The Limits of Business Limited Liability: Entity Veil Piercing and Successor Liability Doctrines

40 Pages Posted: 26 Jun 2011

See all articles by John H. Matheson

John H. Matheson

University of Minnesota Law School

Date Written: January 1, 2004

Abstract

The quest for limited liability in business enterprises and transactions has been a driving force in the development of business organization law for centuries. The historical development of corporations and limited partnerships evidences this primary goal. The recent development of the modern forms of limited liability partnerships and limited liability companies proves that this quest continues unabated. In addition, parties to significant business transfer transactions have long sought by construct and contract to apportion and limit their respective legal responsibilities and liabilities.

Counterbalancing this inexorable trend toward limited liability has been the penchant of common law jurisprudence to define its limits. Common law theories of piercing the corporate veil and successor liability, among others, have been developed and expanded by the courts as equitable restraints on the strength of business limited liability protections, making these protections more akin to presumptions than unassailable principles.

If, as the famous aphorism goes, "hard cases make bad law," then hard business cases provide a recipe for Hungarian goulash. So it is with the entree recently served up by the Minnesota courts in a series of substantive trial court determinations and three reported appellate decisions, culminating in the Minnesota Supreme Court's recent en banc report of Johns v. Harborage I, Ltd.. Here's how the recipe goes. Start with one business enterprise, Gators Bar and Grill ("Gators") located in the Mall of America shopping center. Chop that business into three legally distinct parts, all with intertwined relationships: a limited partnership that leases the business premises, holds the liquor license, and owns the operation's physical assets; a second limited partnership that provides management services to the business; and a corporation that supplies employees to the business. Add one sexual harassment victim with a valid but unsatisfied judgment against the corporate piece of the business. Separately arrange a transfer of the assets of the first limited partnership, not found to be liable on the harassment verdict, to a distinct, unrelated corporation, from which satisfaction of the harassment judgment ultimately is sought. Cover with a combination of both federal and state common and statutory law. Combine all ingredients together and sprinkle liberally with equitable considerations. The result is, as with many other culinary creations, at least interesting. Whether or not one finds it appealing or appetizing is, as in all matters of this kind, dependant on one's personal (legal) tastes.

This article seeks to make sense of the recipe and the ultimate concoction that is Johns v. Harborage I, Ltd. (collectively "Johns").The legal substance of the case involves the use by business parties of devices to limit their liabilities. Part II describes the development of limited liability entities ("LLEs"), and the use of limited liability transactions, such as those employed by the defendants in Johns, as well as exceptions to the applicable presumptions of limited liability. Part III parses the facts and history of the multiple Johns decisions. Part IV explains and explores the rulings in Johns in light of the legal and equitable principles surrounding the evolution of business limited liability and its exceptions.

Keywords: Piercing, Enterprise Liability

Suggested Citation

Matheson, John H., The Limits of Business Limited Liability: Entity Veil Piercing and Successor Liability Doctrines (January 1, 2004). William Mitchell Law Review, Vol. 31, p. 411, 2004-2005, Available at SSRN: https://ssrn.com/abstract=1870379

John H. Matheson (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-3879 (Phone)

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