Three Short Takes: (1) Exclusive Nature of Florida Charging Order Precludes Garnishment; (2) Tricky Signature Block on Contract Personally Obligates Georgia LLC’s Manager; (3) Idaho Clarifies That Veil-Piercing Claims Are Equitable

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  • Three Short Takes: (1) Exclusive Nature of Florida Charging Order Precludes Garnishment; (2) Tricky Signature Block on Contract Personally Obligates Georgia LLC’s Manager; (3) Idaho Clarifies That Veil-Piercing Claims Are Equitable | LLC Law Monitor

Three Short Takes: (1) Exclusive Nature of Florida Charging Order Precludes Garnishment; (2) Tricky Signature Block on Contract Personally Obligates Georgia LLC’s Manager; (3) Idaho Clarifies That Veil-Piercing Claims Are Equitable

We have a roundup this week of three recent LLC cases.

1.   Charging Order. A dispute between two members of a Florida LLC resulted in litigation, in which the trial court ultimately awarded one member a $41,409 judgment against the other member. After an appeal that affirmed the judgment, and on the prevailing member’s motion, the trial court issued a writ of garnishment in favor of the prevailing member. The LLC as garnishee indicated that it was indebted to the losing member in an amount in excess of the judgment, and that it had funds in that amount in its possession. The court then ordered the LLC to pay the judgment amount to the prevailing member, under the writ of garnishment against the member’s distributions from the LLC.

The losing member appealed the garnishment order, contending that the Florida LLC Act’s charging order provisions barred the garnishment. Young v. Levy, 140 So.3d 1109 (Fla. Dist. Ct. App. June 18, 2014).

Florida’s LLC charging order statute states:

Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.

Fla. Stat. § 608.433(5). The member that won the garnishment order argued that the LLC’s distributions were “profits” or “dividends” subject to a writ of garnishment and thus exempt from Section 608.433(5). However, Section 608.433(5) refers to the judgment debtor’s “interest” in the LLC, and the Florida LLC Act defines a member’s interest to include the profits and losses of the LLC. Fla. Stat. § 608.402(23). The court accordingly relied on the “sole and exclusive remedy” language of Section 608.433(5) and reversed the garnishment order. Young, 140 So.3d at 1112.

This is not a surprising result, but it’s always good to see an appellate court interpret a statute in a straightforward way. Exclusive does mean exclusive.

2.  Personal Liability. A Georgia LLC entered into four written contracts with an advertising agency, for print and Internet advertising. The LLC did not pay the full amount of the agency’s invoices, and the agency sued both the LLC and its manager for the balance. The trial court found in favor of the agency and awarded judgment against the LLC, and against its manager, for damages, attorneys’ fees, and interest.

The manager appealed, contending that he was not a party to the contracts and signed them only in his representative capacity. Buffa v. Yellowbook Sales & Distrib. Co., No. A14A0209, 2014 WL 2766746 (Ga. Ct. App. June 19, 2014).

The four agreements showed that they were with the LLC, but they also had language that implicated the manager. Clause 15F of each agreement stated: “The signer of this agreement does, by his execution personally and individually undertake and assume the full performance thereof including payments of amounts due thereunder.” Id. at *1.

Additionally, the signature block of each contract stated: “This Is an Advertising Contract Between Yellow Book and [printed company name] and [signature] Authorized Signature Individually and for the Company (Read Clause 15F on reverse side).” The court reviewed the language and signature blocks and concluded that the manager was clearly a party to the contracts and therefore liable to pay amounts owing. Id. at *2.

The court also rejected the manager’s argument that he was at most obligated as a guarantor of the LLC’s obligations and therefore was not liable because his guaranty did not satisfy the Statute of Frauds. “Since the language employed in the Yellowbook advertising contracts reflects that Buffa agreed to undertake a primary obligation to perform under the contract, we need not address his arguments regarding the Statute of Frauds.” Id. at *3 n.3. The Court of Appeals therefore affirmed the trial court.

We often hear the maxim, caveat emptor, or buyer beware. This case illustrates the maxim that signers of contracts, even when signing for an LLC, must beware of language in the contract or in the signature block that may unexpectedly saddle the manager with personal liability for the LLC’s obligations.

3.   Equity and Veil-Piercing Claims.  The Idaho Supreme Court ruled earlier this summer on a breach of contract lawsuit that involved multiple claims, including several veil-piercing claims. Wandering Trails, LLC v. Big Bite Excavation, Inc., 329 P.3d 368 (Idaho June 18, 2014). The court’s discussion of the issues and the facts is lengthy, but one part of the opinion stands out because it resolves an unclear issue in Idaho law.

Idaho law is fairly clear on the basic rule: To pierce the veil of an Idaho LLC and impose personal liability on the LLC’s members or managers, the claimant must show that the LLC is the alter ego of the members, i.e., that there is a unity of interest and ownership to a degree that separate personalities of the LLC and members do not exist, and that if the acts complained of were to be treated as only the acts of the LLC, an inequitable result would follow. Id. at 376.

The court pointed out, however, that Idaho law is not clear whether veil-piercing claims are issues at law or at equity. Id. at 373. The significance is that if veil piercing is an equitable claim, then the trial judge must decide whether to pierce the veil. If it is not an equitable claim, the jury will decide whether the veil is to be pierced. “This Court’s opinions have been unclear regarding whether veil-piercing claims present a question for the jury or whether they are equitable issues to be tried by the court.” Id.

The court reviewed prior decisions, pointed out the inconsistencies, and concluded: “To clarify, we hold that issues of alter ego and veil-piercing claims are equitable questions….In these cases, the trial court is responsible for determining factual issues that exist with respect to this equitable remedy and for fashioning the equitable remedy.” Id. The court noted that a court may empanel an advisory jury on factual questions relevant to piercing the veil, but is not required to do so.

The court’s ruling on this issue is not surprising, because piercing the veil is universally recognized as an equitable remedy. “The doctrine of piercing the corporate veil is equitable in nature.” 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.25, at 162 (rev. vol. 2006) (footnote omitted). What is perhaps surprising was the confusion in prior Idaho law, which Wandering Trails has now straightened out.

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