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GreenHunter Energy, Inc. v. Western Ecosystems Technology, Inc.

Supreme Court of Wyoming

November 7, 2014

GREENHUNTER ENERGY, INC., a Texas corporation, Appellant (Defendant),
v.
WESTERN ECOSYSTEMS TECHNOLOGY, INC., a Wyoming corporation, Appellee (Plaintiff)

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Appeal from the District Court of Platte County. The Honorable John C. Brooks, Judge.

Representing Appellant: Matthew D. Kaufman and J. Zachary Courson of Hathaway & Kunz, P.C., Cheyenne, Wyoming. Argument by Mr. Kaufman.

Representing Appellee: James R. Salisbury and Anthony M. Reyes of Riske & Salisbury, P.C., Cheyenne, Wyoming. Argument by Mr. Salisbury.

Before BURKE, C.J., and HILL, KITE, DAVIS, and FOX, JJ.

OPINION

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DAVIS, Justice.

Appellant GreenHunter Energy, Inc. is the sole member of a limited liability company, GreenHunter Wind Energy, LLC (LLC). It appeals from a district court decision piercing the LLC's veil to hold it liable for the LLC's contractual obligations to Appellee Western Echosystems Technology, Inc. (Western). We conclude that under the specific circumstances of this case, the evidence supports the use of this extraordinary equitable remedy. We therefore affirm.

ISSUES

Appellant presents the following issues, which we have rephrased somewhat:

1. Did the district court err as a matter of law by applying incorrect factors to determine whether the LLC's veil of limited liability should be pierced?

2. If the district court consulted the appropriate factors in determining whether to pierce the veil of the LLC, were its factual findings clearly erroneous and misapplied to the law?

FACTS

In 2009, Appellee Western and the LLC[1] entered into a contract whereby Western undertook to provide the LLC consulting services related to the potential development of a wind turbine farm in Platte County, Wyoming. While Western performed under the contract, the LLC paid nothing for Western's services. Western consequently brought a breach of contract action against the LLC and obtained a judgment in the amount of $43,646.10. Western Ecosystems Technology, Inc. v. Greenhunter Wind Energy, LLC, No. 2010-131 (8th Dist., Wyo. 2011). The district court also granted judgment in favor of Western in the amount of $2,161.84 for attorney's fees incurred in bringing a motion to compel discovery. The judgments cannot be satisfied because the LLC has no assets upon which Western can execute.

After learning that it could not collect on its judgments against the LLC, Western brought this action against Appellant, the sole member of the LLC, seeking to pierce the LLC's veil and hold Appellant liable for the LLC's contractual obligations. After discovery was complete and dispositive motions were denied, the case proceeded to a bench trial.[2]

At trial, Western argued that Appellant was the LLC's alter ego and presented evidence, much of it uncontroverted, that it felt proved as much. Western was able to demonstrate that the LLC is a wholly-owned subsidiary of Appellant, the latter being the sole member and manager of the former. The LLC consistently carried an operating capital balance which was insufficient to cover its debts, and on numerous occasions its account had a balance of zero. Western showed that Appellant decided when and how much money to advance to the LLC to allow it to pay its accounts payable. Therefore Appellant, as the sole source of operating funds for the LLC, decided which of its creditors would be paid. Although Appellant advanced funds to permit the LLC to pay some creditors, it did not transfer any funds to allow the LLC to pay Western.

Western was also able to show that the LLC did not have employees of its own, but that employees of Appellant performed services for and on behalf of the LLC, including negotiation of wind farm leases and other agreements. The LLC's chairman and general counsel held the same positions with Appellant.

Western also established that Appellant and the LLC have the same business address. All bookkeeping and financial management of the LLC were performed by employees of Appellant, including maintenance of accounts receivable and accounts payable for the LLC. The tax returns of the LLC were consolidated with those of Appellant because the LLC had only a single

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member, and federal tax law permitted it to be treated as a disregarded entity. By this means, Appellant was able to deduct $884,092.00 in expenses and claim a loss of $61,047.00 for the LLC's activities on the Platte County wind farm project.

For its part, Appellant presented evidence through its and the LLC's general counsel. This witness was not personally involved in many of the relevant events, and in the instances in which he was involved, he could not recall much. Appellant also provided exhibits, such as certain LLC filings with Wyoming's Secretary of State and the LLC's general ledger from 2007 through 2011. These documents tended to demonstrate that the two entities were detached, and that they maintained separate accounts.

The district court found in favor of Western. It pierced the LLC's veil and awarded a judgment of $45,807.94 against Appellant for the amount the LLC had not paid under its contract with Western and for the sanctions incurred during the underlying action.

Appellant timely perfected this appeal. Additional evidence from the bench trial, as well as the district court's findings of fact and conclusions of law, will be discussed as necessary below.

