The Louisiana Third Circuit Court of Appeal caused quite a stir in the Louisiana business community in December, 2005 when it rendered its decision in Doland v. ACM, 921 So.2d 196 (La.App. 3 Cir. 12/30/05). In Doland, the Court was called upon to resolve a heated dispute over the termination of a lease of video poker machines. The video poker machines were being leased by ACM [FN1] for use in the Pat’s of Cameron Restaurant. Upon the expiration of the original three year term, written notice had been given of the restaurant’s desire to retain possession of the machines on a day-to-day basis, and to continue as such until the restaurant was able to obtain different machines, either through direct purchase or through another lessor. The restaurant had the machines disabled by the Louisiana State Police after ACM refused to remove the machines after removal was requested by the restaurant. Because of ACM’s refusal to remove them, the video poker machines remained disabled but on the premises of the restaurant, preventing the installation of new video poker machines, for roughly three months. During this time, the restaurant experienced a decrease in revenue not only from the lack revenue generated from the video poker machines themselves, but also from a decline in restaurant sales due to a lack of patronage.
Pat Doland d/b/a Pat’s of Cameron sued ACM for damages resulting from ACM’s failure to remove the video poker machines. Doland’s claims survived, among others, a no right of action challenge brought by ACM. ACM asserted that Doland had no right of action because the restaurant is owned by Pat’s Restaurant of Cameron, Inc., an S corporation, and not by Doland individually. In spite of the ownership of the restaurant, the Court allowed Doland to recover [FN 2] because the lease was executed by Doland, individually, without any designation that the lease was entered into by Doland acting on behalf of the corporation. What is alarming is that the Court went on to state:
We similarly find that the lease agreement that is presently before us was entered into individually by Pat Doland. He signed the lease in his personal name, without any designation that he was acting on behalf of any other entity. In addition, we find it relevant that “Pat’s Restaurant of Cameron, Inc.” is a Chapter S corporation. The owners of such qualifying entities are taxed as sole proprietors or partnerships and are personally liable for the losses and debts of such a corporation; the Chapter S corporation is not taxed. See 26 U.S.C.A. §§ 1363, 1366. Under Louisiana law, this corporation, therefore, is not a separate and distinct entity from the individual, Doland, and as a result, there exists no legal distinction between the individual and the business. See Robinson v. Heard, 01-1697 (La. 2/26/02), 809 So.2d 943. Doland at 201. (Emphasis added).
Although the above-quoted language is dictum, it was enough to send a wave of panic surging through the S corporations, limited liability companies and registered limited liability partnerships across the state. S corporations, limited liability companies and registered limited liability partnerships can enjoy the benefits of both limited liability and pass through taxation [FN 3], making them appealing options for certain business ventures [FN 4]. Unless remedied, this language alone could have been enough to allow the courts to begin to erode away the protection from liability enjoyed by these entities, leaving only C corporations, subject to double taxation, shielded from liability. Entities that thought they would be able to enjoy both pass through taxation and limited liability were possibly facing a foreseeable change in the protection they enjoy.
The Court more recently granted a rehearing for the limited purpose of deleting the above-quoted dictum. The Court then went on to clarify that S corporations are offered a “shield of protection against individual liability” even though, because of pass through taxation, there is “no legal distinction for income tax purposes between an individual and a Chapter S corporation”.
There can be no guarantee that any business entity is free from the piercing of the corporate veil and the resulting collapse of the business entity. There is also nothing to stop a court in another matter from readdressing the issue. What is encouraging is that, at least for now, the Court realized the severity of the impact its dictum could have on the business community and made a directed effort to remedy the situation.
[FN 1] The original lease was between the restaurant and Allied Gaming Management, Inc. (“Allied”), which sold its assets (including this lease) to ACM as part of Allied’s Chapter 11 bankruptcy reorganization plan prior to the expiration of the original three year term.
[FN 2] Not only was Doland able to recover for lost revenue stemming from the lack of video poker gaming, but also from the lost restaurant sales. The Court also awarded Doland interest, general damages and attorney’s fees.
[FN 3] Pass through taxation allows entities such as partnerships, sole proprietorships, S corporations, limited liability companies electing to be treated as partnerships to avoid taxation at the entity level. This results in only one level of taxation: at the individual shareholder, partner, or member level. To the contrary, C corporations and limited liability companies electing to be treated as a corporation are taxed first at the entity level and then again at the shareholder or member level.
[FN 4] There are certain restrictions on the formation of these types of entities.