing
plaintiffs were successful 40% of the time,61 would-be LLC veil piercers were only
56. In addition, I excluded the following: (1) cases in which a veil piercing claim was rejected on
jurisdictional grounds, see, e.g., Nadler v. Grayson Constr. Co., Inc., Civ. A. No. CV020190015S, 2003 WL
1963158 (Conn. Super. Ct. Apr. 15, 2003); (2) cases where a party sought to pierce the veil solely to achieve
personal jurisdiction over another party, see, e.g., Waltrip v. Kimberlin, No. C045898, 2005 WL 1230770 (Cal.
Ct. App. May 24, 2005), United States ex rel. Hadid v. Johnson Controls, Inc., No. 04-60146, 2005 WL
1630098 (E.D. Mich. July 7, 2005), since the standards for a finding of alter ego for the sake of jurisdiction are
more lenient than the standards for substantive veil piercing, see Dorfman v. Marriot Intern. Hotels, Inc., No. 99
CIV 10496, 2002 WL 14363 at *11, n.13 (S.D.N.Y. Jan. 3, 2002) (Different standards apply when evaluating
whether or not to pierce the corporate veil for liability purposes.); (3) cases in which veil piercing was sought
merely to enforce an arbitration agreement against a non-signatory, see, e.g., IFC Interconsult, AG v. Safeguard
Intern. Partners, LLC, 356 F. Supp. 2d 503 (E.D. Pa. 2005), for the same reason; and (4) Gallinger v. N. Star
Hosp. Mut. Assurance, Ltd., 64 F.3d 422, 427 (8th Cir. 1995), based on Bainbridges insightful observation that
the entity at issue in Gallinger was not an LLC but a Bermudan business form. See Bainbridge, supra note 17,
at 81 n.26.
57. Thompson, supra note 9, at 1038. Subsequent work by Stephen Presser suggests that in the years
following Thompsons data set, tort creditors indeed became more susceptible to piercing than voluntary
creditors. David L. Cohen, Theories of the Corporation and the Limited Liability Company: How Should
Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities
Regulation for the Limited Liability Company, 51 OKLA. L. REV. 427, 440 (1998) (citing STEPHEN B. PRESSER,
PIERCING THE CORPORATE VEIL 1-37 n.2 (1997)). One possible explanation for the higher rates of veil piercing
in contract cases is that it is easier in tort cases to show that a manager/member/owner engaged in conduct for
which s/he can be held directly liable. See, e.g., Estate of Countryman v. Farmers Co-op. Assn, 679 N.W.2d
598 (Iowa 2004) (explaining that plaintiff in wrongful death case appealed finding of no direct liability but did
not appeal rejection of veil piercing claim).
58. Thompson, supra note 9, at 1038.
59. Id. at 1048.
60. This large number of LLC veil piercing cases may also reflect the relative availability of unpublished
dispositions on Westlaw in the time period covered by this Articles searches. Thompsons study covered a time
frame in which Westlaw may not have made available as many unpublished dispositions. A large number of the
LLC veil piercing cases observed by my study were unpublished cases.
61. Thompson, supra note 9, at tbl.1.
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Figure One
Number of cases
16
14
12
10
8
6
4
LLC Veil piercing cases
2
0
1997
1999
2001
2003 2005
Year
successful 39% of the time. What makes this result particularly surprising is that the LLC
is a new business form, and the owners of LLCs would presumably be more likely to
make mistakes with regard to respecting company formalities than the owners of
corporations, who are familiar with the corporate form and its requirements, would be.
Category
#
All Cases
61
Table One
Pierce
19
No Pierce
42
% Piercing
31%
One explanation may be that LLC owners are less likely to have their companies veils
pierced because they are, on average, represented by more-talented and careful lawyers
than the owners of the median close corporation. There is no way to substantiate this
hypothesis. The logic behind it is that when the LLC form first emerged, only the
brightest of business lawyers saw its advantages for small businesses and pushed this new
form on their clients. These lawyers may have continued to represent and counsel LLC
owners, and helped them to respect the separation of their individual identities and the
companies identities. With time, and the growing acceptance of LLCs, one would expect
the rate of LLC veil piercing to trend closer towards the rate of piercing for corporations.
As Figure 2 shows, however, there is no discernable time trend concerning the rates of
piercing.
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Figure Two
Number of cases
10
8
6
No pierce
Pierce
2
0
1997
1999
2001
2003
2005
Year
Table 2 details the number of cases and rates of piercing based on the identity and
number of the owners of the defendant LLC.62 As Table 2 shows, the clear majority of
LLC veil piercing cases involved LLCs owned by individuals, rather than entities. The
small sample size involved in each category make interpretation of the results very
difficult. The number of owners and the identity of the owners do not seem to make a
dramatic difference in terms of LLC veil piercing. Notably, none of the LLCs in the
sample were publicly held.
Table Two
Identity of
Number of
Pierce
No Pierce
% Piercing
Owner
owners
Individual
One
8
15
35%
Two or Three
6
10
37.5%
Close but more
1
1
50%
than three
Public
0
0
0
Total
15
26
37%
Individuals
Entity
One
3
4
43%
Two or Three
1
4
20%
Total Entity
4
8
33%
Table Three reports differences in piercing based on type of case (contract, tort, or
statutory claim).63 Not only are there far more efforts to pierce in contract cases (fully
62. This is roughly parallel to Thompson, id. at tbl.7.

63. It is not always possible to distinguish between contract and tort claims. Some legal theories
(constructive fraud, for instance) are mixed notions of contract and tort. However, this table is meant to
represent generally whether the claim was a tort or a contract type of case. Mainly, this distinction captures
whether the plaintiff is a known business partner, or an unknown personal injury victim.
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two-thirds of all the LLC veil piercing cases), plaintiffs in those cases are more
successful than tort claimants. This is in accordance with Thompsons results for
corporations,64 even though it defies the predictions of some scholars.65
Context
Contract
Tort
Statutory
Cases
42
11
8
Table Three
Pierce
14
1
4
No Pierce
28
10
4
% Piercing
33%
9%
50%
Table Four reports veil piercing cases, and piercing rates, by state.66 Of those states
with more than three piercing cases, piercing rates range from a low of 14% in New York
and 19% in Connecticut to a high of 86% in California. Californias high rate of LLC veil
piercing is interesting, since Thompson found that California also pierced in the
corporations context at higher rate than any other state.67 Similarly, New York pierced at
among the lowest rates for corporations than other states with a large number of piercing
cases.68 It is highly likely that courts experience with corporate veil piercingand their
developed bodies of corporate veil piercing precedentis helping to guide their LLC veil
piercing decisions. As far as total number of cases, Connecticuts national lead in cases is
not surprising given that it has the highest percentage of LLCs among new corporate
entities.69 More than 80% of Connecticuts new business filings in 2002 and 2003 were
LLCs.70 Similarly, Louisiana had the fourth most cases (behind New York and
California); it has the third highest percentage of new business filings as LLCs (behind
Connecticut and Wisconsin).71
64. See supra note 48 and accompanying text.

65. Easterbrook and Fischel predicted that veil piercing would be more common in tort cases, where the
creditors are involuntary and unable to negotiate for additional personal guarantees, rather than contract cases,
where creditors are voluntary. See Easterbrook & Fischel, supra note 12, at 90. However, Thompson found the
opposite. See Thompson, supra note 9, at 1038. There are two viable explanations for this surprising empirical
reality. First, it may be that in the tort context, sufficient insurance coverage exists to satisfy judgments, making
veil piercing unnecessary in the tort context. Second, in tort cases, plaintiffs may be more successful at arguing
that the individual shareholder did something wrongful for which she should be held personally liable, again
making veil piercing unlikely.
66. This is the equivalent of Thompson, supra note 9, at tbl.6.
67. See Thompson, supra note 9, at 1051.
68. Id.
69. See Friedman, supra note 3, at 37 tbl.
70. Id.
71. Id. New York and California likely have a large number of LLC veil piercing cases simply because
they have the largest economies, populations, and the most litigation, even though these two states have
relatively slow to embrace the LLC. In New York and California, corporations still predominate over LLCs in
new filings (with corporations amounting to more than two thirds of filings). Id. at 39 tbl.
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State
AR
AZ
CA
CO
CT
DE
FL
GA
IA
IL
LA
MA
ME
MS
NY
NV
OK
DE
SC
TN
TX
Total Number
of Cases
1
1
7
1
16
1
1
2
1
3
4
3
2
2
7
1
1
2
1
1
1
Table Four
Pierce
0
0
6
1
3
0
0
1
0
1
2
0
0
1
1
0
0
1
1
1
0
1075
No Pierce
1
1
1
0
13
1
1
1
1
2
2
3
2
1
6
1
1
1
0
0
1
% Piercing
0%
0%
86%
100%
19%
0%
0%
50%
0%
33%
50%
0%
0%
50%
14%
0%
0%
50%
100%
100%
100%
Table Five reports veil piercing cases in federal and state courts.72 As with
corporations, federal and state courts pierce at approximately the same rate (although the
relative frequency is reversed, with federal courts piercing more in corporation cases and
less in LLC cases).73
Category
State courts
Federal courts
Total Number
of Cases
43
18
Table Five
Pierce
15
4
No Pierce
% Piercing
28
14
34%
29%
Table Six reports piercing rates and the number of cases by type of court: trial,
intermediate appellate, and state supreme courts.74 Unlike the results for corporations, in
which the three levels of courts pierced at roughly the same rate,75 the data for LLCs
72.
73.
74.
75.
This is the equivalent of Thompson, supra note 9, at tbl.3.

