LLC Law Monitor : Northwest Limited Liability Company Lawyer & Attorney : Doug Batey : Stoel Rives Law Firm : LLC Formation, Tax Liability

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A limited liability company will generally shield its members and managers from the LLC’s debts and obligations, but the shield is not absolute. LLC members or managers who carry out an LLC’s tort can in some cases be personally liable for the injured party’s damages. The South Carolina Supreme Court had to decide such a case earlier this year. 16 Jade St. LLC v. R. Design Constr. Co., LLC, No. 27107, 2012 WL 1111466 (S.C. Apr. 4, 2012).

(A tort is not a breach of contract – it is an actionable, civil wrong. Examples include fraud, breach of a fiduciary duty, and negligently causing an auto accident. A party injured by a tort may be able to recover damages from the wrongdoer if requirements such as causation and proof of damages are satisfied. Tort law has its origins in the English common law and is part of the common law of all U.S. states.)

Background.  Carl Aten and his wife were the only members of R. Design Construction Co., LLC, a construction contractor. R. Design contracted with Jade Street for the construction of a four-unit condominium, and Aten served as R. Design’s general manager on the project. Jade Street had numerous complaints of defects in the construction, and ultimately R. Design walked off the job. Jade Street sued R. Design and Aten for negligence, breach of implied warranties, and breach of contract.

The trial court found that R. Design was liable for breach of contract, negligence, and breach of implied warranties. It also found that Aten was personally liable for his negligence. Id. at *2.

The Court’s Analysis.  Aten argued on appeal that South Carolina’s Uniform Limited Liability Company Act (ULLCA) shielded him from personal liability for any negligence he committed while working for R. Design. The relevant ULLCA language states:

Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

S.C. Code § 33-44-303(a). (Subsection (c) provides for member liability if the LLC’s articles of organization so provide and the member has consented in writing to that provision. It was not applicable to Aten.)

The court saw the question as one of statutory interpretation – did the legislature intend the LLC statute to shield members from personal liability for acts they commit in furtherance of the LLC’s business? 16 Jade St., at *2. The court noted that this was a question of first impression in South Carolina.

Looking first to other states, the court pointed out that a majority of the states that have examined similar statutory language “have concluded that a member is always liable for his own torts and cannot rely on his status as a member of an LLC as a shield.” Id at *3 (citing cases from half a dozen states). The court also cited a number of scholarly articles which opine that LLC statutes do not insulate a member from tort liability “primarily due to the common law concept that one is always liable for his torts.” Id. In the spirit of two-handed lawyers, the court also referred to a few courts that have concluded that their states’ LLC statutes do shield a member from personal liability for at least some types of torts.

Having surveyed the landscape, the court then dissected the language of Section 33-44-303(a). The first sentence says that the liabilities of the LLC, whether arising in contract or in tort, are solely the liabilities of the LLC. Since an LLC is a fictional entity and can act only through an agent such as a member or manager, that sentence seems to say that the member or manager who carries out the LLC’s tort does not thereby incur any personal liability. “[T]his language suggests R. Design alone is responsible for torts committed by Aten in the course of the company’s business.” Id. at *4. The court saw the second sentence as reinforcing the first, by stating that merely being or acting as a member or manager of an LLC will not cause the member or manager to be liable for the LLC’s obligations.

The court recognized, however, that interpreting the statute to shield LLC members or managers who commit torts in furtherance of the LLC’s activities would remove a long-standing common law remedy for injured parties. The court accordingly applied a higher standard of review. “Statutes will not be held in derogation of the common law unless the statute itself shows that such was the object and intention of the lawmaker, and the common law will not be changed by doubtful implication.” Id. at *5 (quoting 82 C.J.S. Statutes § 534 (2009)).

The court then referred to the majority view of the courts of other states, comments from the legislative history of Section 33-44-303, and comments from Section 304 of NCCUSL’s Revised Uniform Limited Liability Company Act (RULLCA). Id. These all follow the principle that shielding LLC members and managers from the LLC’s debts and obligations does not apply to claims seeking to hold members or managers liable for their own tortious conduct. These authorities treat members or managers, even when acting on behalf of the LLC, as also acting on their own behalf when committing a tort.

The court also reviewed the rule for corporations – i.e., that a shareholder is not liable for the debts or obligations of the corporation but is responsible for the consequences of its own conduct – and could find no evidence that the legislature intended to change that rule with respect to LLCs. Id.

Finding no clear legislative intent to restrict the common law, the South Carolina Supreme Court ruled in a three-to-two decision that Section 33-44-303(a) “does not insulate the [member] tortfeasor himself from personal liability for his actions.” The court accordingly affirmed the trial court’s finding that Aten was personally liable for torts he committed in furtherance of R. Design’s business. Id. at *6.

The brief dissenting opinion argued that the statute was clear and unambiguous and not amenable to an interpretation that a member tortfeasor of an LLC is personally liable for torts committed in the furtherance of an LLC’s business. Id. at *7. The dissent did not address the majority’s point that interpreting the statute to shield those who commit torts would derogate from the common law and therefore required a higher standard of review.

Comment.  Both the majority and the dissenting opinions ignored the inherent ambiguities in Section 33-44-303(a). For one, the first sentence cannot mean what it seems to say. Ignoring the reference to subsection (c), it says: “the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company.” No exceptions are noted. Read literally, it precludes joint liability of an LLC. Consider the following hypothetical. An LLC borrows money from a bank, and the LLC’s sole member guarantees the LLC’s payment obligation to the bank. A literal reading of the first sentence would mean that only the LLC is liable to repay its debt and the member is shielded from the guarantee obligation it willingly agreed to.

For another, consider that even reading the first two sentences together would not change the result, if the member was acting as a member. The statute does not explicitly require that the member act on behalf of the LLC, only that the member be “acting as a member.” What does that mean? Members in a manager-managed LLC have the status of members and the right to vote for managers, but they don’t act on behalf of the LLC.

The majority opinion acknowledged that removing the LLC’s liability shield for members who commit torts on behalf of the LLC “appears to strip away one of the main reasons why a person chooses to form an LLC,” and the court expressed particular concern about single-member LLCs. Jade St., 2012 WL 1111466,at *5. But to have held the other way would have been to open the floodgates – wouldn’t we all want our own single-member LLC to shield us from what would otherwise be liability for our own torts?

South Carolina’s statute allows an LLC to be organized for any lawful purpose. S.C. Code § 33-44-112(a). You could form an LLC for the purpose of owning and driving your personal vehicle. Under the dissent’s view of Section 33-44-303(a), you would presumably be “acting as a member” and therefore would not be liable for any injuries caused by your negligent driving.

This is a far-fetched example, of course, but it shows the lack of clarity in the statute. Given that ambiguity, the majority opinion arrived at what appears to be the correct result, particularly in light of its agreement with the majority of other courts and commentators that have considered this issue for comparable statutes, and with the comments to NCCUSL’s RULLCA.