In re All Terrain, LLC

622 B.R. 770

IN RE: ALL TERRAIN, LLC, Debtors.

Bankruptcy Case No. 17-40999-JMM

United States Bankruptcy Court, D. Idaho.

Signed September 24, 2020

Thomas D. Smith, Pocatello, Idaho, Attorney for Chapter 7 Trustee.

Hyrum D. Erickson, Attorney for Robert Edwards.

MEMORANDUM OF DECISION

JOSEPH M. MEIER CHIEF U. S. BANKRUPTCY JUDGE

Introduction

Before the Court is the chapter 7¹ Trustee's Objection to Claim No. 5. Dkt. No. 293. Creditor Robert Edwards ("Edwards") filed Claim Number 5 in this bankruptcy case. On December 16, 2019, the Trustee filed an objection to the claim, Dkt. No. 293, and subsequently filed an amended objection on March 9, 2020. Dkt. No. 307. An evidentiary hearing was set for June 23, 2020, and interested parties filed pre-trial memorandums in support of their positions. See Dkt. Nos. 330 and 331. The Trustee and Edwards thereafter entered a stipulation to resolve the claim by foregoing oral arguments and submitting written closing briefs, Dkt. No. 334, and this Court approved the procedure as stipulated. Dkt. No. 336. The parties were ordered to submit simultaneous closing and response briefs, Dkt. No. 339, and subsequently did so. See Dkt. Nos. 337, 340, and 342.

The Court has considered the stipulated facts and exhibits as well as the arguments put forth, and this Memorandum Decision sets forth the Court's findings, conclusions, and reasons for its disposition of the objection. Rules 7052; 9014.

Facts

The parties stipulated to the following facts for the limited purpose of resolving Claim Number 5:

a. Paul Hathaway ("Hathaway") was the sole owner and operator of both Hathaway Homes Group, LLC ("HHG") and the Debtor, All Terrain, LLC ("Debtor" [or "All Terrain"] ).

b. HHG breached its contract with Edwards by never ordering the mobile home for which he made the down payment of $50,000 and by not transferring $35,000 it was holding for Edward's benefit for the purchase of a lot on which the mobile home was to sit.

c. Edwards is only one of many HHG customers who made down payments or deposits and did not receive the homes they contracted for.

d. From 2015 to 2016, Hathaway spent millions of dollars gambling and some portion of that money came from his businesses, including HHG and the Debtor.

e. Sometime after September 2017, Hathaway took money from both the Debtor and HHG and used it for gambling.

f. Edwards did not enter into any type of contractual agreement with the Debtor or have any dealings with the Debtor.

g. The the (sic) Court may take judicial notice of the existence of Hathaway's personal bankruptcy case, Case No. 17-40989-JMM, and HHG's bankruptcy case, Case No. 17-40992-JMM.

Dkt. No. 334. The parties also agreed to admit the following exhibits to resolve Claim Number 5:

a. Contract between Edwards and HHG dated October 7, 2016 (Exhibit 1);

b. Complaint and Demand for Jury Trial (Exhibit 2);

c. Edwards's incurred attorney costs and fees (Exhibit 3); and

d. Transcripts from meetings of creditors on January 5, 2018 (Exhibit 4).

Id.

Arguments

Edwards dealt exclusively with HHG but seeks to assert a claim in this case against All Terrain. Edwards argues that the distinction between HHG and All Terrain is arbitrary because Hathaway freely transferred funds between both entities, some of which he used to gamble, and because the "books" of each entity are unreliable. Because of Hathaway's actions, Edwards argues that he should be able to pierce the corporate veil of HHG in order to assert his claim against All Terrain in this case. The Trustee objects to this claim because Edwards contracted with HHG and not All Terrain. More specifically, the Trustee argues that a veil-piercing theory is inappropriate here because Edwards seeks to pierce HHG's corporate veil to get to All Terrain, rather than Hathaway as an individual, and that All Terrain does not stand behind HHG's corporate veil.

Analysis and Disposition

1. Piercing the Corporate Veil

"Generally, ‘[m]embers of an LLC are not liable for the misconduct of the company unless it is proven that the company is the alter ego of the member or manager.’ " Drug Testing Compliance Grp., LLC v. DOT Compliance Serv. , 161 Idaho 93, 383 P.3d 1263, 1276 (2016) (quoting Wandering Trails, LLC v. Big Bite Excavation, Inc. , 156 Idaho 586, 329 P.3d 368, 376 (2014). This Court has recently held that a member or manager of an LLC is not shielded from liability for his own wrongful or tortious conduct. See T Street LLC v. Jaques (In re Jaques) , 615 B.R. 608, 629 (Bankr. D. Idaho 2020). "Where a limited liability company shields its member(s) from liability, and equitable considerations compel a court to disregard that shield, creditors may also ‘pierce the veil’ of the LLC by establishing the LLC was the ‘alter ego’ of its member(s), and thereby impose personal liability on the otherwise protected member(s)." Id.