Compare tbl.5 with Thompson, supra note 9, at tbl.3.
This is the equivalent of Thompson, supra note 9, at tbl.4.
Id.
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reveals much higher piercing rates in intermediate appellate courts than in trial courts.
Whether this is merely a function of the small sample size of the LLC data set, or a
lasting trend, will be revealed by time. It is possible that in these early years of LLC veil
piercing, plaintiffs have been overly enthusiastic about pleading a veil piercing count,
even though the facts fail to support imposing that remedy. The trial courts are the first
line of defense against these frivolous claims, and may be weeding them out such that the
bad veil piercing arguments surface less frequently at the appellate level.
Category
Trial Courts
Intermediate
Appellate Courts
Supreme Court
Total number
of Cases
32
27
2
Table Six
Pierce
No Pierce
% Piercing
5
14
27
13
16%
52%
0%
Finally, Table Seven documents the appearance of various explanations for veil
piercing, and the rates at which courts pierced when they found an LLC and its members
satisfied each condition.76 The factors that appeared numerous times that were most
likely to lead to veil piercing are alter ego, undercapitalization, and lack of substantive
separation. In contrast, when courts found a failure to respect formalities, they pierced
only 56% of the time (with corporations, courts pierce 66% of the time when they find a
failure to respect formalities).77 These results are substantially similar to the ones
Thompson obtained in his study of corporate veil piercing.78 However, although the rate
of LLC veil piercing based on failure to respect formalities was lower than the equivalent
rate for corporations found by Thompson, it may be surprising to some that formalities
played as large a role as they have in LLC veil piercing cases. Some scholars,79 and even
a number of LLC statutes,80 have rejected the consideration of corporate formalities as a
basis for LLC veil piercing. The obvious reason for avoiding formalities analysis in
LLC veil piercing cases is that LLCs are not characterized by the same level of
formalities as corporations (mandatory director elections, shareholder meetings, etc.).81
The fact that a majority of cases that mentioned LLC formalities pierced the veil may
suggest that courts are ignoring this analysis.
76. This is the equivalent of Thompson, supra note 9, at tbl.11.

77. See id.
78. See id.
79. See Bendremer, supra note 7, at 404 ([T]he corporate formalities basis for veil piercing is largely
inapplicable [to Delaware LLCs]. . . . One of the advantages of utilizing the LLC entity is precisely to avoid the
burdens of [corporate] formalities. It would be an ironic result if making use of one of the principal features of
the Act led to liability.); Timothy P. Glynn, Beyond Unlimiting Shareholder Liability: Vicarious Tort
Liability for Corporate Officers, 57 VAND. L. REV. 329, 353 n.109 (2004); Vandervoort, supra note 20, at 6869; Fox, supra note 8, at 1172 (Many commentators contend that the formalities factor in corporate veil
piercing is not appropriate for LLC veil piercing.).
80. See Bendremer, supra note 7, at 395 n.77 (collecting statutes rejecting failure to respect corporate
formalities as a basis for LLC veil piercing).
81. See Vandervoort, supra note 20, at 76.
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Factor
Instrumentality
Alter Ego
Misrepresentation
Agency
Dummy
Lack of Substantive
Separation
Intertwining
Undercapitalization
Informalities
Domination & Control
Overlap:
Officers
Directors
Owners
Office
Business Activity
Employees
Management
Other
Total Overlap
Table Seven
Number of Cases
Number of
in which Factor
Piercing
Mentioned to
Results
Describe LLC
2
2
13
13
2
0
0
0
3
3
5
5
1077
No-Piercing
Results
% Pierced
0
0
2
0
0
0
100%
100%
0%
0%
100%
100%
1
8
16
11
1
6
9
7
0
2
7
4
100%
75%
56%
64%
2
1
7
5
1
2
0
0
11
0
1
4
3
1
1
0
0
7
2
0
3
2
0
1
0
0
4
0%
100%
57%
60%
100%
50%
0%
0%
64%
Generally speaking, the preliminary record on LLC veil piercing does not differ
dramatically from the record on corporate veil piercing. LLCs seem slightly less likely to
be pierced; contract cases are more common than tort cases; piercing is particularly
unlikely in LLC cases involving torts; and the rate of piercing does not seem to depend in
the LLC context as much on the number of shareholder-owners as it does in the close
corporation context.
III. RESPONDING TO THE CASE AGAINST LLC VEIL PIERCING
A. Statutory Critique
Bainbridges case for abolishing LLC veil piercing begins with a sort of statutory
critique. Bainbridge notes that LLC statutes can be divided into two groups: statutes
invoking veil piercing82 and silent statutes.83 Bainbridge is particularly critical of courts
interpretation of the silent statutes. He dedicates a subsection of his paper to discussing
82. See Bainbridge, supra note 17, at 81. The only example discussed is Minnesota. Id.
83. See id. at 82-83. Examples discussed include Connecticut, New York, Utah, and Colorado. Id. at n.29.
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the Wyoming LLC veil piercing case, Kaycee Land & Livestock v. Flahive.84 Bainbridge
objects to the courts analysis of the Wyoming LLC statute, which is silent as to veil
piercing:
[T]he court invoked the hoary canon of statutory construction under which
statutes in derogation of the common law are to be strictly construed. Because
the court saw no evidence of legislative intent to preclude application of the
common law veil piercing to the LLC context, the court held that the LLC veil
could be pierced.85
Bainbridge argues that there was no common law of LLCs . . .. The LLC . . . was an
entirely new statutory creation. There was no background of common law against which
it was to be implemented. Corporate common law was relevant to the problem at bar only
by virtue of judicial fiat.86
Unfortunately, none of the scholars addressing LLC veil piercing has attempted to
return to the LLC statutory debates to determine if there was any discussion of the issue
of veil piercing in the enactment of LLC laws.87 Such research is complicated by the fact
that states adopted LLC laws in various waves,88 and in many cases little debate occurred
at the state level.89 The most thorough review of the liability-limitation provisions of the
statutes themselves concluded that LLC laws do little, if anything, to change the longstanding and well-developed judicial exceptions to limited liability based on either
piercing the corporate veil or direct liability for active participation.90
Bainbridges statutory critique ignores an important detail of LLCs. While there may
not have been American common law on LLCs prior to the enactment of state LLC
statutes, there is developed law on the models upon which LLCs were based. There is
some dispute as to the true intellectual origins of the LLC.91 Most commentators argue
that state legislatures explicitly sought to create a form similar to the German
Gesellschaft mit beschraeukter Haftung,92 the Portugese sociedate por quotas
responsibilidade limitada, and the Latin American limitada.93 Others argue that the LLC
84. Id. at 85-86.

86. Id. at 86-87.
87. The most thorough account of the enactment of LLC statutes nationwide, which was based on a
number of first person interviews with the drafters of LLC statutes, unfortunately does not contain any
information on legislatures thinking on the issue of veil piercing. See generally Goforth, supra note 29.
88. John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era of Multiple
Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners Limited-Liability Protection,
75 WASH. L. REV. 147, 164-65 nn.83-88 and accompanying text (2000).
89. State legislative histories are often scarce and . . . fraught with peril for the careful investigator . . . .
In re Giampietro, 317 B.R. 841, 847 n.8 (Bankr. D. Nev. 2004).
90. Robert G. Thompson, The Limits of Liability in the New Limited Liability Entities, 32 WAKE FOREST
L. REV. 1, 21 (1997).
91. See Cohen, supra note 5, at 468.
92. See William J. Carney, Limited Liability Companies: Origins and Antecedents, 66 U. COLO. L. REV.
855, 857 (1995) (citing WILLIAM D. BAGLEY & PHILIP P. WHYNOTT, THE LIMITED LIABILITY COMPANY: THE
BETTER ALTERNATIVE 1.501-.503 (1992)).
93. See Cohen, supra note 5, at 468. These forms were common even prior to the widespread adoption
of LLC statutes in America. See Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability
Company: From Sure Bet to Long Shot, 22 J. CORP. L. 131 n.1 (1996).
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is derived from the Anglo-American joint-stock company.94

