Piercing the Fiduciary Veil

35 Pages Posted: 9 Mar 2014 Last revised: 31 May 2014

See all articles by Colin P. Marks

Colin P. Marks

St. Mary's University School of Law

Date Written: March 7, 2014

Abstract

Limited partnerships (LPs) and limited liability companies (LLCs) permit formation with a unique management structure in that these entities may be managed by another limited liability entity, such as a corporation. Thus, the true managers are those individuals who manage the manager. It is well settled that the managing entity, such as a corporate general partner, owes default fiduciary duties, but what of these second-tier managers? Technically, it is the managing entity that owes the duties, not the managing entity’s owners, officers, and directors, yet courts have struggled with strict adherence to this separation when it would seem inequitable to do so. Unfortunately, courts and commentators have failed, thus far, to articulate a clear rule as to when fiduciary duties should attach to second-tier managers that also makes allowances for countervailing concerns regarding the scope of such a duty. This article offers an approach aimed at resolving this problem by simply re-examining what it is that courts are doing when they attach liability. In the process of doing so, this article makes three major contributions to the existing scholarship. First, it is the only article describing the three main approaches courts have adopted to address the problem. Second, the article explains why alternate equitable theories, as currently applied, are inadequate to address this issue. Finally, this article offers a unique solution as to when fiduciary duties should attach to second-tier managers. Specifically, this article posits that liability should attach under a form of piercing the corporate veil. Unlike traditional piercing, which focuses on the abuse of the corporate form, this limited form of piercing, which I dub “piercing the fiduciary veil,” should focus on the abuse of the control exercised by second-tier managers.

Keywords: piercing, piercing the corporate veil, fiduciary, limited partnership, LP, limited liability company, LLC, manager, general partner, USACafes, Harwood, defalcation,McBeth, Bennett, Gotham, Wallace, Delaware, Texas, RULPA, ULPA, ULLCA

JEL Classification: K1, K10, K12, K13, K19, K2, K20, K22, K4, K41, L1, L10

Suggested Citation

Marks, Colin P., Piercing the Fiduciary Veil (March 7, 2014). Lewis & Clark Law Review, Vol. 19. Available at SSRN: https://ssrn.com/abstract=2406217 or http://dx.doi.org/10.2139/ssrn.2406217

Colin P. Marks (Contact Author)

St. Mary's University School of Law ( email )

One Camino Santa Maria
San Antonio, TX 78228
United States

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