Tax Monitor
WEST VIRGINIA LEGISLATURE ALTERS PIERCING THE VEIL ANALYSIS FOR LIMITED LIABILITY COMPANIES
April 22, 2022
To avoid facing a piercing the veil argument, West Virginia limited liability companies should ensure they are adequately capitalized and carry sufficient insurance coverage. West Virginia Senate Bill 6 (“SB 6”), signed by Governor Justice on March 28, 2022 and effective June 10, 2022, limits the ruling of the Supreme Court of Appeals of West Virginia in Joseph Kubican v. The Tavern, LLC, 752 S.E.2d 299 (2013) and substantially reduces opportunities for piercing the limited liability company veil to inflict personal liability on LLC members and managers.
In Kubican, the Court addressed an issue of first impression in West Virginia, specifically whether West Virginia’s enactment of the Uniform Limited Liability Company Act protects LLC members from claims attempting to pierce the LLC’s “corporate veil.” Id. at 301-02. Ultimately, after analyzing the language of W.Va. Code §31B-3-303 and examining how other courts have evaluated claims to pierce the veil of an LLC, the Court answered this question in the negative, creating this “general test”:
[T]o pierce the veil of a limited liability company in order to impose personal liability on its member(s) or manager(s), it must be established that (1) there exists such unity of interest and ownership that the separate personalities of the business and of the individual member(s) or managers(s) [sic] no longer exist and (2) fraud, injustice, or an inequitable result would occur if the veil is not pierced. This is a fact driven analysis that must be applied on a case-by-case basis and, pursuant to W.Va. Code § 31B-3-303(b), the failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business may not be a ground for imposing personal liability on the member(s) or manager(s) of the company.
Kubican at 313.
SB 6 restricts the applicability of the Kubican test by amending Section 31B-3-303 of the West Virginia Code. Under the new Section 31B-3-303(d), before the Kubican analysis can be applied to analyze a claim to pierce the veil of an LLC, it must first be determined that “(1) the company is not adequately capitalized for the reasonable risks of the corporate undertaking and (2) the company does not carry liability insurance coverage for the primary risks of the business, with minimum limits of $100,000 liability insurance, or such higher amount as may be specifically required by law.” This new requirement essentially acts as a roadmap providing direction for how LLC members may largely avoid personal liability.
SB 6 further clarifies that (i) piercing the corporate veil is not necessary to utilize the doctrine of joint enterprise liability, and (ii) Section 31B-3-303, as amended, does not shield LLC members from liability for their tortious conduct when acting on behalf of the LLC, but such liability does not require a veil piercing analysis. SB6 also introduces a “clawback” provision into Section 31B-3-303, allowing certain creditors of an LLC to clawback transfers made to an LLC member that has committed a “wrongful act” when the LLC cannot satisfy the creditor’s judgment.
The full text of enrolled SB 6 can be found here.