Both of these models upon which LLC statutes were crafted involve some element
of veil piercing. Indeed, in a joint-stock company there is no corporate veil, even if the
holders of stock certificates assume they are only liable to the extent of their
contribution.95 The joint-stock companys members are liable as if they were partners.
The German Gesellschaft mit beschraeukter Haftung, Portugese sociedate por quotas
responsibilidade limitada, and the Latin limitada, are therefore the most relevant
examples for determining whether the entity legislatures created by enacting LLC statutes
was meant to be subject to veil piercing like a corporation or enjoy even greater
immunity.96 Wyomings LLC law was enacted to create an American business form
similar to the Latin limitada, at the behest of a special interest (a mining concern) that had
experience with limitadas in its international operations.97 The Panamanian limitada
inspired the Hamilton Brothers Oil Company of Denver to seek enactment of an LLC law
in Wyoming after their initial efforts in Alaska were unsuccessful.98 The Florida
legislaturethe second legislature (after Wyoming) to enact an LLC lawspecifically
discussed how the LLCs empowered by its statute were similar to the Central and South
American limitada.99
These entities are all subject to veil piercing.100 Brazils New Civil Code, for
instance, provides that the quota-holders (owners) of a Brazilian limitada may be held
personally liable for the limitadas debts when they have used the limitada for improper
purposes.101 Even though German GmbH statutes, like American LLC laws, provide
that only the companys assets can be used to satisfy its liabilities,102 German courts have
developed a body of case law (referred to as Durchgriffshaftung) which provides for
piercing of the [privately owned GmbH] corporate veil in exceptional cases for serious
reasons of equity and good faith.103
94. See Carney, supra note 92, at 856.
95. See 13 AM. JUR. 2d Joint-Stock 11 (2005) (citing cases).
96. See Carney, supra note 92, at 856 ([T]he very origins of the Wyoming LLC, which are said to lie in
part in the Latin limitada, invite us to look abroad as well.).
97. But see id. (While some writers have credited the limitada as the source of LLCs, I will argue . . . that
the LLC represents a fairly close approximation of the unincorporated joint-stock company that developed in
England in tandem with, and as a substitute for, the royally chartered corporation.).
98. See id. at 857.
99. See Goforth, supra note 29, at 1201 (The committee reports discussing LLCs specifically noted that
LLCs were similar to a form of business organization prevalent in Central and South America . . . .).
100. Italian limitadas are subject in exceptional circumstances of veil piercing: superamento dello schermo
della personalita guiridica. Jose Engracia Antunes, The Liability of Polycorporate Enterprises, 13 CONN. J.
INTL L. 197, 215 (1999). Similarly, Central and South American limitadas are subject to veil piercing: abuso
de la personalidad juridica. Id.
101. See Matthew S. Poulter, My Clients Going to Brazil: A U.S. Practitioners Guide to Brazilian
Limitadas Under the New Civil Code, 11 SW. J.L. & TRADE AM. 133, 139-40 (2005).
102. See Daniela Weber-Rey, Insolvency of a German Limited Liability Company: De Facto Shareholders,
Group Liability for Individual Shareholders, 7 PACE INTL L. REV. 523, 523 (1995).
103. Sandra K. Miller, Piercing the Corporate Veil Among Affiliated Companies in the European
Community and in the U.S.: A Comparative Analysis of U.S., German, and U.K. Veil Piercing Approaches, 36
AM. BUS. L.J. 73, 99 (1998). German courts have also developed a body of law to hold a parent company liable
for the obligations of a subservient company in certain cases where the parent controls the subsidiary
extensively and places insufficient importance upon the separate interests of the subsidiary company. Id. at 76.
In fact, although there is less veil piercing litigation in Germany than in the U.S., German law is said to be more
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LLC statutes were enacted initially at the behest of a special interest seeking to
replicate a foreign corporate form. The legislative intent to create such a form cannot be
ignored, and if that form is susceptible to veil piercing, it is at least plausible to assert that
the LLC was meant to be subject to veil piercing as well.104 Even if its foreign
antecedents were not in the forefront of the minds of legislators enacting LLC statutes, it
seems unreasonable to assert that the legislatures did not act with the knowledge and
awareness of the longstanding corporate veil piercing doctrine. Had the legislatures
intended to do away with that doctrine in the new LLCs, one would expect them to have
said so. As one court noted,
[t]he legislature is deemed to have been aware of our deeply rooted common
law remedy of imposing personal liability upon a shareholder of a corporation
where the corporate shield has been used to promote injustice, and the
legislature surely could have expressly created a blanket limitation of [LLC]
member liability had it so chosen. Not much imagination is required to
hypothesize all sorts of pernicious uses of such a blanket limitation.105
If LLCs were meant to be free of corporate law veil piercing, why is there no antipiercing language in LLC statutes? Why is there only limited language restricting the
cases in which the LLC veil may be pierced? It is, of course, possible that LLC statute
drafters hoped that by never mentioning veil piercing they would preserve their ability to
later argue (as lawyers representing LLC defendants) that LLCs are not subject to veil
piercing at all. Interpreting LLC statutes as barring veil piercing based on this kind of
speculation would be to reward defense-side lawyers (and their clients) for legislative
chicanery. Legislatures are, of course, free to amend statutes to abolish LLC piercing, but
they have not done so.
B. Policy Concerns
1. Indeterminacys Last Stand?
One of the most often lodged attacks against veil piercing generally is that the
doctrine is indeterminate. That is to say, that its application is inconsistent, and cannot be
accurately predicted. Veil piercing has been called freakish[]106 and inconsistent with
liberal in terms of the circumstances in which the court will pierce the subsidiarys corporate veil. Id. at 83;
see also Carsten Alting, Piercing the Corporate Veil in American and German LawLiability of Individuals
and Entities: A Comparative View, 2 TULSA J. COMP. & INTL L. 187 (1995); Rudolf F. Colle & Claus Caspary,
International Financing of U.S. Takeovers: Country by Country ReviewFederal Republic of Germany, 671
PLI/CORP 401, 435 (1990); Weber-Rey, supra note 102, at 523.
104. One might argue that the Brazilian or Panamanian legal system, given rampant fraud and corruption, is
not the right source of legal cues for American lawmakers and courts. However, the author cannot come up with
a way that veil piercing promotes fraud, bribery, or black-masked death squads. To the extent that LLCs were
designed to mirror the economic and legal function of the limitada, the veil piercing aspects of those legal
regimes seem a reasonable place to look for insight into the ideal legal regime for such entities.
105. Bastan v. RJM & Assocs., LLC, No. CV99 0593189 S, 2001 WL 1006661 at *1 (Conn. Super. Ct.
June 4, 2001) (unpublished opinion).
106. Easterbrook & Fischel, supra note 12, at 89.
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the goals of certainty and predictability.107 Thus, the veil piercing invites the prospect of
occasional judicial errors.108
Justice (then Judge) Cardozos oft-quoted opinion on veil piercing no doubt inspired
much of this criticism: The whole problem of the relation between parent and subsidiary
corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are
to be narrowly watched for starting as devices to deliberate thought, they end often by
enslaving it.109 It is somewhat understandable why this mist is so vexing to scholars.
Legal scholars strive for predictive accuracy. Law schools defend their intellectual
integrity against more empirically based social sciences by striving to characterize the
study of law as a quasi-scientific venture (when pseudo-scientific is probably more
accurate).110 Legal scholars seem to hate rules that are left to the common sensibilities of
ordinary judges to decide.111
Of course, indeterminacy can have real efficiency costs, particularly in certain
branches of litigation that have developed highly sophisticated practices on both the
defense and plaintiff side. For example, given the high rates of either pretrial dismissal or
settlement of securities litigation and arbitration, predictability in that context helps price
settlements and reduces unnecessary litigation expenses.112
However, the truth is that the LLC context may not be one in which indeterminacy is
of major concern. LLCs are small businesses. When they face contract disputes, it is on
an ad hoc basis. LLC contract disputes are not routine and standardized so as to
necessitate perfect prediction of likely outcomes in order to calculate settlement values.
a. Indeterminacys Limited Costs in the LLC Context
Bainbridge argues that the uncertainty and unpredictability manifest themselves in
the LLC context in increasing transaction costs for small businesses.113 His argument
107.
108.
109.
110.
Bainbridge, supra note 16, at 515.