STANDARD OF REVIEW

A district court's conclusions of law are subject to de novo review. Miner v. Jesse & Grace, LLC, 2014 WY 17, ¶ 17, 317 P.3d 1124, 1131 (Wyo. 2014). We review findings of fact to determine if they are clearly erroneous when compared to the record. Id.; see also Windsor Energy Grp., L.L.C. v. Noble Energy, Inc., 2014 WY 96, ¶ 9, 330 P.3d 285, 288 (Wyo. 2014). A finding is clearly erroneous when, although there is evidence to support it, a review of all the evidence leaves us with the definite and firm conviction that a mistake has been made. Id. Although findings are presumed to be correct, this Court will examine all of the properly admissible evidence in the record, and findings by the trial court are not entitled to the limited review afforded a jury verdict. Id. However, we defer to the district judge to evaluate the credibility of the witnesses, and we do not reweigh disputed evidence. Id. Findings of fact will not be set aside merely because we would have reached a different result. Id. Lastly, this Court assumes that the evidence supporting the prevailing party's position below is true, and it gives that party the benefit of every reasonable inference that can fairly and reasonably be drawn from it. Id.

DISCUSSION

Factors to determine whether the LLC's veil of limited liability should be pierced

Certain legally recognized entities, such as corporations and limited liability companies, are separate and distinct from their owners.[3] Kaycee Land & Livestock v. Flahive, 2002 WY 73, ¶ 4, 46 P.3d 323, 325 (Wyo. 2002); Wyo. Stat. Ann. § 17-29-104 (LexisNexis 2013) (" A limited liability company is an entity distinct from its members." ). The fundamental feature of these business entities is limited liability, although that protection does not extend to behavior resulting in injustice. See Kaycee, ¶ ¶ 4-6, 46 P.3d at 325 (" [A] corporation's legal entity will be disregarded whenever the recognition thereof in a particular case will lead to injustice." ); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 Geo. Wash. L. Rev. 1143, 1145-46 (1994).

The common law therefore allowed courts to pierce the veil of limited liability and disregard the putatively separate entity under certain exceptional circumstances. Kaycee, ¶ 6, 46 P.3d at 326. Courts have

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applied or declined to apply this remedy in a manner that has often been confusing and inconsistent, as two luminaries of the legal world observed over a score of years ago: " Piercing seems to happen freakishly. Like lightning, it is rare, severe, and unprincipled." Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation , 52 U. Chi. L. Rev. 89 (1985) (internal quotation marks omitted).

With the advent of different types of business entities, including limited liability companies, the circumstances under which courts may properly pierce the veil have become even more difficult to understand. However, with the benefit of time and experience, this equitable remedy must begin to be applied with greater consistency and more predictability.

In order to determine how to approach piercing in this case involving a limited liability company, we begin by studying the development of the law governing business organizations. Early on, the corporation was conceived to assure continuity of existence and to provide a means for shareholders to invest without incurring personal liability which might threaten their private wealth for the acts of the business. Kaycee, ¶ 10, 46 P.3d at 327; see also 114 Am. Jur. 3d Proof of Facts 403, § 1 (updated 2014). The concept of limited liability for corporations stimulated commerce and industrial growth throughout the years, and " [t]his incentive to business investment has been called the most important legal development of the nineteenth century." Consumer's Co-op. of Walworth Cnty. v. Olsen, 142 Wis.2d 465, 419 N.W.2d 211, 214 (Wis. 1988) (quoting David H. Barber, Piercing the Corporate Veil, 17 Willamette L. Rev. 371, 371-72 (1981)).

From the time early statutes controlling corporations were enacted, and continuing today in our own Wyoming Business Corporation Act, corporations have been required to meet many formal requirements as to their structure and governance. See Wyo. Comp. Stat. Ann. § 5037 et seq. (Mullen 1920); Wyo. Stat. Ann. § 17-16-101 et seq. (LexisNexis 2013). The corporation is also burdened by additional taxation because " a corporation is subject to tax on its income, and if the income is distributed to shareholders as dividends, they are also taxed on the income, resulting in double taxation." 14A William M. Fletcher et al., Fletcher Cyc. of the Law of Corp. § 6907.50 (updated 2014).

While the limited liability provided by corporations has served an important purpose in the development of our economy, there have been instances when exacting adherence to the concept that shareholders will not be liable for corporate debt led to injustice. See Caldwell v. Roach, 44 Wyo. 319, 333-34, 12 P.2d 376, 380-81 (1932). As a result, courts began piercing the corporate veil. We long ago explained " [t]hat the legal entity of a corporation will be disregarded whenever the recognition thereof in a particular case will lead to injustice, has been announced so frequently that it is hardly necessary to cite the authorities." Id. As the years passed, we continued to summarize circumstances under which a corporate veil would be pierced pursuant to Wyoming law:

Before a corporation's acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate ...

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