In re Giampietro, Bankruptcy No. BK-S-02-22743-BAM

• Decision Date: 23 November 2004
• Docket Number: Bankruptcy No. BK-S-02-22743-BAM,Adversary No. 03-1175-BAM.
• Parties: In re James GIAMPIETRO, Debtor. AE Restaurant Associates, LLC, a Nevada Limited Liability Company, Plaintiff, v. James Giampietro, Defendant.
• Court: U.S. Bankruptcy Court — District of Nevada

317 B.R. 841

In re James GIAMPIETRO, Debtor AE Restaurant Associates, LLC, a Nevada Limited Liability Company, Plaintiff, v. James Giampietro, Defendant.

Bankruptcy No. BK-S-02-22743-BAM, Adversary No. 03-1175-BAM.

United States Bankruptcy Court, D. Nevada.

November 23, 2004.

COPYRIGHT MATERIAL OMITTED

David J. Winterton, Las Vegas, NV, for Defendant James Giampietro.

Victoria L. Nelson, Byron Thomas, Las Vegas, NV, for Plaintiff AE Restaurant Associates, LLC.

Opinion

BRUCE MARKELL, Bankruptcy Judge.

James Giampietro, the debtor and defendant in this adversary proceeding, is an inveterate gambler. In the year prior to his chapter 7 bankruptcy filing in November of 2002, he claims to have lost more than $700,000 gambling at various casinos in Las Vegas, including one 2-1/2 day spree at a local casino in which he lost more than $125,000.

Mr. Giampietro is also a restauranteur. During the twenty years preceding his bankruptcy, he managed or owned several restaurants in Las Vegas. This case concerns his efforts to acquire a restaurant in 2000.

The plaintiff in this adversary proceeding is AE Restaurants Associates, LLC ("AE"), a limited liability company owned and managed by a retired pathologist, Dr. Allen Anes and his wife. Prior to 2000, AE owned a restaurant in Las Vegas called the Portabello. Losses mushroomed at this restaurant; Dr. Anes testified that the restaurant lost more than $600,000 in the two years prior to 2000. By April 2000, he had closed the restaurant. He then sought to sell its assets.

AE and Mr. Giampietro negotiated with each other for the sale of these assets, and for a transfer of the lease of its location. During these negotiations, Mr. Giampietro formed a Nevada limited liability company, Chianti Cafe, LLC ("Chianti Cafe"), as his acquisition vehicle. A deal was signed under which Chianti Cafe would buy AE's assets for $200,000. Twenty thousand dollars were placed in escrow under this agreement, pending a closing and transfer of the assets, which was to occur as soon as Chianti Cafe acquired a liquor license.

The deal never closed for reasons that remain disputed. Chianti Cafe sued AE in state court for the return of the $20,000; AE counterclaimed for breach of contract, and ultimately obtained a judgment against Chianti Cafe for $130,000.¹ By the time AE obtained this judgment, and sought to add Mr. Giampietro as a defendant, however, Mr. Giampietro had filed his chapter 7 case.

AE then commenced this adversary proceeding against Mr. Giampietro seeking to deny his discharge under 11 U.S.C. § 727(a)(3).² Trial took two days. After hearing the testimony of the parties and reviewing the record in this case, the court will enter judgment in favor of Mr. Giampietro.

I. AE's Need to Establish Alter Ego Status

AE's initial hurdle is standing. Under Section 727(c), standing to pursue denial of a discharge is limited to "the trustee, a creditor, or the United States trustee." Neither the chapter 7 trustee nor the United States trustee joined in AE's complaint, so AE's ability to pursue this action turns on its status as a "creditor."

Many hops within the Code are necessary to pin down what constitutes a "creditor." Section 101(10)(A) states that "creditor means—¶ entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor ..." AE, as a limited liability company is an "entity" under Section 101(15),³ so the sole issue remaining is whether AE had "a claim against the debtor that arose ... before the order for relief."

The Bankruptcy Code intentionally defines "claim" broadly. Under Section 101(5), a claim means a:

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

Without a doubt, AE had a claim, as used in Section 101(5), against Chianti Cafe.

II. Does The Alter Ego Doctrine Apply to Nevada Limited Liability Companies?

But is a claim against a limited liability company in which the debtor is the only member also a claim against that member?

