The members of a limited liability company are protected from personal liability to the company’s creditors absent the elements necessary to pierce the corporate veil. In Langford Tool & Drill Co., v. The 401 Group, LLC, et al., A14-0507 (Minn. Ct. App. Jan. 12, 2015), the Minnesota Court of Appeals reversed a Hennepin County District Court ruling, finding that an LLC member did not receive a benefit in his status as a member of an LLC or as a personal guarantor, and thus, had not been unjustly enriched. The court’s ruling demonstrates that where a plaintiff cannot demonstrate the Victoria Elevator Co. requirements to pierce the corporate veil, it cannot circumvent the requirements by re-casting its claims against the member of an LLC as “unjust enrichment.”
In Langford Tool & Drill Co., The 401 Group, LLC (“401 Group”), an LLC owned by Sohan Uppal (“Uppal”), Uppal’s wife, and Uppal’s son, entered into two contracts with a general contractor, Positive Companies, Inc. (“Positive”), to improve real property and a restaurant located in Minneapolis, Minnesota. Under the first contract, Positive was to furnish labor, material, skill, and equipment necessary to renovate the property. Additionally, 401 Group could request change orders, wherein Positive would provide additional work “a la carte.” Under the second contract, Positive was to provide the same services to 401 Group as it did under the first contract entirely through “a la carte” change orders.
Prior to entering into the contracts with Positive, 401 Group obtained two loans from Mainstreet Bank. Under the loans, Mainstreet Bank made periodic advances to 401 Group for renovations in exchange for a mortgage on the property, assignments of rent, and the personal guaranties of Uppal and his wife. Mainstreet Bank ceased making advances under the loans when it alleged that the scope and type of renovations had changed dramatically. Shortly thereafter, the Federal Deposit Insurance Corporation closed Mainstreet Bank and sold all of its assets, including the loans, to Central Bank.
After the banks ceased making advances, Uppal began paying contractors from his personal account on behalf of 401 Group. Under the terms of previous loan agreements between the parties, Uppal was reimbursed for making these bridge loans to 401 Group. Here, however, Uppal was not reimbursed by the bank. Nevertheless, he continued to make personal payments on behalf of 401 Group as best he could, going so far as to personally promise Positive that he would pay for Positive’s construction work.
The underlying litigation began when a subcontractor sued the 401 Group, Uppal Enterprises LLC, Mainstreet Bank (Central Bank, as successor in interest), and other subcontractors in a mechanic’s lien action for unpaid services rendered. Another subcontractor intervened and served a third-party summons and complaint against Positive, the general contractor. Positive asserted counterclaims and cross-claims against Uppal, including breach of contract and unjust enrichment.
The district court ordered a bifurcated trial with the contract claim going to the jury and the unjust enrichment claim reserved for a bench trial if the jury found there was no contract. The jury determined that there was no oral contract between Uppal and Positive for the construction work. Instead, the district court entered judgment against 401 Group in the amount of $1,267,814 based on its contract with Positive. The district court never held the bench trial, but instead issued findings of fact and conclusions of law, wherein it held that Uppal had been unjustly enriched in the amount of $1,267,814. The district court found that Uppal made oral promises that he would personally pay Positive and that he had personally benefitted from the work performed by Positive in improving the collateral to a loan in which Uppal was a personal guarantor as both a personal guarantor and as a member of two LLCs.
Unjust Enrichment as Equitable Remedy
Unjust enrichment is an equitable doctrine that allows a plaintiff to recover a benefit conferred upon a defendant when retention of the benefit is not legally justifiable. Caldas v. Affordable Granit & Stone, Inc., 820 N.W.2d 826, 838 (Minn. 2012). It, however, does not apply when there is an enforceable contract that is applicable. Id. Additionally, unjust enrichment is not available where a party failed to pursue other available legal remedies. See Mon-Ray, Inc. v. Granite Re, Inc., 677 N.W.2d 434, 440 (Minn. Ct. App. 2004). To establish a claim for unjust enrichment, a party must show that the other party knowingly received something of value for which it, in equity and good conscience, should pay. ServiceMaster of St. Cloud v.GAB Business Services, Inc., 544 N.W.2d 302, 306 (Minn. 1996). Unjust enrichment requires more than a showing that one party benefitted from the efforts of another. “It must be shown that a party was unjustly enriched in the sense that the term could mean illegally or unlawfully.” First Nat’l Bank of St. Paul v. Ramier, 311 N.W.2d 502, 504 (Minn. 1981).
