HB 7340 — AN ACT CONCERNING THE USE OF VEIL PIERCING TO DETERMINE THE PERSONAL RESPONSIBILITY OF AN INTEREST HOLDER OF A DOMESTIC ENTITY FOR THE DEBTS, OBLIGATIONS OR OTHER LIABILITIES OF SUCH ENTITY AND THE RESPONSIBILITY OF A DOMESTIC ENTITY FOR THE DEBTS, OBLIGATIONS OR OTHER LIABILITIES OF AN INTEREST HOLDER OF SUCH ENTITY.

General Assembly SubstituteRaised Bill No.

7340 January Session, 2019 ANLCO ACTNo. CONCERNING THE USE OF VEIL PIERCING TO DETERMINE THE PERSONAL RESPONSIBILITY OF AN INTEREST HOLDER OF A DOMESTIC ENTITY FOR THE DEBTS, OBLIGATIONS OR OTHER LIABILITIES OF SUCH ENTITY AND THE RESPONSIBILITY OF A DOMESTIC ENTITY FOR THE DEBTS, OBLIGATIONS OR OTHER LIABILITIES OF AN INTEREST HOLDER OF SUCH ENTITY.

5574 Referred to Committee on JUDICIARY Introduced by:

(JUD) AN ACT CONCERNING THE USE OF THE INSTRUMENTALITY TEST TO DETERMINE THE LIABILITY OF THE SHAREHOLDERS OF A CORPORATION AND THE MEMBERS OR MANAGERS OF A LIMITED LIABILITY COMPANY.

(NEW)Section (Effective33-673 fromof passagethe andgeneral applicablestatutes tois anyrepealed civiland action filed on or after the effectivefollowing dateis ofsubstituted this section) As used in thislieu sectionthereof and(Effective sectionsOctober 21, and2019): 3 of this act:

(1)(a) "Affiliate"A meanspurchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to anythe specifiedshares person,except anyto otherpay personthe directlyconsideration orfor indirectlywhich controlling,the controlledshares bywere orauthorized underto commonbe controlissued withas suchprovided in section 33-672 or specified person.in the subscription agreement as provided in section 33-671.

As(b) usedUnless otherwise provided in thisthe subdivision,certificate "control"of hasincorporation, a shareholder [of a corporation] or other person is not personally liable for the sameacts meaningor givendebts toof that[the] terma incorporation 17except CFR[that 240.12b-2,he may become personally liable by reason of his own acts or conduct] as amendedset fromforth timein tosubsection time;(c) of this section.

(2)LCO "DomesticNo. entity" means an entity whose internal affairs are governed by the law of this state;

(3)5574 "Entity"1 meansof (A)5 aRaised businessBill corporation,No.7340 (B)(c) aA nonstockshareholder corporation,or (C)other aperson limitedshall liabilitybe partnership,personally (D)liable afor limitedthe partnership,acts including a limited liability limited partnership, (E) a limited liability company, or (F)debts anyof other person that (i) has a separatecorporation legalwhen existence,the andcorporation (ii) is subjectan toinstrument aor provisionagent of the generalshareholder statutesor LCOsuch \\PRDFS1\HCOUSERS\BARRYJN\WS\2019HB-07340-R011person. of 4 HB.docx Substitute Bill No.

7340A whichcourt providesshall thatfind, anin interestaccordance holderwith ofthe suchprovisions personof isthis notsection, personallythat liablea forcorporation ais debt,an obligationinstrument or otheragent liability of sucha personshareholder solely by reason of being or acting as such interestperson holder;when:

(4)(1) "GovernanceThe interest"shareholder hasor person exerts complete control and domination of the samefinances, meaningpolicy asand providedbusiness inpractice sectionwith 34-600respect ofto a corporate transaction, such that the generalcorporate statutes;entity to the transaction had, at the time, no separate mind, will or existence of its own;

(5)(2) "Governor"such hascontrol is used by the sameshareholder meaningor asperson providedto in(A) sectioncommit 34-600fraud or wrong, (B) perpetrate a violation of thea generalstatutory statutes;duty or other legal duty, or (C) to commit a dishonest or unjust act in contravention of another person's legal rights;

(6)and "Interest"(3) meansthe (A)control aexerted governanceby interestthe inshareholder anor entity,person, (B)as adescribed transferable interest in ansubdivisions entity,(1) orand (C)(2) aof share,this membershipsubsection, interestproximately orcaused otherthe ownershipinjury interestor inunjust anloss entity;complained of.