The initial answer is, of course, no. Nevada law expressly limits the liability of a member of a limited liability company; that is the purpose of "limited liability" in the name of the entity. As stated in Nevada statutory law, "unless otherwise provided in the articles of organization or an agreement signed by the member or manager to be charged, no member or manager of any limited-liability company formed under the laws of this state is individually liable for the debts or liabilities of the company." NEV. REV. STAT. § 86.371 (2004).

AE counters that it is a creditor because, under an extension of Nevada law,⁴ James Giampietro is the "alter ego" of Chianti Cafe.⁵ Under analogous corporate law, Nevada courts have recognized that claimants who plead and prove specific elements of control, identity and resulting fraud or injustice may ignore statutory limited liability of corporate shareholders. See, e.g., LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 8 P.3d 841 (Nev.2000); Frank McCleary Cattle Co. v. Sewell, 73 Nev. 279, 317 P.2d 957 (Nev.1957). Recent Nevada statutory law, enacted in 2001, also recognizes this exception as to corporations. See NEV. REV. STAT. § 78.747 (2004), added by ch. 601, § 1, 2001 Nev. Stat. 3170.

The question is whether Nevada law would recognize "alter ego" claims with respect to limited liability companies. The alter ego doctrine has a long and contentious history. Its origins lie in equity, and the desire of courts to not permit investors to manipulate the statutory privilege of limited liability to the knowing disadvantage of those who deal with the corporation. See, e.g., STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL § 1:3 (2004). As often as it is raised, however, it seems as often not to be found. See, e.g., Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036 (1991) (finding that alter ego claims succeed only about 40% of the time). As two well-known commentators phrased it, the alter ego doctrine and its result of piercing the corporate veil is "like lightning, it is rare, severe, and unprincipled. There is a consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law." Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 89 (1985).⁶

The "unprincipled" nature of the doctrine and the confusion it generates has lead some to call the theory into question as a useful common law doctrine. See Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479 (2001); Douglas C. Michael, To Know a Veil, 26 J. CORP. L. 41 (2000). Regardless, no court or legislature has yet sought to eliminate the doctrine.

Indeed, many states, including Nevada, have formally incorporated it into their statutory schemes for corporations. See NEV. REV. STAT. § 78.747 (2004). This codification as to corporations, however, leaves open the question as to whether to extend similar principles to limited liability companies.

The argument in favor of this extension is that the doctrine is an equitable one that allows courts to scuttle subterfuges designed to injure creditors at the expense of owners; the argument against is that, although Nevada generally recognized limited liability companies in 2001 when it codified the alter ego doctrine for corporations, it did not similarly codify the doctrine for limited liability companies. This lacuna arguably creates a negative inference that there is no alter ego exception for limited liability companies. No Nevada court has considered this issue, and thus this Court must make a guess as to what a Nevada court would do in a similar situation.

If presented with the issue, this court believes it highly likely that Nevada courts would recognize the extension of the alter ego doctrine to members of limited liability companies. The varieties of fraud and injustice that the alter ego doctrine was designed to redress can be equally exploited through limited liability companies. As recently stated by the Nevada Supreme Court, "the 'essence' of the alter ego doctrine is to 'do justice' whenever it appears that the protections provided by the corporate form are being abused." LFC Mktg. Group, Inc. v. Loomis, 116 Nev. 896, 903, 8 P.3d 841, 845-6 (Nev.2000). With respect to limited liability companies, the "protections" of limited liability provide the same sort of possibilities for abuse.

Against this strong policy of preventing abuse of limited liability, the court discounts heavily any argument that Nevada's codification of the principles of alter ego liability for corporations in 2001 created a negative inference that the Nevada legislature intended to abrogate alter ego liability with respect to limited liability companies. Although some states have explicitly provided for alter ego liability for limited liability companies,⁷ the sparse legislative history of the 2001 Nevada legislation indicates that legislators were interested in increasing corporate franchise fees, and were prepared to codify corporate alter ego liability as a price for that increase.⁸

Nowhere in the legislative minutes or other scraps of legislative history, however, is there any indication of an intent to tighten or clarify alter ego liability for corporations while eliminating it for limited liability companies or any other limited liability entity (such as limited partnerships, limited-liability partnerships or limited-liability limited partnerships). Indeed, such...