Bainbridge, supra note 17, at 102.
Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 58 (N.Y. 1926).
Critics have suggested that
the current state of empirical legal scholarship is deeply flawed . . . . The sustained, self-conscious
attention to the methodology of empirical analysis so present in the journals in traditional
academic fields (without which scholars in those disciplines would be unable to publish their work
in reputable journals or expect it to be read by anyone with an interest in how the world works)
that is, the articles devoted to methodology in these disciplinesis virtually nonexistent in the
nations law reviews.
Lee Epstein & Gary King, The Rules of Inference, 69 U. CHI. L. REV. 1, 6 (2002) (emphasis omitted).
111. See Daniel Q. Posin, Turning Green: Louisianas Piercing-the-Corporate-Veil Jurisprudence and its
Economic Effects, 79 TUL. L. REV. 311, 315 (2004) (describing veil piercing as having a quicksilver nature
and asking when you get down to it, just when do courts pierce the corporate veil?).
112. See Brain S. Sommer, The PSLR Decade of Decadence: Improving Balance in the Private Securities
Litigation Arena with a Screening Panel Approach, 44 WASHBURN L.J. 413, 422 n.56 (2005) (noting that high
discovery expenses account for a high settlement rate in securities litigation); Matthew Roskowski, Note, A
Case-by-Case Approach to Pleading Scienter Under the Private Securities Litigation Reform Act of 1995, 97
MICH. L. REV. 2265, 2267 (1999) (Securities fraud lawsuits that withstand a 12(b)(6) motion almost always
settle, regardless of the actual merits of the case or the probability of success at trial, because of the massive
discovery and defense costs associated with such suits.).
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begins with the unpredictability of veil piercing. That is, because the doctrine lacks
analytical rigor, it is hard for businesses to predict how a court will decide a particular
veil piercing claim. Because veil piercing can be avoided in most cases by keeping proper
books and respecting corporate formalities, Bainbridge predicts that LLCs will invest to
inefficient excess in lawyers114 and other intermediaries rather than growing their
businesses.115 Since LLCs are predominantly small businesses,116 they are the entities
least able to afford such an investment.117 Bainbridge also suggests that an indeterminate
veil piercing doctrine distorts the insurance purchase decisions of both LLCs and their
owners.118 If owners are uncertain of whether they might be held personally liable for the
LLC debts, they might cause LLC managers to purchase more insurance for the LLC (so
that the LLCs assets are never wholly depleted). Alternatively, owners might over-insure
against personal liability out of a fear of veil piercing. On the other hand, some LLC
owners might fail to appreciate the risk of veil piercing and systematically underinvest in
such insurance. Either way, indeterminacy might skew LLCs insurance choices.119
If LLC veil piercing really were such an inefficient policy, one might expect some
state legislature to have clearly forbidden veil piercing. States could begin to compete for
LLCs the way they once competed for corporations,120 and offering a more efficient
liability regime would be one way to do so. Yet to date, there is no evidence that such
racing is widespread.121 At least one legislature sought to restrict judicial veil piercing
114. It is worth noting that many LLCs already have a lawyer, since a lawyer may have filed the LLCs
articles of organization. Thus, the LLC is not an unlawyered corporate form, which the general partnership is
now becoming. Friedman, supra note 3, at 49 (The general partnership has essentially disappeared as a
lawyered business form.).
115. Bainbridge, supra note 17, at 102 ([V]eil piercing focuses entrepreneurial incentives on the wrong
issues, such as by encouraging them to spend time and effort on organizational formalities that simply dont
address the real problem of negative externalities.).
117. See Larry T. Garvin, Small Business and the False Dichotomies of Contract Law, 40 WAKE FOREST L.
REV. 295, 312 (2005). For small business owners, [l]egal issues may be high among those neglected. Given
form contracting, the likely ubiquity of boilerplate terms, and the fairly high probability that any particular
contract will be performed, it would not make sense for a small merchant to hire a lawyer to scrutinize all
contracts. Id.
118. Bainbridge, supra note 17, at 101 (Some investors will over-invest in expensive precautions, while
others will under-invest in insurance and risk reduction.); Fox, supra note 8, at 1144 (Legislatures and courts
must resolve this issue because, without guidance regarding the potential liability involved in LLC membership,
investors and entrepreneurs will be unable to make informed decisions regarding the risk and return on their
investments.).
119. Small business ownersthe ones most likely to use the LLC as the entity of choicehave repeatedly
complained about the high costs of insurance. See Garvin, supra note 117, at 307 n.51. To the extent that veil
piercing, or abolishing LLC veil piercing, does upset small business insurance markets, those costs would be
particularly hard to bear.
120. See Bacon, supra note 6, at 1119. See generally Goforth, supra note 29.
121. This may not be true in the context of LLCs used specifically in the context of complicated business
transactions. It seems a fair speculation that Delaware LLCs are the vehicle of choice for business practitioners
using LLCs for the sake of effecting triangular mergers, going private transactions, and other complicated
processes. Recent amendments to the Delaware LLC law may reflect a desire to attract additional LLC business
for the state. For example, in 2000 Delaware clarified Section 18-215(b) of the Delaware Limited Liability
Company Act to make more clear the fact that the liabilities of one series of an LLC may not be enforced
against the general assets of the LLC or other series of the LLC so long as assets are held or accounted for
separately. The 2000 amendment added the terms directly or indirectly, including through a nominee or
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in the corporate context,122 but no states have sought to abolish LLC veil piercing.
In truth, the kinds of behaviors veil piercing might induce on the part of LLC
operators are not all that burdensome. One commentator advised LLC owners to
ensure that (1) one member does not operate the company without consultation
from other members; (2) the business is held out as a separate legal entity; (3)
that members do not usurp the corporate decisions of the manager, when the
LLC elects to have the LLC manager managed; and (4) members dont
commingle personal funds or property with that of the LLC or hoard company
assets for personal use.123
All of these suggestions are really just good business practice.124 While avoiding
commingling funds, for example, might be somewhat inconvenient, it also makes it more
likely that a small business will be able to monitor accurately its cash flows, something
that is profit-enhancing rather than wasteful. Similarly, ensuring that an LLC is managed
by its manager, or by participation of all, rather than a single member-owner, is really just
good corporate governance.
While Bainbridge argues that LLC veil piercing increases costs and reduces
efficiency for small business, abolishing LLC veil piercing would perversely lead to the
same result. Just as an LLC is most likely a small business, those who engage in
commerce with that LLC are most likely to be small businesses or individuals. In other
words, in thinking about LLC veil piercing, we cant focus solely on the identity and
character of the defendant LLC. We need to think of the effects on dyads composed of
what is most likely a small business LLC defendant and a small business or individual
plaintiff. My speculation is that most of the LLC veil piercing cases will involve small
business or individual plaintiffs.125 Where the plaintiff in an LLC veil piercing case is a
otherwise as a parenthetical following the statutory term held. See John H. Small, Delawares 2000
Legislation for LPs, LLCs and Corporations, available at http://www.prickett.com/00legislation.htm (last
vistied June 27, 2006). Delawares renewed interest in clarifying this provision is clearly aimed at targeting
high-end LLCs. It is hard to imagine an LLC needing series of membership units unless it is a venture
capital LLC, hedge fund, or other high-end enterprise. However, Delawares attractiveness to high-end
LLCs may also be based on the institutional competence of its chancery courts, rather than the features of its
LLC law. See Bendremer, supra note 7, at 387.
122. See OHIO REV. CODE ANN. 1701.95(H) (West 2006); TEX. BUS. CORP. ACT. ANN. art. 2.21(A)
(Vernon 2006); see also Thompson, supra note 9, at 1042 (describing statute and probable origins).
123. Brigham, supra note 7, at 77-78 (citing Steven C. Bahls, Application of Corporation Common Law
Doctrines to Limited Liability Companies, 55 MONT. L. REV. 43, 63-64 (1994)).
124. Doing these simple things has helped some LLCs escape veil piercing claims. See, e.g., KLM Indus. v.
Tylutki, 815 A.2d 688, 693 (Conn. App. Ct. 2003). The KLM court reversed the lower courts finding that the
veil should be pierced and noted that the defendant entity maintained its returned checks and statements, filed
and maintained corporate tax returns, and filed its biannual reports. Id.
125. See, e.g., Law Offices of Gary Oberst PC v. Omerta LLC, No. CV030197379, 2004 WL 2757633
(Conn. Super. Ct. Nov. 4, 2004) (unpublished opinion) (discussing solo practitioner lawyers attempt to pierce
restaurant LLCs veil). But see S.R. Intl Bus. Ins. Co. v. World Trade Center Props., LLC, 375 F. Supp. 2d
238, 245 (S.D.N.Y. 2005) (addressing LLC veil piercing in the context of the World Trade Center insurance
dispute); Duke Energy Trading & Mktg., LLC v. Enron Corp., No. 01 B 16034, 2003 WL 1889040, at n.3
(Bankr. S.D.N.Y. Apr. 17, 2003) (unpublished opinion) (rejecting plaintiffs LLC veil piercing claims regarding
Enron trading subsidiaries on standing grounds). This is of course an empirical question, which cannot be
answered with firm data. It is possible that LLC creditors are mostly sophisticated business entities. In that case,
Bainbridges indeterminacy critique would be more persuasive.
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sophisticated business entity rather than a small business, courts would be less likely to
pierce an LLCs veil.126
If LLC veil piercing were abolished without the general abolition of veil piercing
(something that seems unlikely), LLCs and close corporations would become subject to
different sets of rules: corporations would be vulnerable to veil piercing, but LLCs would
not. This would introduce indeterminacy because the businesses dealing with these firms
would have to know the difference. LLC owners have not always been clear to their
customers and suppliers about what type of entity they were operating.127 LLCs business
partners would be the least equipped to appreciate the extremely significant consequences
of their business partners organizational forms. As such, the small businesses that deal
with LLCs would increase their investment in lawyers, investigators and the like, and
might systematically over- or under-insure.
Moreover, if LLC veil piercing is not abolished nationwide, but on a piecemeal basis
with some states abolishing and others not abolishing, further confusion would be
introduced to the small business arena.128 Small businesses would need to research the
status of veil piercing in the state in which the LLC they are contracting with happens to
be domiciled before determining what sort of additional legal guarantees to seek. That
would raise costs and reduce efficiency for the very entities targeted by proponents of
LLC abolition.
For involuntary or tort creditors, abolishing veil piercing in the LLC arena without
also abolishing it in the general corporate arena would produce severe inequities. A
pedestrian struck by a van driven by ABC, Inc.s employee could seek to pierce the veil
under appropriate circumstances, but a pedestrian struck by a van driven by XYZ, LLCs
employee could not. Since an involuntary creditor most likely did not even know of the
LLCs existence, let alone its limitation of liability,129 this result is profoundly unfair.
126. See, e.g., Advanced Tel. Sys., Inc. v. Com-Net Profl Mobile Radio, LLC, 846 A.2d 1264, 1282 (Pa.
Super. Ct. 2004) ([Plaintiff] knew it was dealing with [the LLC, a limited liability company], knew [the
LLCs] liability is very limited, and admits it knew that [the LLC] would have assets, and $15 million of
financing . . . . [Plaintiff] had demanded no guarantees for the [LLCs] obligations yet now it asks the Court, in
effect, to provide guarantees after-the-fact.); Imperial Trading Co., Inc. v. Uter, 837 So. 2d 663, 671-72 (La.
Ct. App. 2003) (Imperial representatives knew or reasonably should have known that Uter and Menzie were
acting in a representative capacity, as opposed to an individual capacity.).
127. See, e.g., LM Ins. Corp. v. Sourceone Group, Inc., 381 F. Supp. 2d 761, 762 (N.D. Ill. 2005)
(describing a corporation as also known as an LLC). Shockingly, even corporate law scholars have
