The Maryland Court of Special Appeals added further reinforcement to the protections provided when conducting business as a limited liability company (LLC).
In Serio v. Baystate Properties, the Maryland Court of Special Appeals reversed the Circuit Court’s finding that Serio’s activities as the sole member of an LLC warranted piercing the corporate veil to impose individual liability. Prior to Serio, under Maryland law, a court could disregard a corporate form and impose individual liability only in instances of fraud or to enforce “paramount equity.” This disregard of the corporate form to impose liability on a member or shareholder is called “veil piercing.”
In Serio, Baystate entered into a contract with Serio Investments, LLC, a single member LLC owned by Serio, to develop and build residential homes. According to Baystate, Serio represented that the sale of two other lots would provide his LLC with the necessary capital to perform under the contract and that Serio Investments LLC would set up an escrow account to pay subcontractors. Ultimately, the proceeds from these sales never made it to the LLC and an escrow account was never established. The LLC, which was woefully undercapitalized, went into bankruptcy and thus Baystate sued Serio individually, attempting to pierce the corporate veil.
The trial court imposed personal liability on Serio, concluding that paramount equity (i.e., fundamental fairness) warranted piercing the corporate veil. The Court of Special Appeals reversed, effectively eliminating the paramount equity exception to the protections offered by a corporate formation. The Court reiterated that Maryland has taken a dim view of veil piercing and will only do so where there is evidence of fraud. In this case, the court concluded that at its core, this case involved a contract dispute between two businesses and that a business loss is often just the result of a bad business deal; therefore foreclosing the possibility or recouping such losses from the business owners absent some sort of personal guaranty.
This case highlights two important business lessons: (1) make sure you conduct your business under a recognized business form, e.g., LLC, incorporated entity; and (2) perform some due diligence on your business partners.
For further information, contact Matt Hjortsberg at 410-583-2400 or at Hjortsberg@bowie-jensen.com.