brown and black brick wallKey Business Court Decisions

An SPV Does Not Automatically Permit Veil Piercing

An entity created for a single, special purpose does not necessarily mean that piercing the entity’s corporate veil is always appropriate.  Loray Master Tenant, LLC v. Foss N.C. Mill Credit 2014 Fund I, LLC, 2021 NCBC 78 (J. Bledsoe).  A plaintiff must still assert factual allegations that show the SPV is a mere instrument and/or alter ego of another; otherwise, the request to pierce the entity’s corporate veil will be doomed.

Plaintiff is an LLC and the managing member of an entity that owned a revitalization project (“Mill”), which was developed through the use of historic tax credits.  North Carolina law prohibits developers like Plaintiff from selling tax credits outright. However, investors (like Defendant Foss N.C. Mill Credit 2014 Fund I, LLC (“Foss 2014”)) often become members of such developer and then use the project’s tax credits in exchange for making capital contributions to the developer-entity.  After borrowing significant funds to refurbish the Mill and passing numerous tax credits along to Foss 2014 and other investors, Plaintiff notified Foss 2014’s managing member, Foss and Company, Inc. (“Foss”), that its capital contributions were now due.  Foss 2014 continuously refused to make the requested payment, giving different reasons each time.  After Foss 2014 finally made its required payment, Plaintiff filed suit against Foss 2014 for, inter alia, breach of the operating agreement, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty.  Plaintiff sought to pierce Foss 2014’s corporate veil and hold Foss personally liable for Foss 2014’s actions. Contending that because Foss 2014 was a single purpose vehicle (“SPV”) created solely for the purpose of investing in Plaintiff, Plaintiff alleged the existence of an SPV necessarily meant Foss 2014 was the alter ego of Foss.  Foss moved to dismiss, contending that Plaintiff had failed to make any factual allegations that would support piercing Foss 2014’s corporate veil and holding Foss personally liable.

The Business Court agreed.  Emphasizing just how rare it is to pierce a corporation’s veil (Opinion, ¶18) (“[a] court’s decision to pierce the corporate veil, thereby ‘proceeding beyond the corporate form, is a strong step: Like lightening, it is rare and severe.’”), the Business Court held the complaint’s mere conclusory allegations about Foss’ control and relationship to Foss 2014 were insufficient.  A party must plead specific factual allegations that prove the necessary elements, the Business Court explained.  Allegations which simply mirror the necessary veil piercing elements are insufficient to sustain a veil piercing claim.  In directly addressing Plaintiff’s contention that because Foss 2014 was a SPV necessarily meant that it was Foss’ alter ego, the Business Court rejected that contention. (Opinion, ¶27).  The mere fact that an entity is an SPV, the Business Court explained, is not dispositive of the veil piercing issue; rather, a plaintiff must still make sufficient factual allegations that, when taken as true, show how an SPV was the alter ego or the mere instrument of the other entity. Id.   Because Plaintiff failed to make the necessary factual allegations, the Business Court dismissed Plaintiff’s alter ego claim.

 Based upon this decision, a business should understand that merely because it operates an SPV does not mean that North Carolina courts will automatically pierce the SPV’s veil and hold it responsible for the SPV’s liabilities; rather, a plaintiff must show something much more.

            Additional legal points:

  • Absent a decision from the North Carolina Supreme Court on the appropriate choice of law to apply when deciding whether to pierce a foreign corporation’s veil, the Business Court will continue to apply North Carolina law.  (Opinion, ¶17).
  • An indemnity provision in an operating agreement that merely carves out a member’s breach of fiduciary duty from those items for which the company will provide indemnity does not, in and of itself, create any fiduciary duty.  (Id., ¶¶48-49).

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