The state Superior Court has ruled that the corporate veil of a limited liability corporation can’t be pierced just because the LLC’s only purpose was to hold the stock of a corporation that acquired loss-inducing leasehold interests in nursing homes.
James T. Walmsley and Christopher W. Sullivan wanted to pierce the veil of an LLC, FELD, of which retired attorney Frederick H. Ehmann held a 50 percent interest, in order to enforce two judgments against Ehmann personally, according to the opinion written by Judge Susan Peikes Gantman. Gantman wrote the unpublished decision on behalf of the panel, which included Judges Jacqueline O. Shogan and Sallie Updyke Mundy.
Ehmann is a former shareholder of the law firm Ehmann VanDenbergh & Trainor, Gantman said.
FELD’s only purpose was to hold the stock of 22 Acquisition Corp. as the sole shareholder, Gantman said. FELD also made 22 Acquisition the agent for FELD in all business matters. The agency agreement “also provided tangible tax benefits for [Ehmann and his co-shareholder] … in that it allowed them, as FELD shareholders, to take any operating losses incurred by 22 Acquisition,” the judge said.
Walmsley and Sullivan are trying to collect on judgments originally owed to a vendor, NovaCare, that provided therapy services to nursing homes acquired by 22 Acquisition, Gantman said. Walmsley and Sullivan argued that the trial court erred by concluding that one of the factors it should consider was that NovaCare did not rely on the creditworthiness of FELD, Gantman said.
“Appellants contend no Pennsylvania appellate cases identify reliance on the creditworthiness of a corporation as a factor to consider in this context,” Gantman said. “Instead, the focus should be on the bona fides of the corporation, and whether there was a failure to adhere to corporate formalities, undercapitalization, and intermingling of corporate and personal affairs.”
The court said NovaCare did not contract with FELD but with the company hired by 22 Acquisition to manage the nursing homes, the court said.
“The trial court’s consideration of evidence, or lack thereof, regarding NovaCare’s reliance on the creditworthiness of FELD is relevant here for the insight it provides into whether FELD was established to defraud its creditors. The record evidence permits no reasonable inference that FELD’s lack of capital arose from an intent to defraud creditors.”
An LLC does not need to adhere to the same type of formalities as a corporation, and the lack of formalities must lead “to some serious misuse of the corporate form,” Gantman said. As well, undercapitalization of an LLC is only relevant if it leads to the inference that a corporation was established to defraud its creditors or other improper purpose, Gantman said.
Healthcare Financial Partners and Complete Care Services (CCS) proposed the creation of 22 Acquisition to Ehmann and Ehmann’s fellow 50 percent interest-holder in FELD in order to acquire leasehold interests in nursing homes and “to save an otherwise sinking investment made by Healthcare Financial,” Gantman said.
After 22 Acquisition got the leasehold interests in 15 nursing homes in Florida and Texas, Healthcare Financial provided 22 Acquisition with the funding to acquire the nursing homes through secured and unsecured loans, Gantman said. CCS also entered an agreement with 22 Acquisition to manage the nursing homes.
Ehmann and his co-interest-holder did not invest any money to acquire the nursing homes, although Ehmann VanDenbergh did represent 22 Acquisition in some transactions, the judge said.
The investment in the nursing homes ran into money trouble, and 22 Acquisition did not pay one of its vendors, NovaCare, for providing therapy services to the nursing homes, Gantman said.
After 22 Acquisition emerged from bankruptcy, NovaCare obtained two separate judgments against 22 Acquisition and FELD for $1.96 million, Gantman said. The judgments have been assigned to Walmsley and Sullivan.
Walmsley and Sullivan also argued that FELD’s corporate form should be disregarded because, among other reasons, FELD was undercapitalized when formed and Ehmann “unfairly benefited at the expense of NovaCare in the form of income tax losses as well as compensation and a bonus from his law firm,” Gantman said.
But the panel said the mere fact that 22 Acquisition’s losses flowed through to FELD’s balance sheet and thus led to tax benefits to FELD’s shareholders, including Ehmann, does not mean FELD was undercapitalized.
While FELD’s only purpose was to hold the stock in 22 Acquisition, FELD observed the formalities required in Pennsylvania to form an LLC, which include filing articles of organization and filing federal tax returns, Gantman said.
As an LLC, FELD could operate in a more informal manner, Gantman said.
Ehmann’s attorney, Daniel P. McElhatton of McElhatton Foley, said there was absolutely no evidence that Ehmann authorized any payments and that there was no reliance by NovaCare on FELD, much less Ehmann.
“There was absolutely no reliance,” McElhatton said. “There couldn’t be because they didn’t know of Ehmann’s existence.”
If NovaCare and its successors to the money NovaCare was owed wanted to argue that they relied upon Ehmann, NovaCare should have joined Ehmann when NovaCare obtained judgments against FELD in Montgomery County Common Pleas Court, McElhatton said.
The other 50 percent interest-holder in FELD, Steven Fishman, settled with Walmsley and Sullivan prior to trial, according to the opinion.
Michael E. Sacks, an attorney for Walmsley and Sullivan with Hamburg & Golden in Philadelphia, said he and his co-counsel are planning to file an allocatur petition with the state Supreme Court on behalf of their clients.
“We strongly disagree with the decision of the Superior Court, which represents a departure from existing law on piercing the corporate veil. The decision protects people who set up sham LLCs, fail to observe corporate formalities, and use the arrangement to self-deal at the expense of creditors,” Sacks said in an e-mailed statement. “In this case, a company that FELD controlled received payments for services from Medicare, but instead of paying the actual providers of those services, chose to pay only certain creditors, like Mr. Ehmann’s law firm, and not others.”
Walmsley and Sullivan’s counsel mischaracterized the testimony in the trial before Philadelphia Common Pleas Court Judge Gary S. Glazer, before the Superior Court and now as they contemplate an appeal, McElhatton said.
“This statement by them is an attempt to try the case in some other media form and it’s crap,” McElhatton said.
The Superior Court issued its decision in Walmsley v. Ehmann on Feb. 28.
(Copies of the 23-page opinion in Walmsley v. Ehmann, PICS No. 12-0558, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •