Honoring Corporate Formalities
Langford Tool & Drill vs. The 401 Group, LLC, et al.
No. A14-0507 (Minn. Ct. App. 2015)
In Langford Tool & Drill vs. The 401 Group, LLC, an unpublished decision, the Minnesota Court of Appeals reiterated the necessity to honor corporate formalities so one does not trigger personal liability.
The facts were as follows: Sohan Uppal is the owner of 401 Group with his wife and son. 401 Group and Positive Companies, a general contractor, entered into two contracts together. The first contractor required Positive Companies to furnish labor, material, skill, and equipment to renovate real property. That first contract was worth $1,836, 143.00. During the renovation 401 Group would approve work orders for additional work that would require additional compensation.
The second contract was similar in scope and required Positive Companies to again furnish labor, material, skill and equipment for work at a restaurant in the 401 building. The contract price of this contract was only $1.00 with the anticipation that there would be change orders and additional compensation.
401 had obtained two bank loans in a total amount of $6,130,00.00 that contemplated period advances in exchange for collateral including a mortgage and assignment of rents. The bank eventually stopped granting advances due to alleged change of scope of the project. The bank never started making payments again even though the first portion of the project was not complete. And that bank that made the initial loan was closed down and purchased by a subsequent bank.
As a result of all of the problems with getting paid, Mr. Uppal began to make payments from his personal account to the contractors and in total paid out $700,000. Mr. Uppal was under the impression he was merely making loans to 401 Group and would be reimbursed once payments from the new bank resumed. Mr. Uppal made personal promises that he would pay the contractors for their work. The litigation began when one of the contractors filed a mechanic’s lien.
The district court ordered a bifurcated trial where the contract claim going to the jury and reserving the unjust-enrichment claim reserved for a bench trial in case the jury found that no contract existed. The jury did in fact conclude that there was no oral contract between respondent and appellant for respondent’s construction work. The district court entered a judgment against 401 Group and asked for motions on the unjust enrichment claims. Mr. Uppal claimed he was the owner of the LLC and shielded from personal liability. The district court disagreed and found that since Mr. Uppal personally benefitted from the work from the contractors and had been unjust enriched.
After finding that Positive Companies was able to bring an unjust enrichment claim, the Court of Appeals reversed the district court’s decision. The Court of Appeals held that even though Mr. Uppal “acted as a guarantor under the agreement with the bank, he was not a personal guarantor under any other agreement in this case.”
Additionally, the court did not find enough facts to “pierce the corporate veil” and held,
The company that allegedly benefitted from respondent’s services, Uppal Enterprises, did not even have a contract with [Positive Companies]. The 402 Group was the entity that signed and breached the construction contract with respondent. The bridge loans made by [Mr. Uppal] on behalf of 401 Group to [Positive Companies] and others, were just that, bridge loans…[i]t was the 401 Group’s “acts” that led to the supposed benefit…and [Mr. Uppal] is protected from personal liability.
Although the Court of Appeals did not pierce the corporate veil in this instance, it is important for company owners to not make any personal promises or take any actions, i.e. by paying personally for contracts entered into through an LLC, to even give the impression that there could be personal liability.