occasionally made dramatic errors of confusion with respect to LLCs and corporations. Stephen Pressers
casebook includes a subchapter titled The Limited Liability Corporation. See STEPHEN B. PRESSER, AN
INTRODUCTION TO THE LAW OF BUSINESS ORGANIZATIONS: CASES, NOTES AND QUESTIONS 57 (2005). While
one might be tempted to chalk that up to an editing or typographical error, the error is repeated in the Notes
and Questions section of the chapter. Id. at 66. If leading corporate law scholars sometimes miss the distinction
between LLCs and corporations, law students, courts and small-business people certainly can be expected to
make similar mistakes. See also Mowles v. Predictive Control Sys., Inc., No. Civ.A. CV-02-355, 2003 WL
23109994 (Me. Super. Ct. Dec. 4, 2003) (involving a LLC mistakenly captioned Inc.); Quantum Color
Graphics, LLC v. Fan Assn Event Photo GmbH, 185 F. Supp. 2d 897 (2002) (referring to a party as a
California Limited Liability Corporation); Meterlogic v. Copier Solutions, Inc., 185 F. Supp. 2d 1292 (S.D.
Fla. 2002) (involving Copier Solutions, Inc., a Missouri Limited Liability Company).
128. One might argue, conversely, that since states currently differ in their legal treatment of LLC veil
piercing claims, see supra Part II, abolishing LLC veil piercing would do away with state-by-state variation
and reduce indeterminacy.
129. Cohen, supra note 5, at 488.
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In addition to the fact that indeterminacy is not a major down-side to LLC veil
piercing (or a down side that would be exacerbated by abolishing LLC piercing), it could
also be argued that this indeterminacy has advantages. The veil piercing doctrines
muddiness may lead business founders to overcapitalize their business ventures (fearing
that a court will find that they undercapitalized a business, pierce the veil, and find them
personally liable for LLC torts or contracts). But is overcapitalization really such a bad
thing?130 Overcapitalization reduces the risk that a business will face a successful veil
piercing claim. But it also reduces the risk that the business will fail. Business failures
may have negative externalities that, from a social utility-maximizing perspective, mean
that an individual businesspersons capitalization decisions may not be optimal. When a
business fails, there are administrative costs arising from bankruptcy;131 owners and
employees are dislocated;132 and customers and suppliers face transaction costs in finding
new ways to satisfy their product and service needs.133 Small businessesthe
predominant use of LLCsare particularly vulnerable to failure.134 To the extent that
LLC owners fearing application of an indeterminate veil piercing doctrine put more
money into their businesses than their own individual marginal utility analysis would
dictate, that might serve to reduce the rate of business failures and alleviate associated
negative externalities.135
Abolishing LLC veil piercingand insisting courts focus instead on whether
particular LLC owners did something for which they can be held personally liablecan
also have a perverse impact on sharing work within a firm and on the firms incentive
structure. If only those who personally participate are liable for particular transactions,
members may dodge high risk transactions or demand higher compensation.136
2. Reversing Tort Reform
Finally, Bainbridge makes a roundabout and at times even poetic argument that LLC
veil piercing somehow subverts a meaningful legislative effort to achieve tort reform. If
LLCs and other unincorporated limited liability entities spread as a backdoor
130. Overcapitalization would be capitalization of a business at a level beyond the point of optimal
investment. The excess investment does not lead to a positive expected return, at least compared to the
expected return of other investments. See John Lee et al., Restating Capitalization Standards and Rules: The
Case for Rough Justice Regulations (Part One), 23 OHIO N.U. L. REV. 631, 725 n.348 (1997).
131. Adam Feibelman, Defining the Social Insurance Function of Consumer Bankruptcy, 13 AM. BANKR.
INST. L. REV. 129, 162-64 (2005).
132. See generally CLAIRE WHYLEY, RISKY BUSINESS: THE PERSONAL AND FINANCIAL COSTS OF SMALL
BUSINESS FAILURE (1998).
133. See Ted Janger, Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design, 43
ARIZ. L. REV. 559, 579 (2001).
134. See Donald R. Korobkin, Vulnerability, Survival, and the Problem of Small Business Bankruptcy, 23
CAP. U. L. REV. 413, 435 (1994).
135. In addition, if veil piercing helps reduce the rate of LLC veil piercing in particular (as opposed to
piercing for other business entities), it may help speed the adoption of LLCs in states where they do not yet
account for a majority of new corporate filings. See Friedman, supra note 3, at 55-58. As LLCs become more
widespread and more successful, network economic effects will multiply the advantages (and reduce the risks
associated with forming a business as an LLC, as opposed to a Subchapter S corporation, limited partnership, or
limited liability partnership). If LLCs are actually the efficient entity choice in many cases, as commentators
suggest, anything that spreads or encourages their adoption helps promote economic growth and efficiency.
136. Thompson, supra note 2, at 942-43.
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mechanism for achieving tort reform,137 then continuing to allow veil piercing in the
LLC context somehow thwarts this reform effort.
Even if LLC statutes spread because legislators sought to actively promote[e]
business,138 offering an alternative government subsid[y] that offsets the differential
burden of the tort system on small business,139 that does not make such backdoor
reform an efficient policy. While occasionally backdoor redistribution may be
necessary where forces of political economy make it impossible to achieve direct
reform,140 that certainly is not the case in the context of the tort reform debate.
Proponents of tort reform have been successful in many states and have achieved a
considerable amount of national political support.141 Tort reform using a backdoor
method is simply not as efficientfrom a marginal perspectiveas direct tort reform,
since it will inevitably introduce unanticipated behavioral incentives to the business
world.142 Indeed, if LLCs were meant to be a subsidy, the efficient way to go about that
is to simply transfer wealth to the target businesses. Any other method has additional
inefficiency generating consequences.
But Bainbridge does not rest his argument on the efficiency of limited liability
alone. No, instead he invokes populist democracy, drawing on the work of Stephen
Presser. Limited liability encourages small and impecunious entrepreneurs to start and
grow new business.143 Otherwise, only the rich would invest in new ventures. Limited
liability therefore helps destroy[] class distinctions and enhance[] personal and social
mobility.144 Presumably, if limited liability did all of these good things during the
nineteenth century, superlimited liability, in the form of LLCs not subject to veil
piercing, would lead to even more class mobility and populist democracy.
137. Bainbridge, supra note17, at 104 n.166 (citing Larry E. Ribstein, The Evolving Partnership, 26 J.
CORP. L. 819, 836 (2001)).
138. See Bainbridge, supra note 17, at 99 (citing John H. Matheson & Raymond B. Eby, The Doctrine of
Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving
Owners Limited-Liability Protection, 75 WASH. L. REV. 147, 182 (2000)). In fact, the LLC is better understood
as a simple effort to expand the availability of limited liability/pass-through tax treatment beyond the group
that could use it under Subchapter S to include ventures with more complicated governance and financial
arrangements among their participants, Thompson, supra note 2, at 929, rather than as part of a broader move
for tort reform.
140. See, e.g., Geoffrey Christopher Rapp, Monopolys Hidden Justice: How Lax Antitrust Enforcement
May Stimulate Charitable Giving and Overcome the Political Economy Barriers to Redistributive Taxation, 70
UMKC L. REV., 303, 303-04 (2001).
141. See Sara Falkinham, Recent Decision, TortsPremises LiabilityThe Open and Obvious Defense
is no Longer a Complete Bar to Plaintiff Recovery, 64 MISS. L.J. 241, 255 (1994) (noting the rising popularity
of tort reform).
142. In other contexts, leading law and economics scholars have asserted that direct reforms designed to
obtain redistribution are more efficient than indirect reforms because direct reforms do not have unintended
behavioral incentive effects. See Louis Kaplow & Stephen Shavell, Should Legal Rules Favor the Poor?
Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income, 29 J. LEG. STUD. 821 (2000).
Here, if LLCs were intended to redistribute wealth from plaintiffs to defendants, one of the apparent goals of
tort reform legislation, a more direct effort would have been more efficient.
143. Bainbridge, supra note 17, at 104 (citing Stephen B. Presser, Thwarting the Killing of the
Corporation: Limited Liability, Democracy and Economics, 87 NW. U. L. REV. 148, 155-56 (1992)).
144. Bainbridge, supra note 17, at 105 (citing MICHAEL NOVAK, TOWARD A THEOLOGY OF THE
CORPORATION 42 (2d ed. 1990)).
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This claim strikes me as a stretch. While it may be true (although there is room to
doubt)145 that in the nineteenth century limited liability was necessary to permit the
development of a modern economy and, in particular, modern investment markets, that is
no longer the case.146 Under the current state of affairsin which veil piercing is an
established part of corporate lawthe financial markets are more diversified and
accessible than ever.147 Veil piercing is rare enoughand one suspects, sufficiently
unknown outside of educated legal circlesthat eliminating it in the LLC context simply
couldnt have any effect on income distribution and the democratic essence of
American society.
IV. THE EFFICIENCY CASE FOR LLC VEIL PIERCING
Relatively little work has concentrated on the efficiency gains of the veil piercing
doctrine, as opposed to the efficiency gains of unlimited liability generally. Critics of
LLC veil piercing describe two supposedly proffered policy justifications for LLC veil
piercing. The first has something to do with the legal fiction of personhood associated
with certain types of business entities.148 The actual shape of this argument is somewhat
difficult to make out, and no scholar has used it as a justification for defending LLC veil
piercing. The argument would go something like this: limited liability is something we
confer upon corporate entities because they are distinct fictitious persons; if the owners
of those entities fail to respect that fiction, then the benefit of limited liability lacks an
intellectually coherent justification, and is therefore removed. Veil piercing helps serve
some sort of logical parallelism. In addition to being difficult to describe or defend, this
supposed justification for LLC veil piercing is simply not a very strong policy
justification.149
145. Despite Pressers attractive story, most law and economics thinking is actually centered around the
benefit limited liability offers wealthy investors, who would be reluctant to make small investments if veil
piercing could be imposed to require them to supply unlimited amounts of additional capital. Easterbrook &
Fischel, supra note 12, at 90. The so-called democratic argument embodied by Pressers work is usually
offered by those who approach corporate law from a historical perspective, see David L. Cohen, Theories of the
Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for
Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company, 51
OKLA. L. REV. 427, 438 (1998). It is mildly ironic that Bainbridge, from the law and economics camp, uses this
thinking in his attack on veil piercing.
146. It may of course be true at the margins of the investment world that limited liability factors into
investors decisions. For example, limited liability may enable venture capitalists . . . to invest in diverse
enterprises without incurring the excessive costs necessary to monitor each enterprise closely. John H.
Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era of Multiple Limited Liability
Entities: An Opportunity to Codify the Test for Waiving Owners Limited-Liability Protection, 75 WASH. L.
REV. 147, 182 (2000).
147. Michael V. Seitzinger, Icarus in the Boardroom: The Fundamental Flaws in Corporate America And
Where They Came From, 52 FED. LAW. 54, 55 (2005) (reviewing DAVID SKEEL, ICARUS IN THE BOARDROOM:
THE FUNDAMENTAL FLAWS IN CORPORATE AMERICA AND WHERE THEY CAME FROM (2005)).
148. See Bainbridge, supra note 17, at 93-94.
149. This argument has at times been framed in terms of a quasi-estoppel notion. To the extent that the
defendant shareholder has failed to treat the corporation or LLC as a substantively separate entity, the
shareholder may be said to be estopped from later asserting that it is a separate entity. While this notion may
be a bit easier to understand, it does not require veil piercing analysis. Rather, standard promissory estoppel
notions apply. Therefore, it is not a wholly satisfying explanation for a separate body of veil piercing law.
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The second supposed explanation relates to negative externalities. Again, though,

