Pip, Jimmy, and Theodore Brennan are brothers and shareholders of Brennan’s, Inc., which owns and operates New Orleans’s famous Brennan’s Restaurant. In 1998, the Brennan brothers retained attorney Edward Colbert and his firm, Kenyon & Kenyon, L.L.P., to represent Brennan’s, Inc., in a dispute with another family member. All bills were sent to Brennan’s, Inc., and the payments came from the company’s checking accounts.

    

As a close corporation, Brennan’s, Inc., did not hold formal corporate meetings with agendas and minutes, but it did maintain corporate books, hold corporate bank accounts, and file corporate tax returns. In 2005, Brennan’s, Inc., sued Colbert and his law firm for legal malpractice. In its answer, Kenyon & Kenyon demanded unpaid legal fees both from Brennan’s, Inc. and from the Brennan brothers personally. The trial court found that the Brennan brothers could not be held personally liable. Kenyon & Kenyon appealed. The law firm argued that the court should pierce the corporate veil because Brennan’s, Inc., did not observe corporate formalities and because the Brennan brothers did not honor their promises to pay their legal bills.

    

IN THE LANGUAGE OF THE COURT

  

Daniel L. DYSART , Judge.

As a general rule, a corporation is a distinct legal entity, separate from the individuals who compose it, thus insulating the shareholders from personal liability.    

There are limited exceptions where the court may ignore the corporate fiction and find the shareholders personally liable for the debts of a corporation. One of those exceptions is where the corporation is found to be the “alter ego” of the shareholder. It usually involves situations where fraud or deceit has been practiced by the shareholder through the corporation. Another basis is where the shareholders disregard the corporate formalities to the extent that the corporation and the shareholders are no longer distinct entities.

  

Absent fraud, malfeasance or criminal wrongdoing, courts have been reluctant to hold a shareholder personally liable for corporate obligations. When a party seeks to pierce the corporate veil, the totality of the circumstances is determinative. [Emphasis added.]

The Kenyon firm was aware of the nature of the operation of Brennan’s, Inc.,  prior to being retained. The client was Brennan’s, Inc., bills were sent to Brennan’s, Inc., and payments were paid with checks from the Brennan’s, Inc., bank accounts.  Brennan’s, Inc., maintained its own accounting records and filed its own tax returns. The Kenyon firm acknowledged that Brennan’s, Inc., acting through its shareholders, promised to make good on the debt. [Emphasis in original.]   

There is no evidence that the Brennan brothers ever agreed to bind themselves personally for any debt incurred in connection with the legal services provided by the Kenyon firm. There is no written retention agreement between the corporation and the Kenyon firm, nor is there a written guaranty from any of the brothers. The Kenyon firm admits that there is no requirement for small, [close] corporations to operate with the formality usually expected of larger corporations. The Kenyon firm has failed to establish that the lack of corporate formalities, particularly meetings, agendas and minutes, is sufficient to pierce the corporation veil. Brennan’s, Inc., at all times since its inception has maintained corporate books, corporate bank accounts, and has filed corporate tax returns.

  

The Kenyon firm has not proven that any of the Brennan brothers made promises to pay the firm’s bills without the intent to pay them. If a broken promise to pay was sufficient to establish fraud, then every lawsuit against a corporation for a debt would automatically allow for the piercing of the corporate veil. Clearly, a juridical entity such as a corporation can only speak through its shareholders. [Emphasis added.]

  

DECISION AND REMEDY The Louisiana appellate court held that Kenyon & Kenyon could not hold the Brennan brothers personally liable by piercing the corporate veil. The court therefore affirmed the trial court’s judgment for the Brennan brothers.

  

THE ETHICAL DIMENSION Should the Brennan brothers be held personally liable because they misled their attorneys? Why or why not?

  

THE ECONOMIC DIMENSION Do corporations benefit from shareholders’ limited liability? If so, how?