When entering into a new venture, it is not uncommon for a new
legal entity to be formed in order to insulate an existing company
from the liabilities associated with the new business. While the
law absolutely permits this, a recent case in the Bankruptcy Court,
In Re Cameron Construction &
Roofing, is a good reminder that achieving true insulation
requires more than simply filing another set of Articles of
Incorporation.In 2000, Cameron
Construction & Roofing, Inc. ("Inc.") was formed by
Wilfred Cameron, who was the corporation's President,
Treasurer, Clerk and sole Director. Two years later, Mr. Cameron
formed Cameron Construction LLC ("LLC"), and he was named
its Managing Member. Further, Mr. Cameron owned 99.9% of the equity
in LLC, with the remaining 0.1% being held by Inc.
By 2014, Inc. had become insolvent, and it filed a Chapter 7
Bankruptcy Petition. A Trustee was appointed to marshal and
distribute Inc.'s assets, and LLC was joined as a defendant in
the bankruptcy proceeding. Specifically, the Trustee sought to have
the Court rule that assets of LLC could
be used to satisfy the debts of Inc. LLC
objected to this, arguing, that it was undisputed that the two
entities filed their own tax returns, had separate employees to
whom W-2s were issued, and filed their own Annual Reports.
Nevertheless, there also was evidence that:
While Inc. provided 10% of the
capital used to launch LLC, Inc. only was given a 0.1% equity stake
From 2011-2013, LLC's 17
employees worked exclusively for Inc., and such work was outside
the scope of LLC's stated business purpose.
While Inc. supposedly leased space
from LLC, there was no written lease, the amount of rent paid
varied from year to year, and LLC booked these supposed rent
payments as payments for the work its employees provided to
After considering all of the foregoing, the Court ruled
The evidence established that there was common ownership of
[Inc. and LLC] by Wilfred Cameron, who controlled the two entities
and there was intermingling assets. [Inc.] was thinly capitalized,
and the two entities observed only minimal corporate formalities by
filing separate tax returns and Annual Reports. There [also] was no
evidence of other corporate record keeping or payments of
As such, the Court allowed the Trustee to apply assets of LLC to
the debts of Inc. More generally, and as Cameron and
numerous other cases have noted, in evaluating whether one entity
can be liable for the debts of another, courts will evaluate the
(1) Common ownership; (2) pervasive control; (3) confused
intermingling of business activity assets, or management; (4) thin
capitalization; (5) nonobservance of corporate formalities; (6)
absence of corporate records; (7) no payment of dividends; (8)
insolvency at the time of the litigated transaction; (9) siphoning
away of corporate assets by the dominant shareholders; (10)
nonfunctioning of officers and directors; (11) use of the
corporation for transactions of the dominant shareholders; (12) use
of the corporation in promoting fraud.
So while setting up a new entity may be a prerequisite to
insulating an existing business from liability, such protection
only will be achieved if continued diligence in keeping the
companies separate is exercised.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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