Members and managers of Iowa limited liability companies (LLCs) are generally protected from incurring personal liability for the act(s) and/or omission(s) of the LLC. Indeed, Iowa Code Section 489.304 identifies some of the protections afforded to members and managers of an Iowa LLC:
1. For debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise all of the following apply:
a. They are solely the debts, obligations, or other liabilities of the company.
b. They do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.
Despite the language reproduced above, litigants will often attempt to “pierce the corporate veil,” which generally means: hold members and/or managers of an LLC personally liable for certain act(s) and/or omission(s). Iowa’s appellate courts have touched upon the legal theory of “piercing the corporate veil” in many cases. For example: See Cemen Tech v. Three D Industries, L.L.C., 753 NW 2d. 1 (Iowa 2008). Litigants often attempt to pierce the corporate veil and hold members and/or managers personally liable by arguing corporate formalities are or have been disregarded. Iowa’s Limited Liability Company Act, however, addresses this issue and restricts Iowa courts from piercing the corporate veil in certain circumstances, which may come as a surprise to many.
Iowa Code Section 489.304(2) limits an Iowa court’s ability to pierce the corporate veil, stating in part:
The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company.
The language reproduced above was adopted in approximately 2008 and is relatively new in Iowa and several other jurisdictions. As of the date this article was published, Iowa’s appellate courts have yet to opine on the scope of protection afforded under Iowa Code Section 489.304(2). At least one court, however, has recognized such language will likely effect a litigant’s ability to pierce the corporate veil. See In re Wheeler, 444 B.R. 598, 608 (Bankr. D. Idaho 2011) (citing language identical to section 489.304(2) and stating, “[a]lthough the factors considered in corporate veil piercing cases can be applied in the LLC context, those factors may apply with different weight.”).
While Iowa’s courts have yet to opine on the issue, comments to the Revised Uniform Limited Liability Company Act (RULLCA) provide some guidance. Comments to RULLCA state that while a failure to observe formalities is well established as a ground for piercing the veil of a corporation, it is not appropriate for an LLC, “because informality of organization and operating is both common and desired.”
Iowa Code Section 489.304 seems to answer some questions, but creates others. For example, section 489.304(2) is narrowly tailored to protect an LLC’s corporate actions: “[t]he failure of a limited liability company to observe…” However, what about the independent act(s) of the LLC’s individual members and/or managers – do the protections afforded under Section 489.304(2) apply if a member and/or manager fails to individually observe corporate formalities? One can make arguments either way and a licensed attorney should be able to provide guidance on such issues.
It is also important to note that Iowa Code Section 489.304 does not address several other well-recognized justifications for veil piercing, including: undercapitalization, alter ego, and fraud. Because Iowa Code Section 489.304 does not address such issues, strong arguments exists that Iowa courts may use such factors to pierce the veil of an Iowa LLC.
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