"The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager for a debt, obligation, or other liability of the company." Idaho Code § 30-25-304. Instead, in order to establish an alter ego exists, Edwards must prove "(1) a unity of interest and ownership to a degree that the separate personalities of [the individual and the corporation] no longer exist and (2) if the acts are treated as acts of [the corporation] an inequitable result would follow." Id. at *14 (citing Wandering Trails, LLC v. Big Bite Excavation, Inc. , 156 Idaho at 594, 329 P.3d at 376.

This Court has previously rejected efforts to pierce the corporate veil to allow creditors to reach non-debtor entities. See In re Wheeler , 444 B.R. 598, 609 (Bankr. D. Idaho 2011) (concluding that, although the trustee attempted to pierce the corporate veil to reach the assets of a non-debtor entity controlled by the debtor, the trustee's approach was tantamount to a request for substantive consolidation); In re Alpha & Omega Realty, Inc. , 36 B.R. 416, 417 (Bankr. D. Idaho 1984) (questioning whether "nondebtor parties can essentially be declared involuntary debtors through use of a ‘veil piercing’ theory ...."). Those cases are not directly on point because, here, Edwards is attempting to reach the assets of an entity that is a debtor in a separate, but related, bankruptcy case.

The case before the Court presents a unique situation. Even though Edwards transacted in business exclusively with HHG, an LLC operated by Hathaway, Edwards is seeking to assert a claim in this case against All Terrain, another LLC operated by Hathaway, because of the way Hathaway conducted himself with respect to each enterprise. Thus, this situation does not present a classic veil-piercing case. Edwards is not seeking to pierce HHG's corporate veil to get to Hathaway, nor is he seeking to pierce All Terrain's corporate veil to get to Hathaway. Instead, he wants to assert a claim against All Terrain because of his contacts with HHG through Hathaway himself. Essentially, he asks this Court to view Hathaway, All Terrain, and HHG as a single business enterprise. The American Law Reports summarizes this legal theory as such:

The single business enterprise theory has emerged as a controversial veil-piercing theory, with as many courts rejecting it as there are employing it, while a large majority of jurisdictions have not yet addressed it. In the jurisdictions that have adopted the theory, it serves as an adjunct to traditional alter ego doctrine, providing a means of imposing joint liability on multiple entities that are controlled by common ownership, for the wrongdoing of each individual entity, whereas alter-ego theories are designed to hold individual and corporate shareholders liable for corporate wrongdoing committed at their behest. Generally, the single business enterprise theory may be applied when it has been determined that commonly controlled companies have integrated their operations and resources to achieve a common business purpose, to an extent that their separate identities have essentially been merged into a single entity, such that disregarding their separate identity is necessary to avoid an unjust or inequitable result. A determination of whether those two elements have been satisfied generally requires a highly fact-intensive analysis, requiring courts to weigh profuse evidence and lengthy lists of factors that may or must be considered. While no set of factors is to be considered to be exhaustive, and no factor may be considered to be dispositive, common ownership and control is generally the common thread that is essentially prerequisite to any further consideration of liability.

50 A.L.R.7th Art. 2 (Originally published in 2020).

Numerous jurisdictions have declined to recognize the single enterprise theory. See, e.g. Welch v. Regions Bank (In re Mongelluzzi) , 587 B.R. 392, 406 (Bankr. M.D. Fla. 2018) ("Although recognized in other jurisdictions, the common enterprise doctrine has not been recognized by the Eleventh Circuit Court of Appeals. And [defendant] has not cited to an opinion of any court within this jurisdiction that has recognized the application of the common enterprise doctrine as a defense to fraudulent transfer claims."); Rest. of Hattiesburg, LLC v. Hotel & Rest. Supply, Inc. , 84 So. 3d 32, 42 (Miss. Ct. App. 2012) ("Mississippi has never adopted the "single business enterprise" theory to hold affiliated LLCs jointly liable for each other's debts."); Michnovez v. Blair, LLC , 795 F. Supp. 2d 177, 186 (D. N.H. 2011) ("Plaintiffs have identified no authority, and the court's research has identified none, for the proposition that New Hampshire would, if presented with the question, adopt a single-enterprise theory such as California's, under which an entity other than a the (sic) owner of a corporation could be held liable for that corporation's conduct by means of veil piercing."); Mortimer v. McCool , No. 3583 EDA 2018, 2019 WL 6769733, at *17 (Pa....