this explanation may well be nothing more than a straw man.150 A much-debated
literature has emerged making the case for abolishing organizational limited liability in
its entirety.151 Limited liability induces some negative externalities, as protected
corporate owners select managers who engage in riskier behavior.152 However, as veil
piercings critics have correctly pointed out, veil piercing is not likely generally to lead
parties to internalize the negative externalities induced by limited liability because it is so
rarely enforced.153 Moreover, while the rates of piercing in cases where the plaintiff has
pled a veil piercing claim are high, the overall level of piercing is quite low. That is to
say, the typical LLC or corporation will most likely never face a veil piercing claim and
never have its veil pierced. If veil piercing is as rare as empirical evidence suggests, it
may be that shareholders simply ignore the slim risk of veil piercing in making their
decisions. Thus, veil piercing is unlikely to alter significantly the propensity of business
entities to engage in the kind of risky conduct that generates externalities (businesses may
still behave in a risky fashion; the point is that veil piercing has no marginal effect on
their propensity to do so).
Although criticism of the veil piercing doctrine equates the case against limited
liability with the case for veil piercing, the two are not precisely the same. Veil piercing
does not seek to do away with limited liability in all cases. Veil piercing is premised on
recognition of the central place of limited liability in business entity law. Instead, it seeks
to minimize the potential that limited liability will lead to unjust and, as this Article
asserts, inefficient outcomes in particular cases. Rather than rehash the arguments against
limited liability in the abstract, this Part attempts to lay out an efficiency framework in
defense of veil piercing within the LLC realm. Admittedly, the arguments I advance here
are not as well developed as some of the efficiency criticisms of veil piercing. I aim here
to sketch new ground for a policy defense that can be more fully developed, should
readers and courts find these arguments convincing, in further research.
A. Safety Valve Efficiency
The veil piercing doctrine has always been defended in the courts not based on a
150. By arguing that veil piercing is justified on general externality grounds, critics are able to demand
abolition rather than reform of the veil piercing doctrine on the basis that veil piercing judges lack the ability to
perfectly calibrate the remedy (veil piercing) to the problem (externalities). But see Thompson, supra note 2, at
942 (noting the
possibility that the LLC, like the corporation, will be used to shift costs to outsiders whose claims
against an individual member go unpaid. It is unlikely that courts are going to interpret even broad
language in LLC statutes to permit this kind of liability-shifting that exceeds what is now
available in corporations.)
Id.
152. See Henry Hansmann & Reinier Kraakman, Toward Unlimited Liability for Corporate Torts, 100
YALE L.J. 1879 (1991).
153. See Bainbridge, supra note 17, at 96. Bainbridge assumes that LLC veil piercing plaintiffs will be only
as successful, and only as frequent, as would-be corporate veil piercers, and thus opines that an LLC member
has a far greater chance of being struck by lightning than by being held personally liable for their firms debts
and other obligations. Id. In fact, the preliminary data indicate that LLCs are less likely to have their veil
pierced than are corporations.
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sophisticated efficiency basis, but rather as a safety valve.154 Veil piercings critics
from the law and economics wing of the academy scoff at this sort of explanation. As one
critic complained, By emphasizing one platitude rather than another, a court can either
respect or reject a corporations separate personality, depending on the result that the
court considers to be fair, without really explaining what it is doing, and why.155
In reality, though, equity-oriented safety valve rules like veil piercing can enhance
efficiency. Recent experimental work has substantiated a so-called Flouting
Hypothesis.156 When citizens perceive injustice of specific laws, the result is
diminished general compliance with the law.157 That is to say, citizens are more likely
to break the law if they perceive that the legal system is unjust; exposure to unjust aspects
of the legal system therefore increases general lawlessness and non-compliance with the
edicts of the legal-regulatory state. Citizens who see that the law is unjust are more likely
to flout the law. The same is true for the fictional citizens of the business world:
LLCs, corporations, and other limited liability entities.
In the context of this new experimental evidence substantiating the flouting thesis,
doctrines grounded in equitylike the veil piercing doctrinebecome more attractive
from an efficiency perspective. The corporation and its modern descendent, the LLC, are
creations of the legal apparatus of the state. The veil piercing doctrine is specifically a
last-resort alternative to a court asked to enforce the limited liability aspect of a
corporation, LLC, or other entity, in the face of patently unjust or inequitable
circumstances.
It is worth mentioning briefly what is unjust about a plaintiffs inability to access
LLC owners personal wealth absent veil piercing. Veil piercing is essentially a rule of
loss bearing: choosing between an innocent injured plaintiff and an arguably innocent (or
at least not directly liable) business owner, veil piercing allocates the loss to the latter
while limited liability allocates it to the former. As numerous courts have stated, the mere
fact that a plaintiff is unable to recover for her tort or contract injury does not amount to
injustice. What is particularly unjust about applying limited liability in certain cases is
that limited liability upsets the legitimate, reasonable expectations of business actors
about the appropriate level of financing for a business venture. Undercapitalization
based on some normative presumption about the kind of financing appropriate for a
particular type of businessis the touchstone of injustice in the context of limited
liability entities. Where defendants have grossly undercapitalized a business venture
(based on a risk-adjusted expectation of the level of financing necessary to account for
current and potential liabilities), it is unjust to make an innocent plaintiff bear the cost of
tort injury or contract breach.158
154. See Hctor Jos Meguens, Liability of a Parent Corporation for the Obligations of an Insolvent
Subsidiary Under American Case Law and Argentine Law, 10 AM. BANKR. INST. L. REV. 217, 224 (2002)
(Piercing the corporate veil jurisprudence is the traditional safety valve in entity law, under which in
exceptional cases liability may be imposed on a parent or controlling shareholder for the debts of its
subsidiary.).
155. Glenn G. Morris, Piercing the Corporate Veil in Louisiana, 52 LA. L. REV. 271, 271 (1991).
156. See Janice Nadler, Flouting the Law, 83 TEX. L. REV. 1399 (2005).
157. Id. at 1401.
158. Another justice-related aspect of veil piercing is that it helps overcome the limitations imposed on
oral contracts by the statute of frauds. Some courts have recognized, e.g. DeWitt Truck Brokers, Inc. v. W. Ray
Fleming Fruit Co., 540 F.2d 681, 686 n.13 (4th Cir. 1976), that veil piercing may be defended as a means of
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Were veil piercing removed as an available remedy, courts would be forced to apply
limited liability to immunize the owners of a business entity in circumstances that
perpetuated fraud and injustice by upsetting plaintiffs legitimate expectations about
business capitalization. Plaintiffs, lawyers, third parties, members of the media and the
public following a particular case would obtain specific experience with an unjust result
from the legal system. Their likelihood to flout other laws would marginally increase.
It cannot be disputed that flouting generally has negative effects on efficiency.
Widespread lawbreaking makes contracting more difficult, leads to injury, destruction of
economically valuable resources, and even the death of citizens. In the small business
context in particularwhere LLCs have become dominantinformal norms can be far
more important than legal regimes.159 Flouting could pose a far greater problem in such
closely-knit communities. Experience with unjust results regarding limited liability could
lead to a breakdown of norms of honesty and reduce the efficiency of the small business
sector of the economy.
All of this assumes, of course, that veil piercing judges are generally getting it right.
That is to say, that judges reach the right result in piercing the veil, and dont pierce the
veil in situations where that would in fact be the unjust or inequitable outcome. In spite of
the criticism lodged against veil piercing, a range of scholars have concluded that courts
are, in spite of the layer of unhelpful language,160 getting it right.
B. Settlement-Forcing Effects
It is undisputable that large corporations frequently attempt to wear down tort
claimants seeking to reach the parent161 corporation through use of aggressive litigation
strategies and organization of high-risk activities into separately incorporated
subsidiaries. Parent companies, corporations, and owners of LLCs may be prone to adopt
the same strategy. Indeed, in one famous LLC veil piercing case, defendants counsel told
plaintiff, go ahead and sue us . . . there is no money in [the LLC]. Why do you think we
set it up as an LLC in the first place?162 These defendants should have considered
settlement, as they lost their case and the veil was pierced.163
The positive settlement-enhancing effects of the veil piercing doctrine are only
relevant if, at present, the parent corporations, companies or individual owners of LLCs
have improperly aligned litigation incentives. If such parent entities already face
substantial settlement pressure, then veil piercings effect may be redundant or harmful.
enforcing a business owners personal guarantee of a contract or judgment debt that would otherwise be
unenforceable due to a statute-of-frauds requirement that such guarantees be in writing. What is unjust in those
cases about refusing to pierce the veil is again related to the reasonable expectations of a plaintiff. From this
view, it is the reasonable expectations of a plaintiff about the enforceability of a business owners personal
guarantee. See also Harvey Gelb, Piercing the Corporate VeilThe Undercapitalization Factor, 59 CHI.-KENT
L. REV. 1, 10 (1982).
159. See Bainbridge, supra note 16, at 504.
160. See Thompson, supra note 9, at 1037-38 nn.11-15 and accompanying text.
161. John C. Heehan, Graceful Maneuvering: Corporate Avoidance of Liability Through Bankruptcy and
Corporate Law, 65 MONT. L. REV. 99, 123 (2004).
162. Stone v. Frederick Hobby Assocs. II, No. CV0001816205, 2001 WL 861822, at *9 (Conn. Super. Ct.
July 10, 2001).
163. Id.
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Recent work suggests that corporate entities may be less prone to be victimized by
settlement pressures than individual defendants.164 Small business owners appear to be
even more risk seeking than the managers who direct large corporate entities.165 If this is
in fact the case, LLC defendants may be systematically demonstrating a bias against
settlements. By encouraging greater settlements by those directing the litigation strategies
of defendant LLCs, their parent corporations, companies or individual owners, the veil
piercing rule may be efficiently increasing the rate of settlement.
One writer, in criticizing the doctrine of veil piercing in the corporate context, has
speculated that settlements based on the risk of veil piercing must be fairly common.166
This is only a bad thing, of course, if companies are settling frivolous strike suits
because of a fear of veil piercing. To the extent that organizational form may lead
companies to under settle, the marginal incentive offered by veil piercing to settle cases
would actually increase the number of settlements167 and achieve all the efficiency
advantages settlements offer.168
My suggestion that veil piercing may increase the level of settlements, improving
