Oregon Workers' Compensation Law Does Not Shield Employer LLC's Managing Member from Negligence Claim by Injured Worker
The Oregon Court of Appeals recently held that the exclusive remedy provision of Oregon’s workers’ compensation law does not shield an employer LLC’s managing member from a negligence claim by the LLC’s injured worker. Cortez v. NACCO Materials Handling Grp., Inc., No. A144045; 050302632, 2012 WL 758895 (Or. App. Feb. 29, 2012).
Background. Workers’ compensation insurance provides reasonably quick and sure payments to workers injured on the job, regardless of whether or not the employer is negligent. Payments cover medical expenses and disability, but the tradeoff for not requiring the employee to prove negligence is that the amounts are fixed and limited. Workers’ compensation statutes normally provide that the worker’s claim under the statute is the worker’s exclusive remedy against the employer, other employees, and the officers and directors of the employer.
The Case. In Cortez the plaintiff was injured while employed by Sun Studs, LLC, an Oregon limited liability company. Later he filed for and obtained workers’ compensation benefits from Sun Studs’ insurer. He then sued Sun Studs’ sole member, Swanson Group, Inc., for (a) negligence, (b) violations of Oregon’s Employer Liability Law (ELL), Or. Rev. Stat. § 654.305 to 654.336, and (c) noncompliance with the workers’ compensation statute, Or. Rev. Stat. § 656.017. Sun Studs was member-managed and Swanson Group was therefore its sole managing member.
The plaintiff conceded at trial that he could not prove noncompliance with the workers’ compensation statute, and the trial court dismissed his negligence and ELL claims based on the exclusive remedy provision of Oregon’s workers’ compensation statute.
The question before the Court of Appeals was therefore whether the exclusive remedy language in Oregon’s workers’ compensation statute protected the LLC’s managing member from the plaintiff’s negligence and ELL claims. The statute says:
The exemption from liability given an employer under this section is also extended to the employer’s insurer, the self-insured employer’s claims administrator, the Department of Consumer and Business Services, and the contracted agents, employees, officers and directors of the employer, the employer’s insurer, the self-insured employer’s claims administrator and the department ….
Or. Rev. Stat. § 656.018(3) (emphasis added). The court phrased the issue as “whether the legislature intended to include ‘members’ of limited liability companies among those exempt from liability under the exclusive remedy provisions of ORS 656.018.” Cortez, 2012 WL 758895, at *2.
The Court’s Analysis. The court first noted that an LLC is a legal entity distinct from its members, so that even if the exclusive remedy provision applies to an LLC as an employer, it does not necessarily apply to the LLC’s members. Id. at *3. The court then pointed out that when the legislature enacted Oregon’s LLC Act, it included a provision that extended the coverage of certain other statutes to LLC members and managers: “Whenever a section of Oregon Revised Statutes applies to both ‘partners’ and ‘directors’, the section shall also apply: … [i]n a limited liability company without managers, to the members of the limited liability company.” Id. at *4 (quoting Or. Rev. Stat. § 63.002). The list of entities and persons in the exclusive remedy statute includes directors but not partners, so § 63.002 was nonapplicable. The court saw that omission as further evidence that the legislature had not intended to exempt LLC members from liability under § 656.018(3).
The court also reasoned by analogy to corporate shareholders, citing Fields v. Jantec, Inc., 317 Or. 432, 857 P.2d 95 (1993). “Thus, a shareholder, as an owner of a corporation, does not fall under the protection of the exclusive remedy provision in ORS 656.018(3). By analogy, a member, as an owner of an LLC, also does not fall under the protection of the exclusive remedy provision in ORS 656.018(3).” Cortez, at *4.The court did not discuss the fact that Swanson Group, the LLC’s managing member, was both a member and a manager, much like the sole shareholder in Fields who was also an officer and director.
The defendant also claimed that it was not liable because of § 63.165 of the LLC Act, which states that “[a] member or manager is not personally liable for a debt, obligation or liability of the limited liability company solely by reason of being or acting as a member or manager.” The court pointed out that § 63.165 does not shield an LLC member from its own tortious conduct. Cortez, at *5.
The court’s final conclusion was that neither the exclusive remedy provision of the workers’ compensation statute, § 656.018(3), nor the liability limitation of the LLC Act, § 63.165, shielded Swanson Group from the plaintiff’s negligence claim. The court dismissed the plaintiff’s ELL claim on other grounds, and remanded the case to the trial court to resolve the plaintiff’s negligence claim.
Comment. The court began its analysis by mistakenly framing the issue as “whether the legislature intended to include ‘members’ of limited liability companies among those exempt from liability under the exclusive remedy provisions” of the statute. Cortez, at *2. This characterization oversimplifies by ignoring the distinction between members of a member-managed LLC and members of a manager-managed LLC. The former are both owners and active managers of the LLC. The latter are only owners.
Oregon’s LLC Act defines a manager-managed LLC as an LLC that is designated as a manager-managed LLC in its articles of organization or whose articles of organization otherwise expressly provide that the LLC will be managed by a manager or managers. Or. Rev. Stat. § 63.001.
A member-managed LLC, on the other hand, is defined simply as an LLC other than a manager-managed LLC. Id. Swanson Group was the sole member of a member-managed LLC. Cortez, 2012 WL 758895 at *1.
Members of a member-managed Oregon LLC are “managers” under the LLC Act and have full rights to control the management and conduct of the LLC. Or. Rev. Stat. § 63.130(1)(a), 63.130(7). More significantly, a member of a member-managed LLC is an agent of the LLC and the act of such a member on behalf of the LLC binds the LLC.
Conversely, members of a manager-managed LLC have no right to participate in the management and control of the LLC and are not agents of the LLC. (The rights of members in the two types of LLCs are subject to modification in the articles of organization or operating agreement, but the court in Cortez did not refer to any such provisions of either.)
