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Tennessee Business Court Pierces Veil of Limited Partnership in Case of First Impression

Pepper Law, PLC was recently successful in having the Business Court, located in Davidson County, pierce the veil of a limited partnership to hold the limited partner personally liable for a judgment rendered years earlier against the limited partnership. No Tennessee appellate court has yet addressed whether or not the veil of a limited partnership can be pierced, and the decision of the Business Court is believed to be the first time a Tennessee court has ruled on the issue.

Tennessee has long-recognized that the corporate veil of a corporation may be pierced such that an individual may be held liable for the debts of the corporation. As well, in a 2012 opinion, the Court of Appeals of Tennessee ruled that the veil of a limited liability company could be pierced in the case of Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812.

In arguing that the piercing of the veil of a limited partnership to hold a limited partner individually liable was warranted, we relied upon several non-Tennessee cases. Of particular weight in the Business Court’s decision was the opinion of the bankruptcy court for the Southern District of New York in In re Adelphia Commc’ns Corp., 376 B.R. 87 (2007).  In the case before the Business Court, the limited partnership against whom we had earlier obtained a judgment, and for which we sought to pierce the veil to hold its limited partner liable, was a Delaware limited partnership.  In the Adelphia case, the limited partnership at issue was also a Delaware limited partnership.

In the Adelphia case, the court pointed out that there was nothing in the Delaware Limited Partnership Act which prohibited the piercing of the veil of a limited partnership.  The Business Court approved of the reasoning in the Adelphia case, noting that Tennessee appellate decisions had approved of Tennessee courts looking to Delaware courts for guidance on corporate law. In addition to the bankruptcy court in the Adelphia case, appellate courts in New Jersey and Virginia have ruled that the veil of a limited partnership may be pierced to hold a limited partner liable.

In piercing the veil of the limited partnership at issue, the Business Court applied what are referred to in Tennessee case law as the “Allen factors.”  The Allen factors were first enunciated in a federal court opinion, but have been expressly approved and adopted by Tennessee appellate courts.  None of the eleven Allen factors is conclusive, and it is not required that all eleven factors be present in order for the veil to be pierced.

Applying the Allen factors to the case before it, the Business Court found that many had been met, including:

  • The limited partnership was undercapitalized
  • the limited partnership was essentially owned by the one limited partner, who was the defendant and against whom individual liability was sought, Denny Hastings
  • the limited partnership shared office space and employees with a number of other limited partnerships owned and controlled by Mr. Hastings
  • Mr. Hastings used two limited partnerships to facilitate the transfer of an airplane, which transfer the Business Court found was made to prevent the plaintiff, our client, from collecting a judgment it had received against one of Mr. Hastings’ limited partnerships
  • Mr. Hastings failed to ensure arms’-length transactions between his limited partnerships by failing to make entries into financial records memorializing the supposed legitimate transactions between his limited partnerships

The same day our client obtained a significant judgment against the limited partnership whose veil was pierced by the Business Court, Mr. Hastings had orchestrated the transfer of the only asset of that limited partnership, an aircraft, to another of his limited partnerships. Notably, the Business Court held that this fraudulent transfer, standing alone, was enough to justify the piercing of the veil to hold the limited partner individually liable.

The style and docket number of the case at issue are: Executive Air Express, Inc. v. Denny Hastings, et. al., Chancery Court for Davidson County, Tennessee, Business Court Pilot Project, no. 17-1096-BC.  For Tennessee lawyers who handle piercing the veil cases, this decision of the Business Court is one of which to be aware.