PIERCE THAT LIABILITY SHIELD (OR NOT)

             Richard Belliveau provides lighting systems for high-profile events, concert tours, theater events, and showrooms. Richard entered into a License Agreement in 2007 with his company, High End Systems, Inc., which required that High End use Richard’s intellectual property for commercial gain. In exchange, High End agreed to pay Richard a substantial annual amount, in addition to sublicense proceeds.

            High End was sold to Barco, Inc. in 2008, for $55 million, and as a consequence High End became a wholly owned subsidiary of Barco. Richard worked closely with High End and Barco to negotiate new sublicense agreements for the following decade.

            Meanwhile, High end suffered financially. By 2016 Barco was looking for a purchaser. Barco signed a contract with a company in 2017 committing Barco to sell High End for $7.5 million to Electronic Theater Controls, Inc.

            Richard was displeased at the valuation.

            Negotiations between Barco and High End continued and resulted in a sublicense for High End’s current patent portfolio as well as Richard’s future intellectual property. Barco paid $75,000 for the license, but it agreed not to make or sell any licensed products for four years.

            Five days later, Barco sold High end to Electronic Theater Controls.

            Richard sued Barco in Texas State court, claiming that since Barco owned High End, Barco was responsible for High End’s sublicense of all of Richard’s intellectual property to Barco for an unreasonably low value. And that High End’s breach of a duty owing to Richard allowed Richard to prosecute a claim against High End’s owner, Barco.

            Barco removed the State litigation to Federal court. Richard lost at the district court level and appealed.

            The Federal appellate court, using Texas law, determined that in order to prevail Richard must show that Barco used High End to “. . . perpetrate an actual fraud . . . primarily for Barco’s direct personal benefit [italics added].”

            Richard argued that fraud was committed based on High End’s execution of the Barco sublicense for $75k, which Richard contends was far below market value. The appellate court noted that the lower court found that the execution of the Barco sublicense was permitted and not evidence of actual fraud. As well, Richard did not provide to the appellate court sufficient evidence that the Barco sublicense was undervalued.

            To refute, Richard tendered his expert’s opinion that the fair market value of Barco’s rights under the Barco sublicense was over $100 million. And consequently, the $75k amount actually paid was grossly inadequate and evidence of fraudulent intent.

            This argument seemed to gain traction with the appellate court.

            Traction ended when the appellate court determined that this is a breach of contract case, which does not authorize Richard to sue Barco, the shareholder, for operating according to the terms of a contract. Further, the appellate court stated that piercing the corporate veil is a remedy to be used when the actions of the entity’s owner amounting to “actual fraud” render the entity unable to pay its debts.

            Barco prevails, again.

            See Belliveau v. Barco, Inc.; Case 19-50717; US Court of Appeals, 5^th Appellate Circuit; Western District of Texas; January 28, 2021: https://scholar.google.com/scholar_case?case=13618133374852336339&hl=en&as_sdt=6&as_vis=1&oi=scholarr.             

            Lessons / Questions / Observations:

1. Observation: Laws and cases prohibit the formation of corporations, LLC, limited partnerships, and similar for the purpose of committing fraud and then hiding behind the liability shield offered by statute. But absent a clear showing of fraud, it is difficult to reach through the shield to the wallet of the shareholder, member, or partner.
   

2. Question: Richard Belliveau first asserted his claim against High End, then later dismissed High End and replaced it with Barco. Why do you suppose he did so?
   

3. Observation: For those interested in this case or how the “piercing” theory can be successfully used, there is a well-written dissent starting at page 20 from W. Eugene Davis, Senior United States Circuit Judge of the US Court of Appeals. Judge Davis would have returned this case back to the lower Federal court, to allow a jury to hear all the facts and render a verdict.
   

                                                                                    Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.