Facade of the courthouse with columns.
In the case of the 3rd District Court of Appeal in 2021, Segal v. Forastero, Inc., took advantage of an investor who bought and sold real estate an LLC to enter into for a purchase agreement and then left the deal claiming that he had no personal liability since the LLC and not he was signing the contract Has.
His LLC had a history of buying and selling real estate and had a bank account and filed tax returns, but had no bank account or any other asset or activity other than the right to purchase under the purchase agreement itself and any that may have been made at the time of entering into the purchase agreement First deposit. He didn’t guarantee the agreement.
At the time the acquisition agreement was entered into, the seller was notified that the owner of the company had significant assets and appeared to believe that those assets would be owned or contributed to the company.
The purchase agreement required the LLC, as the buyer, to deposit $ 500,000 in escrow within 3 days of signing the agreement, but the LLC owner, Segal, later testified that it was due to his physical Inspection of the property decided not to do so, revealing that significant work was required and was therefore not a viable candidate for him.
According to the 3rd District Court of Appeal, the court that passed judgment against the LLC for breach of contract found that the individual shareholder was responsible for the judgment in a Florida adjunct lawsuit to enforce the judgment that the individual shareholder was responsible for the judgment enables the abandoned seller to penetrate the corporate veil.
The 3rd District Court of Appeals disagreed, ruling that none of the three elements required to show that the company was, or could be pierced, Segal’s alter ego existed. Since all three elements must be met in order to break the corporate veil, it is significant that the appeals court found that none of them apply. The 3 requirements for breaking the corporate veil in Florida are almost uniform across the US, but state laws should be consulted before planning or finalizing what the outcome of any particular situation will be.
In this case, the 3rd District Court of Appeal ruled as follows:
- The LLC was not a mere instrument with no substance. Although at the time of its inception it had no assets or activities other than the subject matter of the contract, the LLC had a substantial history.
- The LLC was not used to defraud a creditor. There was never any overt communication that specifically indicated that the company owned significant assets or that promised that the assets of each defendant would be brought into the company.
- There was no evidence that the seller’s harm was caused by the LLC’s failure to pay. It seems like the appeals court misunderstood that prong, but got prong one and two right.
In this case, it is advised that a company used to shield a person from liability should likely have at least a bank account or other legitimate assets and tokens of existence, so as not to be used as mere instrumentality.
This case also shows that judges conducting trials or making summary judgments are often biased to enforce a judgment and determine that there is an “invalid transfer” or alter ego / veil penetration situation to match the judge’s opinion, what will bring justice to a given situation.
Had Mr Segal opened a bank account on behalf of the company and made this clearer and actually deposited money into the account before signing, then the money he deposited could have been used to pay legal defense costs, and the judge’s opinion before the court of first instance may have turned out differently, which saved Segal time and money for the calling. This is a reminder that counselors need to base their advice not only on the law, but also on how judges can apply it.
There are many other piercing cases, and almost all of them are in the debtor’s favor, unless there is dire, illegal, or completely inappropriate behavior. Businesspeople and consultants should carefully use multiple entities in drafting contracts and arrangements with a view to limiting liability for activities and engagements, and also be aware of the principles of joint and several liability, apparent partners and the manager.
If you would like to learn more on this topic, I invite you to read my book Gassman & Markham Florida & Federal Asset Protection Law and watch my YouTube videos on protecting assets titled Credit Protection A-Z Part I and Advanced Credit Protection Planning Part II.