the efficiency of the judicial system, may appear to conflict with the dominant general
view in modern law and economics. Most law and economics scholars have argued that
clear legal rules are most likely to enhance settlement because they allow parties to more
accurately predict the likely result of litigation.169 In other contexts, I have made this
same argument.170 Veil piercing doctrinesbecause they are uncertain and do not
necessarily produce predictable outcomesmay be viewed in this sense as reducing the
likelihood of settlement. Here is why veil piercing may help encourage optimal
settlement even though it is uncertain, while uncertain legal rules do not generally have
164. See J.B. Heaton, Settlement Pressure (Feb. 2004) (unpublished manuscript, available at
http://ssrn.com/abstract=300959). Mr. Heaton explains that economic models of settlement often falsely
presume that corporate defendants are risk averse like natural individuals, when in fact, corporate defendants
are likely to be risk neutral (or even risk seeking). As a result, corporate defendants are unlikely to face
settlement pressure (pressure to settle bogus lawsuits to avoid a small risk of catastrophic outcome). Because
corporations are not real entities that can feel risk aversion, the settlement pressure story must be more
complicated than it appears through the lens of traditional economic analysis of litigation. Id. at 13. There are,
however, contradictory results in the literature. See Gillian K. Hadfield, Exploring Economic and Democratic
Theories of Civil Litigation: Differences Between Individual and Organizational Litigants in the Disposition of
Federal Civil Cases, 57 STAN. L. REV. 1275, 1281 (2005).
165. See Larry T. Garvin, Small Business and the False Dichotomies of Contract Law, 40 WAKE FOREST L.
REV. 295, 335 n.179 (2005).
166. Morris, supra note 155, at 287. See also Daniel Q. Posin, Turning Green: Louisianas Piercing-theCorporate-Veil Jurisprudence and its Economic Effects, 79 TUL. L. REV. 311, 315 (2004) ([M]any clear-cut
cases for or against piercing are settled and, thus, not reported.).
167. Cf. Joel Waldfogel, Reconciling Asymmetric Information and Divergent Expectations Theories of
Litigation, 41 J.L. & ECON. 451, 470-71 (1998) (where plaintiff is better informed than defendant, plaintiffs will
have a higher win rate at trial).
168. See Carrie Menkel-Meadow, Whose Dispute is it Anyway?: A Philosophical and Democratic Defense
of Settlement (in Some Cases), 83 GEO. L.J. 2663, 2669-70 (1995) (arguing that settlement promotes values such
as consent, participation, empowerment, dignity, respect, empathy and emotional catharsis, privacy, efficiency,
quality solutions, equity, access, and yes, even justice).
169. See, e.g., George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL
STUD. 1, 9-17 (1984) (doctrinal confusion leads to fewer settlements and burdens courts).
170. Geoffrey Christopher Rapp, Proving Markets Inefficient: The Variability of Federal Court Decisions
on Market Efficiency in Cammer v. Bloom and its Progeny, 10 U. MIAMI BUS. L. REV. 303, 307-08 (2002).
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that effect: in the rare cases where courts pierce veils, it is often in a situation where the
defendant was viewed as having a negotiating, bargaining, or sophistication advantage
over the plaintiff. It would be unjust to refuse to pierce in those circumstances. In these
limited contexts, where the defendant may have had a significant advantage over the
plaintiff in terms of sophistication or bargaining position, defendants may be resisting
settlements even where they can gauge the certainty of their poor legal position
because they expect their bargaining and negotiating power to continue to play a role in
the litigation process. Defendants may be anchoring to their pre-litigation position and
expecting that that advantage will persist, and irrationally resisting settlement.
There is some evidence that veil piercing has induced settlements. Companies have
settled in the face of a veil piercing action where they otherwise might have fought it
out.171 For instance, the Celotex Corporation and its subsidiary, Carey Canada Inc.,
settled such a case for $151.9 million.172 Similarly, even though a bankruptcy judge in
one case found no basis to pierce the corporate veil, such claims became part of a $375
million settlement.173 In another case, a veil piercing claim similarly helped promote
settlement of a mass tort lawsuit.174
The alternative to veil piercingfocusing on the actions of individual LLC memberowners that might lead to direct liabilityis not a perfect alternative to veil piercing for
aligning properly settlement incentives. Focusing on individual fraud, for example, will
often require a higher standard of pleading than a veil piercing claim.175 Therefore, veil
piercing may be available in instances where the particular facts to allege fraud against an
individual are not.
Of course, if veil piercing were eliminated, no one would face any pressure to settle
a veil piercing case. The optimal corporate strategy after veil piercings abolition would
be to never settle an LLC veil piercing claim (since that claim would inevitably fail). But
if there are other claims relating to the tort or contract dispute (claims against the LLC,
claims for personal liability against LLC members or managers), incentives might not be
structured to encourage an appropriate level of settlement. The advantage of maintaining
LLC veil piercing is that the possibility of veil piercing might help optimize the LLCs
incentives to settle other claims arising from the same underlying dispute.
The veil piercing doctrine at times invokes a focus on organizational formalities,
something critics deem an irrelevanc[y].176 It is true that organizational formalities
have little to do with the underlying question of whether the defendant-shareholders
d[id] anything for which they are appropriately held personally liable.177 It may be that
veil piercings focus on the irrelevant is designed as an aid to the unjustly victimized
171. See Coltec Indus., Inc. v. United States, 62 Fed. Cl. 716, 720 (Fed. Cl. 2004) (describing growth of
veil piercing claims in asbestos litigation context).
172. See Fred S. Hodara & Robert J. Stark, Protecting Distributions for Commercial Creditors in AsbestosRelated Chapter 11 Cases, 10 J. BANKR. L. & PRAC. 383, 402 (2001).
173. See Hillsborough Holdings Corp. v. Celotex Corp., 197 B.R. 366, 369 (Bankr. M.D. Fla. 1996); see
also Coltec Indus., Inc., 62 Fed. Cl. at 720 n.2.
174. See Claude D. Montgomery et al., Disclosure Statements and Plan Acceptance, PLI DEVELOPMENTS
IN BANKR. & REORG., A-4-4498 at 302 (1996).
175. See Wachovia Secs., LLC v. Neuhauser, No. 04 C 3082, 2004 WL 2526390, at *11 (N.D. Ill. Nov. 5,
2004) (noting that Federal Rule of Civil Procedure 9(b) does not generally apply to piercing allegations).
177. Id. at 79.
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plaintiff in overcoming evidentiary problems. The plaintiff is able to prove that not
allowing veil piercing would promote fraud or injustice, but lacks evidence of individual
wrongdoing by defendant-shareholders. Therefore, the plaintiff is permitted to argue that
the defendants have committed a lesser wrong, that of ignoring the formalities the law
asks for in a business entity. Where defendants know they have done wrong but that the
evidence is in their possession or has been destroyed, the availability of this evidentiary
shortcut may help bring recalcitrant LLC owners to the settlement table.178
C. Limited Liabilitys Few Advantages in an LLC Context
Against the above-described efficiency gains from LLC veil piercing must of course
be weighed the gains of the alternative of no veil piercing.179 Generally speaking, limited
liability offers three types of advantages, none of which is particularly relevant in the
world of LLCs.180
First, limited liability facilitates the accumulation of capital.181 Without limited
liability, wealthy investors would fear that purchasing a single share of stock in a
business entity would require them to place all of their personal assets at risk.182 Such
investors would withhold capital from the market, and the modern publically held
corporation with many small shareholders could not exist.183
Second, limited liability enhances the transferability of shares so as to make possible
the existence of an organized securities market.184 Without limited liability in some
form, the value of an ownership stake in a business entity would depend on the wealth
level of the person holding that share as well as the wealth levels of all the other equity
owners of the entity.185 A share would be worth less to someone who accounts for a
relatively larger share of the total wealth of the owners of an entity, since that shareholder
is more likely in a world of limitless liability to pay a greater share of any judgment
against the entity.186 As a result, it would be impossible to price shares and to conduct
an organized liquid market.187 Some form of limited liabilityeven one with safetyvalve exceptions like veil piercingis a prerequisite to an orderly and functioning
178. Of course, many courts have rejected a singular focus on corporate formalities in the LLC context, and
some states have gone so far as to attempt to write out formalities from the analysis of veil piercing in LLC
litigation. See Brigham, supra note 7, at 75-76.
179. While I have already pointed out that the arguments against limited liability are not the same as the
arguments for veil piercing, supra Part IV, I address here the arguments for limited liability (recognizing that
they are not the same as the arguments against veil piercing) because they do sometimes surface as justifications
for rejecting veil piercing.
180. See Thompson, supra note 2, at 941 (The theoretical arguments often made for limited liability do not
make a persuasive case to broaden limited liability for the LLC.).
181. See Friedman, supra note 3, at 43 (Corporations were created primarily to facilitate the amassing of
capital from a large number of investors.).
182. Easterbrook & Fischel, supra note 12, at 90; see also Henry Manne, Our Two Corporation Systems:
Law and Economics, 53 VA. L. REV. 259 (1967).
184. Id. at 92 (citing Halperin, Trebilcock & Turnbull, An Economic Analysis of Limited Liability in
Corporation Law, 39 U. TORONTO L.J. 117 (1980)).
185. Id.
186. Id.
187. Id.
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securities market.188
Third, limited liability makes possible, as Easterbrook and Fischel argued, the
delegation of management to a diverse group of agents and risk bearing by those who
contribute capital,189 one of the distinctive features of large business entities and the
modern economy as a whole.190 Limited liability facilitates this separation of ownership
and control by (1) decreasing the costs of monitoring corporate managers;191 (2)
decreasing the costs of monitoring other shareholders;192 (3) increasing the transferability
of shares, raising the threat of change of corporate control that helps discipline errant or
lackadaisical business managers;193 (4) increasing capital market efficiency through
eliminating unlimited liabilitys price distorting effects;194 (5) increasing investors
tendency to diversify efficiently;195 and (6) facilitating optimal investment decisionmaking.196
None of these concerns resonates in the LLC context. First, LLCs are largely the
organizational form for small businesses that do not seek to accumulate large amounts of
capital.197 Corporations were created primarily to facilitate the amassing of capital from
large numbers of investors,198 and therefore required limited liability. Small businesses
have flocked to the LLC form, while large corporations have used the LLC primarily
to create wholly-owned subsidiaries.199 The LLC has not been widely used as a
replacement for the corporation for large, capital intensive industries.
It is true that LLCs have recently emerged as a vehicle of choice for certain types of
hedge and venture capital funds,200 the purpose of which is certainly to accumulate
capital. But such funds typically involve only a few investors, and veil piercing is
unlikely to play a major role in venture capital LLC legal disputes because of the
availability of other, more powerful weapons for plaintiffs like the securities fraud
statutes.

