Florida court sheds light on company veil piercing

In the 2021 case of the Segal 3rd District Court of Appeal v. Forastero, Inc., an investor who bought and sold real estate used an LLC, he had to enter into a purchase agreement and then withdrew from the deal, claiming he had no personal liability because it is the LLC and not him who signed the agreement.

Her LLC had bought and sold real estate in the past, had a bank account, and had filed income tax returns, but did not have a bank account or other assets or business at the time she entered into the contract. acquisition, with the exception of the right to buy under the acquisition agreement itself and regardless of the initial deposit made, if any. He did not guarantee the deal.

At the time of entering into the acquisition agreement, the seller was informed that the owner of the company had significant assets and appeared to have believed that these assets were owned by the company or would be contributed to the company.

The purchase contract required the LLC, as the buyer, to make a deposit of $ 500,000 to an escrow account within 3 days of signing the agreement, but the owner of the LLC, Segal, testified later that he had decided not to do so because his physical inspection of the property revealed that he would need a significant job and therefore was not a viable candidate for him.

According to the opinion of the 3rd District Court of Appeals, the trial court which rendered judgment against the LLC for breach of contract found in what is known in Florida as further legal action proceedings to make execute the judgment that the individual shareholder was responsible for the judgment, thereby allowing the failed seller to pierce the corporate veil.

The 3rd District Court of Appeals disagreed, finding that none of the three elements necessary to show that the company was an alter ego of Segal or could be pierced existed. Given that all three elements must come together to pierce the corporate veil, it is significant that the Court of Appeal concluded that none of them would apply. The 3 requirements for piercing the corporate veil in Florida are almost uniform in the United States, but state law should be consulted before planning or concluding what the outcome of a particular situation will be.

In this case, the 3rd District Court of Appeal concluded as follows:

1. The LLC was not a mere instrument without substance. Even though it had no assets or activities other than the contract in question at the time it was entered into, the LLC had a significant track record.
2. The LLC was not used to defraud a creditor. There was never any open communication specifically stating that the company had significant assets or promising that the assets of the individual defendant would be contributed to the company.
3. There was no evidence to show that the damage suffered by the seller was caused by the LLC’s default. It seems that the Court of Appeal was wrong on this point, but it was right on both points.

This case highlights that when a business is used to protect an individual from liability, it should probably at least have a bank account or other legitimate assets and evidence of existence in order to avoid being used as a mere instrument. .

This case also shows that judges who preside over trials or render summary judgments will often be biased in favor of the execution of a judgment and the conclusion that there is a situation of “voidable transfer” or alter ego / veil piercing to satisfy the judge’s opinion on what will do justice. to a particular situation.

If Mr. Segal had opened a bank account in the name of the company and explained it more clearly and had actually put money into the account before signing, then the money he deposited could have been used to pay legal defense costs, and the judge’s opinion in the trial court may have been different, saving Segal time and money to appeal. This is a reminder that advisers should base their opinion not only on the law, but also on how judges can apply it.

There are many more piercing cases on the books, and almost all of them are in favor of the debtor, unless some horrible, illegal, or completely inappropriate behavior has occurred. Businessmen and advisers should make judicious use of multiple entities and also be aware of the principles of joint and several liability, apparent partners and superior defendant when structuring contracts and arrangements to limit liability for business and operations. exhibitions.

If you want to know more about this topic, I invite you to read my book Gassman & Markham Florida & Federal Asset Protection Law and watch my YouTube videos on asset protection titled Creditor Protection From A to Z Part I and Advanced Creditor Protection Planning Part. II.