Maryland.
In recent years, Maryland has become one of the most difficult states in which to pierce the corporate veil, with a success rate at about 25.81%.[1] This is an interesting reversal, given that the state had a relatively liberal 40% rate until 1986.[2] Under Maryland law, where there is no allegation of fraud, a court may still disregard the corporate entity and establish personal liability to enforce the so-called a “paramount equity,”[3] but this seems to be a pretty tough standard to meet.
Serio v. Baystate Properties, LLC[4] is a recent case in point. In that case, Baystate entered into a contract with Serio’s LLC, an investment firm, to build houses on lots owned by Serio individually.[5] Serio’s LLC was identified in the agreement as lender and was to provide an escrow account from which Baystate would receive payments.[6] Subsequently, the parties signed multiple addenda modifying the payment terms, which Serio signed as the managing member of the LLC, and also agreed that Serio would not be held personally liable for his LLC’s obligations.[7] When Serio’s LLC failed to make payments at some point, Baystate filed a lawsuit, seeking to pierce the LLC’s veil.[8] The lower court found that, while there was no evidence of fraud, the circumstances (i.e., that Serio personally owned and sold the lots individually, that Serio’s company possessed no assets and very little cash, and that Serio misled Baystate regarding the sale of the homes and failed to deposit the funds from the sale into the LLC) evidenced an intent to evade the LLC’s obligations to Baystate and, thus, warranted the enforcement of a paramount equity.[9]
On appeal, the court explained that a corporate entity will be disregarded: (i) where it is used as a mere shield for the perpetration of a fraud; (ii) in order to prevent evasion of legal obligations; and (iii) where its stockholders (or members) fail to observe the corporate entity, operating the business as if it were their own.[10] As to the third ground, sometimes referred to as the “alter ego” doctrine, factors to be considered include whether the entity was adequately capitalized, its solvency at the time of the transaction, the observance of corporate formalities, and whether the entity had a separate mind, will, or existence of its own.[11] And in this case, the court did not find any exceptional circumstances to justify piercing the LLC’s veil. According to the court, there was no evidence that Baystate entered into the agreement depending on Serio to fund the contracts from his personal account or that it took reasonable steps to assure the availability of adequate funding.[12] Baystate was aware that the lots were in Serio’s name and Serio made it clear that Serio’s LLC was the contractual partner for funding the project, not to mention the subsequent agreement that Serio would not be held personally liable for any obligations of the LLC.[13] Additionally, Serio’s LLC made payments to Baystate consistent with its obligations under the contract for six (6) months, by checks issued from the LLC’s corporate account and signed by Serio as the “Managing Member.”[14] In other words, while Serio’s LLC might have been inadequately capitalized, it nevertheless had a separate existence and fulfilled its contractual obligations until the collapse of the housing market caused problems.[15] That was unfortunate, but in the court’s opinion, veil piercing was not warranted under such circumstances.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064, [email protected], or www.mcbrideattorneys.com.
[1] Oh, supra n.2, at 117.
[2] Id. fn. 192 (internal citation limited).
[3] See Schlossberg v. Bell Builders Remodeling, Inc., Case No. 11-30672 (Ct. App. Md. Feb. 20, 2015).
[4] 60 A.3d 475 (Md. App., 2013).
[5] Id. at 478.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 488.
[10] Id. at 486 (internal citations omitted).
[11] Id.
[12] Id. at 489.
[13] Id.
[14] Id.
[15] Id.