Sky Cable, LLC v. DIRECTV, Inc. provides an excellent example of what kind of trouble a company owner can run into when they do not follow corporate formalities. Generally, the corporate form shields shareholders from debts owed by the company. However, when fairness 
dictates, the courts will allow a party to go after the individual(s) that own and operate a company. For example, when a court determines that the corporate entity is nothing more than the alter-ego of a sole member, the Courts may disregard the corporate entity and treat it as being one and the same with the individual that owns the company.
Traditional veil piercing involves suing the individual(s) that own a company for a debt owed by the company itself. This case however, involves reverse veil piercing. That means the Plaintiffs were allowed to go after the assets of other companies which were owned by the same person who owned the company that they originally sued.
Randy Coley was accused of and sued for engaging in a fraudulent scheme to sell DIRECTV services. He paid for the DIRECTV services supplied to a resort, but did not pay for all of the services for which he was collecting money from clients. Mr. Coley did so while operating as East Coast Cablevision, LLC (EEC); however, Mr. Coley was also the sole owner of three other LLCs. When Coley and EEC could not pay the judgment, the Court allowed the Plaintiffs to pursue the assets of all four companies.
In making its decision, the Court of Appeals wrote that reverse veil piercing is more appropriate when dealing with a single member LLC because there are no other company members with an interest in the company’s assets. In addition, state law has a strong public policy against allowing the corporate form to be used to commit fraud.
In this case, the Court found that Mr. Coley operated his four LLCs as a single entity in which money flowed freely from one company to another. That is the kind of behavior that will lead to conclude that a company is merely the alter-ego of its owner. The court noted a number of problematic practices. First, the trial court found that Mr. Coley failed to keep complete records showing why money was flowing between the four companies. Specifically, money from one company would be deposited in another company’s bank account or his personal account. Mr. Coley also reported the profits and loses of EEC on his individual tax return. In addition, one of the LLCs, ITT, owned real estate. But, the other LLCs collected rental income from those properties and then transferred those funds, minus expenses, to ITT. It did not help that Mr. Coley had no explanation for why money that belonged to ITT did not go straight to ITT. Funds from these other LLCs were also used to pay his personal car note.
To make matters worse, Mr. Coley transferred payments for expenses for one company to another company and the other LLCs made mortgage payments on the real estate owned by ITT. Mr. Coley took the mortgage interest deductions for these properties on his personal tax return. Finally, Mr. Coley made inconsistent statements about whether he was the sole owner of these LLCs. In one case, he testified under oath that he was the only owner of all four companies and in another proceeding he claimed his wife owned half of each company. Of course, because he had not followed corporate formalities, he was unable to prove either assertion one way or the other.
An incorporated entity is a legal entity that is separate from its owner(s). To preserve their limited liability, incorporated entities need to separate the finances of the company form the owner(s)’ personal finances and from the finances of other companies. In addition, corporations need company by-laws and limited liability companies should have operating agreements in place as well as documentation showing who owns what portion of the company. These and other formalities are the price for the limited liability the state offers you as an incorporated entity.