(7)(d) "InterestIn holder"making hasa thedetermination sameunder meaningsubsection as(c) providedof inthis sectionsection, 34-a 600court ofshall theconsider generalfactors statutes;that include, but are not limited to:

(8)(1) "Person"Whether hasthe corporation was inadequately capitalized, (2) whether funds were added to or removed from the samecorporation meaningfor aspersonal providedpurposes inrather sectionthan 34-600corporate purposes, (3) whether there was overlapping ownership, officers, directors and personnel, (4) the existence of common office spaces, addresses and telephone numbers, (5) the generalamount statutes;of business discretion retained by an allegedly dominated corporation, (6) whether corporate transactions involving the same shareholder or person were at arm's length, (7) whether a corporation was treated as an independent profit center, (8) whether an allegedly dominated corporation paid or guaranteed its own debts, and (9) whether an allegedly dominated corporation had property that was used by another person as if it were its own.

and(e) (9)The "Transferablefailure interest"of hasa corporation to observe formalities relating to the sameexercise meaningof asits providedpowers inor sectionmanagement 34-600of its activities and affairs is not a ground for imposing liability on a shareholder of a corporation for the generalacts statutes.or debts of the corporation.

LCO No.

5574 2 of 5 Raised Bill No.7340 (f) When determining whether a shareholder or person is personally liable for the acts or debts of the corporation, a court shall exclusively make such determination in accordance with the provisions of this section.

(NEW)Section (Effective from passage and applicable to any civil action filed on or after the effective date of this section) (a) A statutory limitation on the liability of an interest holder of a domestic entity for a debt, obligation or other liability of such domestic entity, including without limitation, the limitation set forth in section 33-673 or 34-251a of the general statutes,statutes mayis notrepealed beand disregarded based upon a veil piercing doctrine, claim or remedy in connection with a transaction to which the entityfollowing is asubstituted party,in unlesslieu athereof court(Effective findsOctober by1, clear2019): and convincing evidence that:

(1)(a) TheA interestdebt, holderobligation exertedor completeother dominationliability andof controla overlimited theliability management,company finances,is policiessolely andthe activitiesdebt, ofobligation suchor entityother withliability respectof tothe suchcompany. transaction;

(2)A suchmember, domination[or] andmanager controlor wasother usedperson is not personally liable, directly or indirectly, by theway interestof holdercontribution toor (A)otherwise, commitfor frauda debt, obligation or other intentionalliability wrongof against the personcompany assertingsolely suchby doctrine,reason claimof being or remedy,acting (B)as intentionally violate a statutorymember or commonmanager, lawexcept dutyas toset LCOforth {\\PRDFS1\HCOUSERS\BARRYJN\WS\2019HB-07340-2in ofsubsection 4(b) R01-HB.docxof }this Substitutesection. Bill No.

7340This suchsubsection person,applies orregardless (C)of committhe adissolution deceitfulof orthe othercompany. unlawful act against such person;

and(b) (3)A themember, dominationmanager andor controlother exertedperson byshall thebe interestpersonally holderliable andfor the breachacts or debts of dutya orlimited otherliability actcompany proximatelywhen causedthe injurylimited orliability losscompany tois thean personinstrument assertingor suchagent doctrine,of claimthe member, manager or remedy.such person.

(b)A Incourt makingmay afind, determinationin underaccordance subdivisionwith (1)the ofprovisions subsection (a) of this section, that a courtlimited shallliability considercompany factorsis thatan include,instrument butor areagent notof limiteda to,member, whether:manager or such person when:

(1) The entitymember, wasmanager adequately capitalized, (2) assets of the entity were distributed or otherwiseperson transferredexerts fromcomplete thecontrol entity to the interest holder or any affiliate of such interest holder without any lawful business purpose, (3) there were overlapping interest holders, governors or other management personnel between the entity and thedomination interest holder or any affiliate of such interest holder, (4) the interestfinances, holderpolicy or any affiliate of such interest holder shared office spaces, addresses and telephonebusiness numberspractice with therespect entityto withouta paymentcompany oftransaction, fairsuch consideration,that (5) transactions involving the entitycompany andto the interesttransaction holderhad, or any affiliate of such interest holder were at arm's length and for fair consideration, (6) funds of the entitytime, wereno commingledseparate withmind, fundswill of the interest holder or anyexistence affiliate of such interest holder, (7) the entity was treated as a separate legal entity for financial and other business purposes as evidenced by having its ownown; contractual relationships, bank accounts, books of account and financial statements, (8) the entity was insolvent or rendered insolvent by the acts of the interest holder or any affiliate of such interest holder, and (9) the property of the entity was used by the interest holder or any affiliate of such interest holder without payment of fair consideration.

