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Note: Carl G. Nichols III, who owned and had sole control of Silverleafe International, LLC (Seller) located in Tennessee, contracted to deliver 100 metric tons of USA E/MOT raw cotton to NVK Spinning Co., LTD. (Buyer) located in Thailand. Payment was to be by commercial letter of credit issued by A1 Bank (Issuer) of Thailand.

Seller failed to make timely delivery, and Buyer amended the LC to extend delivery date and give Seller an opportunity to perform the contract. Seller remained unable to deliver the cotton, and both parties entered arbitration on closing out the contract through International Cotton Association, Ltd (ICA). The ICA issued an award against Seller requiring it to pay Buyer USD 291,910.20. However, before the arbitration concluded, Seller was dissolved and unable to pay the award. Buyer then sued Nichols in the U.S. District Court for the Western District of Tennessee, seeking to "pierce the corporate veil" and hold him personally liable. Both parties moved for summary judgment, and Judge Mays granted summary judgment for Nichols and denied it for Buyer.

The Judge stated that "it is common for ... [sellers] to rely on a letter of credit from a buyers' bank as "capital" in purchasing the cotton to be delivered to the buyer. The letter of credit serves both as a guarantee by the buyer to pay the seller on completion of the contract and as assurance to the buyer that the seller can perform as contracted." But, substantial increases in cotton prices between formation of the contract and the agreed delivery date led to Seller's decision to not cover the differences and breach the contract. This "resulted in a large monetary judgment against ... [Seller], but its breach of the Contract does not justify holding Nichols personally liable for that judgment."

The Judge noted that Seller breached the contract and defaulted on the LC due to "an adverse market change" and not to "commit fraud or a wrongful act", without which it is unjustified to pierce the corporate veil and hold the owner of an LLC personally liable. The Judge also stated that Buyer never paid Seller any money, and Seller made no money from the transaction or diverted any assets to its owner, Nichols, showing no fraudulent or wrongful act. Absent fraud, "Seller's ... insolvency and dissolution ... [were] not an "extreme circumstance" that justifies disregarding limited liability, but a typical circumstance in which §48-217-101 protects entrepreneurs from personal liability."

[JL]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.