Washington Court of Appeals Clarifies That Fraud Need Not Be Pleaded with Particularity to Support Veil-Piercing Claim

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Washington Court of Appeals Clarifies That Fraud Need Not Be Pleaded with Particularity to Support Veil-Piercing Claim

The Washington Court of Appeals had to decide earlier this year whether the plaintiff’s complaint in an LLC veil-piercing case was adequate, in Landstar Inway, Inc. v. Samrow, 181 Wn. App. 109, 325 P.3d 327 (May 6, 2014). The plaintiff alleged that the veil should be pierced because the LLC member used the LLC form to commit fraud. The LLC member moved to dismiss the claim against him on grounds that the complaint lacked sufficient detail. The court held that the strict pleading requirements for a fraud claim do not apply to a veil-piercing claim based on fraud allegations.

A brief review of the pleading requirements for a complaint is in order. A complaint is the document that a plaintiff files in court to begin a lawsuit. It must contain a statement of the plaintiff’s claim showing that the plaintiff is entitled to relief from the defendant, and a demand for judgment for the relief requested. In most cases the relief requested will be an award of damages, i.e., money from the defendant to compensate the plaintiff.

The rules of court govern the requirements for a complaint. Washington’s court rules for civil cases, like those of most states, are based on the Federal Rules of Civil Procedure. In most cases the complaint must provide only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Wash. R. Civ. P. 8(a). This is often referred to as “notice pleading,” meaning that the complaint is only required to have sufficient detail to put the defendant on reasonable notice of the claim. The expectation is that the parties will be able to learn additional details, if necessary, during the discovery phase of the proceedings.

The pleading rules are stricter for some types of allegations, however, including claims of fraud:

“In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.” Wash. R. Civ. P. 9(b) (emphasis added). A complaint that alleges fraud but fails to plead the elements of fraud and the detailed circumstances constituting the fraud may face dismissal.

Background. Frank Samrow and Terry Walker formed Oasis Pilot Car Service LLC to provide pilot car dispatching services to trucking companies. Truckers hauling tall cargo loads in Washington are required to have a pilot car escort. The pilot car has an attached, vertical survey pole, higher than the load, and precedes the truck to ensure safe passage under overpasses and bridges.

Oasis entered into a master agreement in 2009 with Landstar Inway, Inc. to provide pilot car services. Later that year Oasis responded to a request from Landstar by dispatching Phil Kent to escort a truck with a tall load from the Canadian border through Washington.

Kent’s pilot car passed under a freeway overpass near Lakewood that Kent believed had been safely cleared, but the truck’s load struck the bottom of the overpass, damaging both the load and the overpass. Landstar eventually paid the owner of the load and the Washington Department of transportation for their damages, and then tendered its indemnity claim to Oasis under the master agreement. The master agreement required Oasis to maintain vehicle liability insurance, but Samrow’s insurance company rejected Landstar’s claim because the insurance was on his personal vehicle.

Landstar then sued Oasis, Samrow, and Kent’s company, CJ Car Pilot, Inc., for negligence, breach of contract, and breach of indemnity. Samrow moved for summary judgment dismissing him from the lawsuit, on grounds that any liability ran to Oasis and not to Samrow personally. The trial court granted Samrow’s summary judgment motion, ruling that the undisputed facts did not justify piercing the LLC’s veil or imposing personal liability on Samrow, and Landstar appealed. Landstar, 181 Wn.App, at 119.

Court of Appeals. The court began its review of Washington’s LLC veil-piercing law by referring to Chadwick Farms Owners Association v. FHC, LLC, 166 Wn.2d 178, 207 P.3d 1251 (2009), and Section 25.15.060 of the Washington LLC Act. To succeed in piercing the veil of an LLC, a plaintiff must prove that the LLC form was used to violate or evade a duty and that the LLC form should be disregarded to prevent loss to an innocent party. Abuse of the corporate form must be shown to establish that the LLC was used to violate or evade a duty, and that typically involves some type of fraud, misrepresentation, or manipulation of the LLC to the member’s benefit and the creditor’s detriment. Landstar, 181 Wn.App. at 123.

Landstar alleged that Samrow abused the corporate form by fraudulently concealing the fact that Oasis dispatched pilot car operators instead of providing pilot car services of its own, and by fraudulently misrepresenting his own personal insurance as Oasis’, to satisfy Oasis’s insurance obligation under the master agreement. But Samrow argued that the court should reject Landstar’s veil-piercing claim because it was based on fraud, and Landstar failed to plead the elements of fraud and the factual circumstances with the particularity required by Civil Rule 9(b).

The court pointed out that it was faced with an issue of first impression: “There is no Washington case addressing whether a party must satisfy the pleading requirements of CR 9(b) in seeking to disregard a corporate form.” Id. at 125. The court looked to the federal courts because they have addressed the issue, but found no unanimity there.

Washington law is clear that piercing the veil is an equitable remedy and not a separate cause of action. If the veil of an LLC is pierced, a member may be held personally liable for the LLC’s underlying tort or breach of contract, but piercing the veil is not a freestanding claim for relief. Id. at 125-26 (citing Truckweld Equip. Co. v. Olson, 26 Wn.App. 638, 643, 618 P.2d 1017 (1980)). From that premise the court reasoned that CR 9(b)’s heightened pleading requirement for claims of fraud should not apply to claims seeking the remedy of piercing the veil, even if the veil-piercing claim is based on fraudulent conduct. The court also noted that its conclusion was consistent with Washington’s commitment to maintaining liberal pleading standards. Id. at 126.

Having rejected Samrow’s contention that Landstar’s complaint failed to satisfy the CR 9(b) heightened pleading requirement, the court went on to the merits of Samrow’s summary judgment motion. The court reversed the trial court’s grant of summary judgment on the veil-piercing claim because it found that material issues of fact remained to be resolved at trial.

Comment. Landstar is significant because it resolved an open question about the pleading requirements for a complaint that seeks to pierce the veil of an LLC, where the veil-piercing request is predicated on fraudulent acts or statements. The court made clear that the normal “notice pleading” rules apply in such a case, unlike the stricter requirements for pleading a direct claim of fraud.

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