In a significant decision regarding banking law, the Supreme Court of Alabama issued a ruling this past October. In Braden Furniture v. Union State Bank, No. 1110943 (Ala. Oct. 19, 2012) the issue was whether the provisions in the Alabama Uniform Commercial Code (more commonly referred to as simply “the UCC”) supersede common-law claims of negligence and wantonness in the event that a drawer seeks to recover from a depository bank any loss of payment for unauthorized checks. The background of this case dealt with an employee of Braden’s furniture who misappropriated funds from Braden accounts and then wrote checks from the company and subsequently deposited those checks into her own USB account. The Supreme Court held that common law claims of negligence and wantonness are in fact displaced by Alabama UCC Article 3 under these circumstances. The court offered the following explanation “Braden Furniture’s common-law claims based upon Union State Bank’s alleged acceptance of unauthorized checks and Union State Bank’s presentment of those improperly payable checks to Braden Furniture’s bank for payment. Because the UCC provides that transactions such as these are governed by the relationship between the drawee bank and its customer, and between the drawee bank and the depository/collecting bank, to allow Braden Furniture’s common-law claims of negligence and wantonness to proceed would create rights, duties and liabilities inconsistent with those set forth in the UCC.” This case was brought before the Alabama Supreme Court on appeal from a summary judgment for Union State Bank and the Supreme Court affirmed the summary judgment.
Under Alabama law a corporate entity can be subjected to a claim of alter ego. A claim of alter ego attacks the validity of the corporate entity and seeks to reach the individuals behind the corporate veil.
What this means is that a corporate entity, whether it be an LLC, a corporation, or a limited partnership, must be properly formed and operated or the organizers, members, shareholders or limited partners. If not, individuals may be subjecting themselves to liability. Traditionally piercing a corporate entity in Alabama has been difficult but recent cases such as Hill v. Fairfield Nursing & Rehabilitation, 134 So.3d 396, 412 (Ala. 2013) illustrate that while the claim of alter ego or piercing the corporate veil is difficult there are an increasing number of cases where a plaintiff pursuing that claim has been successful at reaching individuals behind the corporate entity.
What this means for an individual, member, limited partner, or shareholder of a corporate entity is that attention to detail must be maintained and the corporate structure properly operated or that entity may be disregarded by the courts.
A review of how the corporate entity is operated and whether it is properly maintaining its corporate shield includes the following:
- If you are an LLC do you have valid operating agreement?
- Are minutes kept of regular meetings of the corporation?
- Do you maintain a separate corporate bank account which does not have personal funds or funds from other entities co-mingled in the bank account?
- If you are a corporation have stock certificates been properly issued to shareholders of the corporation?
- Has the corporate entity been properly capitalized?
- Is the corporate entity so controlled by another entity or individuals so as to make it the instrumentality or alter ego of the controlling entity/person? If so, has that control been misused.
Alabama has typically recognized three extraordinary circumstances under which it may be appropriate to pierce the corporate veil:
- Where the corporation possesses grossly inadequate capital;
- Where the corporation is conceived or operated for fraudulent purpose; or
- When the corporation is operated as the alter ego of an individual or entity who exerts excessive control over the same.
See Gibson v. JRM, Inc., 812 So.2d 1269 (Ala. Civ. App. 2001); see also, Messick v. Mooring, 514 So.2d 892, 893 (Ala. 1987).
We have been involved with defending alter ego claims and can assist you in a review of your corporate structure and operation so as to minimize the possibility that you corporate entity will be set aside exposing you to personal liability.
We would welcome the opportunity of addressing your questions on this issue and our initial consultation is always at no charge.
The Alabama law governing limited liability companies changed effective January 1, 2015. It is important to understand the changes the new act known as the Alabama Limited Liability Company Law of 2014 makes to the prior LLC law.
SUMMARY OF SIGNIFICANT CHANGES
The new Act recognizes the contractual nature of the limited liability company. Many of the Act’s provision can be changed by agreement of the members to fit their particular needs. If the members do not change these provisions there are many default provisions that become applicable. (The upshot of the mandatory default provisions in the new law require careful preparation of the limited liability company agreement to make certain that members are not inadvertently binding themselves to default provisions they do not wish to follow in their LLC.)
Under the old law many LLC’s were formed without the preparation of what under the old Act was called an Operating Agreement and under the new Act is called the Limited Liability Company Agreement. The filings required to form, dissolve, merge or convert a limited liability company are now designed to simply provide notice to the State and third parties that the limited liability company exists. (What this means is that the details about the limited liability company will now need to be contained in the limited liability company agreement. If you visit the Secretary of State website you will see that the form for creation of an LLC is now very limited underscoring the need for the preparation of a limited liability company agreement.)
The Limited Liability Company Agreement for the LLC will identify the person or persons who will direct and oversee the activities and affairs of the limited liability company will be governed by the limited liability company agreement.
Authority to act. It should be noted that there is no statutory authority to bind the LLC. A person’s authority to bind the limited liability company will be governed by the Limited Liability Company Agreement and the law of agency.
Once again, the limited liability company agreement becomes important in that banking institutions and others dealing with the limited liability company will now likely all require a clear statement of authority in the limited liability company agreement.
Series. A unique feature of the new Act is that it provides for the creation of what is known as series, LLC’s. The Act permits the limited liability company to establish, either through a Certificate of Formation or through its Limited Liability Company Agreement one or more designated series of assets with which certain members may be included. The Act provides that the assets of one series will not be liable for the obligations of the limited liability company or another series. (This of course requires attention in both the Certificate of Formation and in the Limited Liability Company Agreement. It should be noted in the past many people formed a different LLC for each aspect of business which they wanted to engage in. However, it is likely if the series LLC is utilized that an improperly formed series or one which does not comply with the law will face the challenges of an alter ego or piercing the veil claim if suit is brought against it.)
We will be happy to assist you with a review of your current LLC document or the formation of a new LLC.