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State Capital Title & Abstract Company v. Pappas Business Services, LLC

2009 WL 114160 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

CORPORATIONS; LIMITED LIABILITY COMPANIES; MEMBERS; PERSONAL LIABILITY — Because such a remedy is only equitable, and not legal, a member of a limited liability company may be found responsible for that company’s liabilities only under extraordinary circumstances, such as where there has been fraud or injustice.

A title search company entered into an agreement with a consulting firm to establish a new database for the search company. The project was intended to increase productivity and bring in new clients. The consulting firm represented that it would exercise an undivided duty of loyalty. According to the agreement, the consulting firm was to be intricately involved in the search company’s operations including attending meetings and assisting contract negotiations. After the database project was completed and implemented, the search company discovered that the consulting firm had taken a fee and was receiving an ongoing commission from a software vendor with whom it had negotiated on behalf of the search company. The search company brought a number of breach claims as well as a claim for common law fraud, alleging that the consultant had used strong arm tactics to get the vendor to agree with the fee and commission agreement and then got kickbacks. The company also sought to pierce the limited liability company’s veil and bring claims directly against two of the consulting firm’s members.

The Court dismissed the title search company’s claim for common law fraud because the allegedly fraudulent acts that occurred were intrinsic to the underlying agreement and were to be adjudicated within the scope of a contract dispute. The company’s claim for breach of the duty of loyalty was dismissed because it was duplicative of the company’s claim for breach of the duty of good faith and fair dealing. On the company’s attempt to pierce the veil and hold the two members liable for its alleged losses, the Court pointed out that only under extraordinary circumstances, such as where there has been fraud or injustice, would members or shareholders be found responsible for limited liability company or corporate liabilities. Such a remedy is only equitable, and not legal. It added, however, that for a corporate or limited liability company veil to be pierced, the asserting party must establish that there is no genuine division between the interests of the individual and the limited liability company’s entity. Here, the Court found that although the consulting firm was a small, closely held limited liability company, it was not a sham entity set up for the purpose of defrauding individuals. As a result, the Court dismissed the company’s motion to pierce the limited liability company’s veil, even though the Court referred to the company as a corporation.

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