189. Id. at 93.
190. Id.
191. Id. at 94.
192. Id. at 95.
194. Id. at 97.
195. Id. Unlimited liability increases the risk of investing in multiple companies because a single
catastrophic loss would lead to bankruptcy for the investor. Id.
196. Id.
197. Limited liability may have positive incentive effects even in the small business context by stimulating
economically productive business risk-taking. A potential small business owner may be reluctant to explore a
potentially risky line of business if she is subject to losing her entire personal assets as a result. The liability
shield of an LLC or a corporation might assuage such concerns and make that entrepreneur more likely to take a
risk. To the extent that limited liability is an important stimulus to small business activity, it may then have
economic advantages even in the non-public business context. While these potential small business advantages
to limited liability are worthy of consideration (even though they have not been the focus of significant
scholarly work), this Article would argue that they are offset by the efficiency disadvantages of eliminating
LLC veil piercing discussed in Part IV.B.
198. Friedman, supra note 3, at 43.
199. Id. at 44.
200. See Daniel S. Goldberg, Choice of Entity for a Venture Capital Start-Up: The Myth of Incorporation,
55 TAX LAW. 923 (2002).
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Nor are LLCs the vehicle of choice for publicly traded companies.201 Therefore,
market liquidity is not a strong basis for justifying limited liability in the LLC context.202
Even opponents of veil piercing admit that in the small business context, these concerns
are of less significance:
In close corporations, there is much less separation between management and
risk bearing . . .. Because those who supply capital in close corporations
typically are also involved in decisionmaking, limited liability does not reduce
monitoring costs. Other benefits of limited liability in public corporations
facilitating efficient risk bearing and monitoring by the capital marketalso
are absent for close corporations. Because those who contribute capital often
manage, diversification is much less important in close corporations. Similarly,
close corporations restrict the transfer of their shares to ensure that those who
invest will be compatible with existing decisionmakers. Takeover bids are
impossible; they are not needed because of the lack of separation of the
management and risk-bearing functions.203
All of these points could be made equally with respect to the LLC. Monitoring of
LLC managers, in manager-managed LLCs, is accomplished via the operating agreement.
Similarly, in member-managed LLCs, members can easily monitor one anothers
contributions and can use the LLC operating agreement to define the parameters of each
others roles. Change-of-control transactions are not likely in the vast majority of LLC
settings; instead, control is defined according to the terms of the operating agreement.
V. CONCLUSION
In just a few short years, the LLC has come to dominate new business filings in
many states.204 The empirical work in this Article has demonstrated that there have been
a large number of cases involving veil piercing in the LLC context. In general, the
empirical results indicate that LLC veil piercing occurs along patterns similar to
corporate law veil piercing, with the same states leading the way in terms of piercing
rates, and the same types of factors tending to matter in determining judicial outcomes.
Surprisingly, veil piercing seems less common in LLCs than it has been shown to be in
the close corporation setting.205
This Article has attempted to lay the groundwork for a defense of veil piercing in the
LLC context, something veil piercings critics have claimed has never been offered. The
201. In the early years of the LLC, Robert B. Thompson opined, Since LLCs cannot be expected to have a
public market, the claim for expanding limited liability loses much of its strength. Thompson, supra note 2, at
941. Time has shown that LLCs can be publicly traded, although they thereby lose much of their tax advantages
over corporations, see Susan Pace Hammil, The Limited Liability Company: A Catalyst Exposing the Corporate
Integration Question, 95 MICH. L. REV. 393, 420 (1996) (publicly traded LLCs taxed like corporations), and,
therefore, most LLCs going public convert to the corporate form.
202. See Robert G. Thompson, The Limits of Liability in the New Limited Liability Entities, 32 WAKE
FOREST L. REV. 1, 9 (1997) (Piercing occurs only in close corporations or corporate groups; it does not occur
in publicly held corporations. This emphasizes the benefit of limited liability in supporting public markets.
Conversely, this benefit would do nothing to support expanding a rule of limited liability for LLCs . . . .).
204. Friedman, supra note 3, at 35.
205. See supra Part II.
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policy and statutory attacks on LLC veil piercing, while persuasive and well argued, are
not ultimately convincing.206 While veil piercing may introduce some indeterminacies
into the small business environment, abolishing LLC veil piercing would have the same
effect on perhaps a far greater level. Nor must veil piercing be abolished to achieve some
sort of hidden legislative tort reform agenda. Even if that secret agenda is responsible for
LLC statutes, achieving it indirectly is not efficient compared to direct subsidy. Finally,
veil piercing is entirely consistent with the intellectual origins of the LLC as a
modification of the Latin American limitada and the German GmbH.
The case for LLC veil piercing is strengthened by a consideration of its efficiency
advantages. First, LLC veil piercing helps avoid exposing citizens and businesses to
unjust legal results, increasing their faith in the system and building better norms of
respect for the law. Second, LLC veil piercing may help to realign properly the settlement
incentives of defendant companies. In addition to these efficiency advantages, the case
for LLC veil piercing is augmented by an analysis of the minor role of the supposed
policy advantages of limited liability in the LLC context. Bainbridges proposal to
abolish veil piercing would represent a choice that innocent victims rather than innocent
owners should bear the loss associated with a tort injury or contract breach; that choice
only makes sense if one believes that the efficiency advantages of limited liability
outweigh the efficiency advantages of veil piercing. They do not. LLCs are not widely
used as vehicles for capital accumulation or for entities designed to have easily
transferable ownership interests.
While the general conclusion from the analysis above is that veil piercing has a
place in the emerging body of LLC law, this is not to say that the doctrine is not without
flaw. Others have suggested that veil piercing tests could be codified to reduce
indeterminacy and increase judicial efficiency.207 While any attempt to codify an
equitable safety valve type doctrine might inevitably lead to some unjust results
(potentially incurring the flouting inefficiencies described above),208 there are no doubt
some changes that are appropriate. In particular, though, there is probably room to codify
how corporate formalities will be treated in LLC veil piercing cases. The surprisingly
heavy reliance of courts on formalities in LLC veil piercing cases209 is arguably
inappropriate and perhaps should be scaled back via legislative reform.210
In addition to providing support for the continued use of veil piercing in LLC law,
this Article has also revealed several avenues for further research. Scholars should return
to the legislative histories of LLC statutes and attempt to determine if legislators
contemplated veil piercing in the LLC context. Empirical work on the actual choices
being made by LLC owners in terms of insurance and formality-type investments
(lawyers, accountants, etc.) would also help clarify the actual effects of the veil piercing
doctrine on small businesses. As time passes, the empirical work reported here should be
revisited, with larger sample sizes permitting greater comfort with interpretation of the
results.
206.
207.
208.
209.
210.
See supra Part III.

Matheson & Eby, supra note 88, at 182.
See supra Part IV.A.
See supra Part IV.
Vandervoort, supra note 20, at 83-84.

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The Journal of Corporation Law

64. See supra note 48 and accompanying text.

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Preserving LLC Veil Piercing

This is the equivalent of Thompson, supra note 9, at tbl.3.

RAPP FINAL -SMF.DOC

The Journal of Corporation Law

76. This is the equivalent of Thompson, supra note 9, at tbl.11.

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Preserving LLC Veil Piercing

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The Journal of Corporation Law

84. Id. at 85-86.

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Preserving LLC Veil Piercing

is derived from the Anglo-American joint-stock company.94

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The Journal of Corporation Law

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Preserving LLC Veil Piercing

Bainbridge, supra note 16, at 515.

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The Journal of Corporation Law

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Preserving LLC Veil Piercing

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The Journal of Corporation Law

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Preserving LLC Veil Piercing

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The Journal of Corporation Law

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Preserving LLC Veil Piercing

RAPP FINAL -SMF.DOC

The Journal of Corporation Law

The second supposed explanation relates to negative externalities. Again, though,

RAPP FINAL -SMF.DOC

Preserving LLC Veil Piercing