In Youree v. Recovery House of East Tennessee LLC, a case involving a breach of a lease contract signed by a limited liability company, a Tennessee trial court ruled that the Plaintiff could pierce the corporate veil to hold two LLCs related to the LLC which breached the lease liable for its debts. The Supreme Court of Tennessee reversed the trial court’s decision. Its reasoning contains no less than a directive that the factors set forth years ago in the Allen case, the “Allen factors,” will no longer be outcome determinative, as they have been in many cases since Allen. Instead of proving the existence of some or all of the Allen factors, the Supreme Court held that, to prove a piercing the veil claim, a plaintiff must establish the elements required by a 1979 Tennessee case, Continental Bankers.
The facts alleged by the Plaintiff in Youree to support its piercing the veil claim were:
- Plaintiff leased a commercial property in Davidson County to an LLC named RSN
- RSN breached the contract by failing to pay rent
- Plaintiff filed suit against RSN, and obtained a judgment for $56,000
- Plaintiff then filed a second suit against what it alleged were LLCs “affiliated” with or “related” to RSN — RHET and RHT
- Plaintiff described RHET and RHT as “functional alter egos” of RSN
- For its bases that RHET and RHT were alter egos, Plaintiff alleged a number of facts consistent with the “Allen factors” including that RSN’s facility (for which it failed to pay rent) was used to operate a call center to refer patients to RHET’s facility in Anderson County; that RSN operated a website that marketed RHET’s facility; that RSN, RHET and RHT used the same corporate office; that RSN, RHET and RHT used the same employees; and that RSN, RHET and RHT had overlapping ownership
The LLCs the Plaintiff sued in the second suit, RHET and RHT, failed to respond to the Complaint against them, and the trial court granted a default judgment against them. On appeal, the Supreme Court ruled that, if the Plaintiff’s Complaint failed to allege facts sufficient to support a piercing the veil claim against RHET and RHT, then the default judgment should not have been entered and should be set aside.
Before focusing on the facts alleged by the Plaintiff, the Supreme Court first acknowledged that the law in Tennessee on piecing the veil was inconsistent and confusing, and clarified it by holding that the factors set forth in Continental Bankers, not the ones set forth in Allen, were determinative in piercing the corporate veil cases. Moreover, it held that will be the rule whether the case involves a claim that the corporate veil should be pierced to hold an individual liable for the obligations of an entity, such as a corporation or LLC, or whether, as in the case before it, a plaintiff is attempting to pierce the veil of one entity to hold other entities liable.