The district court found that there was an express contract between 401 Group and Positive, but Uppal did not sign the contract in a personal capacity and was not a personal guarantor. As such, the contract between 401 Group and Positive did not preclude Positive’s unjust enrichment claim against Uppal.
Next, the district court determined that there was no adequate remedy at law for which Positive could recover against Uppal. 401 Group could not satisfy a default judgment exceeding one million dollars, as it had no assets once Central Bank exercised its rights as a secured creditor. As such, Positive would not be paid by both 401 Group and Uppal for the same work, because 401 Group could not pay for the services rendered. For these reasons, the district court determined that there was no adequate remedy at law or contract that would bar Positive’s unjust enrichment claim against Uppal.
The Minnesota Court of Appeals, however, considered whether the district court abused its discretion in concluding that Uppal was unjustly enriched in his capacity as a personal guarantor and as a member of 401 Group.
No Personal Benefit as Personal Guarantor
The appellate court in Langford Tool & Drill Co. found that the district court abused its discretion in finding Uppal unjustly enriched as a personal guarantor of 401 Group. Although Positive’s work increased the value of collateral and resulted in a reduction of the bank’s deficiency judgment against Uppal as a personal guarantor, Uppal was not unjustly enriched. The court instead found that Uppal did nothing illegal, unlawful, or morally wrong by acting as a guarantor on the loan agreement with the bank. Uppal merely made an entrepreneurial risk by obtaining financing, which was not in any way illegal or immoral. The court determined that while Uppal may have received a personal benefit, unjust enrichment does not arise merely due to an individual’s receipt of a benefit.
Further, the court discussed the policy implications of making such a determination. If the court found Uppal liable under unjust enrichment in his capacity as a personal guarantor, it could put other guarantors at risk of unjust enrichment where they receive some tangential benefit from work performed by a third party to improve the collateral of a loan. As such, Uppal was not unjustly enriched as he did nothing illegal and it would not be morally wrong for him to retain any benefit he may have received as a guarantor.
No Personal Benefit as Member of LLC
In addition, the court determined whether Uppal received a personal benefit as a member of 401 Group.
Generally, the member of a limited liability company is protected from personal liability for the company’s acts, debts, liabilities, and obligations. Minn. Stat. §322B.303, subds. 1,2 (2014); see also Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn. 1979) (“Doing business in a corporate form in order to limit individual liability is not wrong; it is, in fact, one purpose for incorporating.”).
The remedy in situations where an individual improperly uses the corporate form for protection is piercing the corporate veil, not unjust enrichment. Here, the court found that it was 401 Group’s “acts” that led to Uppal’s supposed benefit through his ownership interest in 401 Group. “If the court were to allow unjust enrichment as an equitable claim based on benefits a member receives from the corporation, it would open the door for unjust enrichment claims to be brought by a third-party creditor against individual members of a corporation when the corporation defaults on its obligations, which in essence would render the corporate form meaningless.” Langford Tool & Machine Co. at 14. As such, Uppal was protected from personal liability for the company’s acts.
The appellate court in Langford Tool & Machine Co. found that under the facts of the case, a personal guarantor and member of an LLC could not be unjustly enriched in either capacity. Instead, the court found that other remedies and public policy considerations existed to justify not finding Uppal unjustly enriched. As such, creditors must demonstrate that piercing the corporate veil is proper to hold the owner of a limited liability company personally liable for the debts of the company.
For advice on member and shareholder personal liability or rights, contact one of the Minnesota business attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota business attorney James C. MacGillis advises clients on corporate and business law matters such as business entity formation, business transactions, and corporate governance. Jim may be reached at 612.455.0503 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota business law firm located in Minneapolis, Minnesota.