At its core, each business’s goal is usually the same — generating profits. This is true whether a business manufactures auto parts, provides medical services or stages a traveling circus. Accordingly, a primary objective of each business is the collection of money owed; any business that fails to prioritize realization of its accounts receivable soon will find that it is no longer in business.
Thus, it can be instructive to review one company’s errors and its failed attempts to collect a debt. While the company undoubtedly learned from its mistakes, other businesses would be wise to review its situation and learn those same lessons without experiencing the corresponding loss.
Howell Contractors (“Howell”), a Kentucky contracting company, entered into a contract in 2005 with Westview, an LLC organized under Ohio law, to provide services in the building of a residential subdivision in southern Ohio. Several years and one housing collapse later, Howell still was owed roughly $180,000 from Westview for services rendered. After unsuccessful attempts to collect payment, Howell turned to the court system.
Howell filed suit in Kentucky, seeking a judgment against not only Westview, but also the individual owners of that LLC. In other words, Howell was attempting to “pierce the corporate veil” — impose the company’s debts on its owners. Howell’s case recently came before the Kentucky Court of Appeals (the “Court”) in Howell Contractors, Inc. v. Berling, and that Court found that while Howell was entitled to a judgment against Westview, it could not collect from Westview’s individual owners. This left Howell with a $180,000 judgment against a company, Westview, which may have limited assets. At the end of the day, Howell may be out not only the $180,000 but, regardless of whether it actually ever collects on the judgment, it is certainly out the significant legal expense of attempting to collect the $180,000 via the court system. Three lessons can be learned from Howell’s ordeal:
Know who you’re doing business with
While this lesson is important for any number of reasons already known to successful businesses, the Court highlighted one additional reason most executives probably haven’t considered. When deciding whether to pierce Westview’s veil, the Court decided this issue under the law of Ohio, not Kentucky, because Westview was organized in Ohio. Because different states have different laws and different tests as to when it is appropriate to pierce the veil, companies could achieve varying degrees of success imposing company liabilities on individual members depending on the debtor’s state of incorporation.
Think about seeking personal guarantees