(c)(2) Thesuch burdencontrol ofis proofused shallby bethe onmember, themanager or person seeking to hold(A) thecommit interestfraud holderor wrong, (B) perpetrate a violation of a domesticstatutory entityduty responsibleor forother thelegal debts,duty, obligationsor (C) to commit a dishonest or otherunjust liabilitiesact in contravention of sucha entity.person's legal rights;

(d)and The(3) failurethe ofcontrol aexerted domesticby entitya tomember, observemanager formalities relating to the exercise of its powers or theperson, managementas ofdescribed itsin activitiessubdivisions (1) and affairs(2) is not grounds for imposing personal liability on an interest holder of suchthis entitysubsection, forproximately acaused debt,the obligationinjury or otherunjust liabilityloss ofcomplained suchof. LCO {\\PRDFS1\HCOUSERS\BARRYJN\WS\2019HB-073403 of 4 R01-HB.docx } Substitute Bill No.

7340(c) entityIn basedmaking upona determination under subsection (b) of this section, a veilcourt piercingshall doctrine,consider claimfactors orthat remedy.include, but are not limited to:

(e)(1) WhenLCO determiningNo. whether a statutory limitation on the liability of an interest holder of a domestic entity for a debt, obligation or other liability of such domestic entity, including without limitation, the limitation set forth in section 33-673 or 34-251a of the general statutes, may be disregarded based upon on a veil piercing doctrine, claim or remedy, a court shall make such determination exclusively in accordance with the provisions of this section and section 1 of this act.

Sec.5574 3 of 5 Raised Bill No.7340 Whether the limited liability company was inadequately capitalized, (2) whether funds were added to or removed from the limited liability company for personal purposes rather than corporate purposes, (3) whether there is overlapping ownership, officers, directors and personnel, (4) the existence of common office spaces, addresses and telephone numbers, (5) the amount of business discretion retained by an allegedly dominated limited liability company, (6) whether limited liability company transactions involving the same member, manager or person were at arm's length, (7) whether a limited liability company was treated as an independent profit center, (8) whether an allegedly dominated limited liability company paid or guaranteed its own debts, and (9) whether an allegedly dominated limited liability company had property that was used by another person as if it were its own.

3.[(b)] (d) The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager of the company for a debt, obligation or other liability of the company.

(NEW)(e) (EffectiveWhen fromdetermining passagewhether anda applicablemember, tomanager anyor civilperson actionis filedpersonally onliable orfor after the effectiveacts dateor debts of thisthe section)limited Noliability domesticcompany, entity shall be responsible for a debt,court obligationshall orexclusively othermake liability of an interest holder of such entitydetermination basedin uponaccordance awith reversethe veilprovisions piercingof doctrine,this claimsection. or remedy.

[(c)] (f) Nothing contained in sections 34-243 to 34-283d, inclusive, shall be interpreted to abolish, repeal, modify, restrict or limit the law in effect on July 1, 2017, in this state applicable to the professional relationship and liabilities between the person furnishing the professional services and the person receiving such professional service and to the standards for professional conduct, provided (1) any member, manager, agent or employee of a limited liability company rendering professional services formed under sections 34-243 to 34- 283d, inclusive, shall be personally liable and accountable only for negligent or wrongful acts or misconduct committed by such person, or by any person under such person's direct supervision and control, LCO No.

5574 4 of 5 Raised Bill No.

7340 while rendering professional services on behalf of the limited liability company to the person for whom such professional services were being rendered;

and (2) the personal liability of members of a limited liability company rendering professional services formed under sections 34-243 to 34-283d, inclusive, in their capacity as members of such limited liability company, shall be not greater in any aspect than that of a shareholder who is an employee of a corporation formed under chapter 601.

A limited liability company rendering professional services shall be liable for up to the full value of its property for any negligent or wrongful acts or misconduct committed by any of its members, managers, agents or employees while they are engaged on behalf of the limited liability company in the rendering of professional services.

SectionOctober 11, from2019 passageSection and1 New33-673 section applicable to any civil action filed on or after the effective date of this section Sec.

2 fromOctober passage1, and2019 New34-251a sectionStatement applicable to any civil action filed on or after the effective date of thisPurpose: section Sec.

3To fromcodify passagethe andcommon Newlaw sectionuse applicableof the instrumentality test when making determinations as to any(1) civilthe actionliability filedof onthe shareholders of a corporation for the act or afterdebts of the effectivecorporation, dateand (2) the liability of thisthe sectionmembers Statementor managers of Legislativea Commissioners:limited liability company for the debts, obligations or other liability of the limited liability company.