Keeping up Formalities: Protecting Assets Across Commonly Owned Companies
A recent Massachusetts Bankruptcy Court decision should serve as a clear reminder to business owners that, in order to enjoy the benefits that limited liability entities afford, one must respect established corporate formalities and comport business accordingly. Briefly, in In Re: Cameron Construction & Roofing Co., Inc. the Bankruptcy Court held that the assets of a Massachusetts limited liability company, closely related to a Massachusetts construction business subject to Chapter 7 bankruptcy proceedings, could be reached to satisfy the claims of the creditors of the construction business.
The two separate entities shared a common owner yet were formed as distinct enterprises. In this case, however, the Court determined that the owner controlled both the non-debtor LLC and debtor construction business and had allowed for the intermingling of assets. Further, the Court noted that the common owner “was thinly capitalized, and the two entities observed only minimal corporate formalities by filing separate tax returns and Annual Reports.” Thus, the Court held that ‘substantive consolidation’ was the appropriate remedy- effectively disregarding the sovereignty of the separate entities and combining their assets as a means to satisfy the liabilities of one. Had the owner resected the separate corporate forms of his commonly owned entities in his everyday operations he likely would have been in a better position to shield assets held by the non-debtor LLC from creditor access.
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