Thus, members of a member-managed LLC act as agents and representatives of the LLC when they manage it and conduct its business and affairs. And it is representatives of the employer that the key language in the exclusive remedy focuses on: “the contracted agents, employees, officers and directors of the employer.” Or. Rev. Stat. § 656.018(3).
It seems clear that an LLC’s manager is the type of representative that § 656.018(3) is intended to cover. But as the Cortez court pointed out, courts must neither insert in the statute what has been omitted nor omit what has been inserted. Cortez, at *2. The court seems to have ignored, however, the reference in the statute to agents. The LLC Act defines each member of a member-managed LLC as an agent of the LLC, so under a proper understanding of Swanson Group’s status as the sole managing member of the LLC, it should have been shielded from the plaintiff’s negligence claim.
Caution: LLC Members and Managers Should Be Careful When Executing Documents In A Representative Capacity
Note: The following is posted by guest blogger Janet Jacobs.
Like most other entities, LLCs can act only through their representatives, and LLC members are often called on to act and execute documents on behalf of the LLC. Generally, LLC members and managers are not held personally liable for the debts and liabilities of the LLC, provided the acting member or manager indicates that he or she is signing on behalf of the LLC. Usually, the simplest way to demonstrate that the signatory is not accountable personally is to add his or her title to the signature line on the document. Example: Mary Smith, Managing Member of XYC, LLC. However, as pointed out in a recent Maryland case, adding a title to a signature block will not remove personal liability if the text of the document clearly indicates an intention to hold the signatory personally liable.
In Ubom v. Suntrust Bank, No. 2862 (Md. Ct. Spec. App. Apr. 4, 2011), Mr. Ubom applied for a line of credit in the name of his law firm, Ubom Law Group (“ULG”). Mr. Ubom was the sole member and the managing attorney of ULG. The credit agreement form requested information about the applicant (ULG) and the guarantor. Mr. Udom duly completed the applicant LLC’s information. On the page of guarantor information, he provided his driver’s license and social security numbers, date of birth, address, personal financial information and employment information. The only detail that Mr. Udom did NOT provide on the guarantor information page was his legal name. On the signature page of the credit agreement, Mr. Ubom signed twice: once on the applicant line and once on the guarantor line. Both signature lines allowed the signatory to add a title – Mr. Udom added the words “Managing Partner” after each of his signatures.
The credit agreement contained the following language: “To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a ‘Guarantor’ … hereby jointly and severally guarantee payment to the Bank of all obligations and liabilities of the applicant of any nature whatsoever….” Mr. Udom asserted that he had questioned the bank’s representative specifically about his personal liability based on this language, and that person had assured him that so long as Mr. Udom (a) left the “Legal Name of Guarantor” blank and (b) inserted his title on the signature lines, he would not be personally obligated to repay UGL’s debt to the bank.
Three years later, the loan was in default and Suntrust filed a complaint against ULG as the primary obligor and Mr. Udom as guarantor. Mr. Udom did not deny that ULG was liable, but he did contest the allegation that he was personally liable as guarantor, on the grounds that he signed only in a representative capacity, as should have been evident from the addition of the words “Managing Partner.”
Not so, said the lower court. Citing the fact that Mr. Udom was “a sophisticated gentlemen … an attorney,” it granted summary judgment in favor of the bank. While it is beyond the scope of this blog to delve into whether attorneys are automatically mavens in all aspects of business dealings, the lyrics of a song written by the immortal George Gershwin come to mind: “It ain’t necessarily so.”
The court of appeals agreed with the lower court. It turned down Mr. Udom’s request to introduce testimony concerning the bank’s assurances regarding his personal liability, on the grounds that Maryland followed the principle of “objective interpretation” of a contract. In other words, a court should look only at the contract, except in cases of ambiguity, fraud, duress or mistake. In the court’s eyes, the language of the contract was unambiguous. (The court did not discuss whether there was any fraud, duress or mistake involved in the execution of the contract.)
The Udom court explained away Mr. Ubom’s careful addition of the words “Managing Partner” as being only a "descriptive phrase". It pointed out quite correctly that there would be no value in having the primary obligor (the LLC) also act as guarantor of the same obligation, a common sense approach that would be quite persuasive were it not for a conflicting ruling made by the same court in an earlier but strikingly similar case.
In L & H Enterprises Inc. v. Allied Building Products Corp., 88 MdApp. 644 (1991), the credit agreement signed by two officers of the debtor entity provided as follows: “In consideration of [the creditor’s] extending credit I/we jointly and severally do guarantee unconditionally at all times … the payment of indebtedness … of the [debtor]….” The signing officers had provided some personal information but wrote “N/A” in the section calling for information about their respective spouses. The court found the insertion of “N/A” to be compelling evidence of the officers' intention not to be held personally liable, because the spouse’s signature would be a prerequisite for the creditor to reach marital assets. (It would have been helpful if the opinion had confirmed that the officers were, in fact, married, and that the inclusion of “N/A” didn’t simply mean that the officers were single.) The court also found it very significant that there was only one signature line for the applicant; there was no place where a guarantor could sign. As the officers clearly signed the agreement on behalf of the applicant entity, despite the clarity of the italicized language, sufficient ambiguity was created by these other factors to relieve the officers of personal liability.
The opinion issued by the Udom court contains one snippet of information that lends some credence to Mr. Udom’s allegation that he had been told he would nto be held personally liable for ULG's debt: Suntrust Bank held the mortgage on Mr. Udom’s house. Even if one discounts Mr. Udom’s assertion that the bank manager talked him into taking out a business loan, there was a pre-existing relationship between the parties that could have led Mr. Udom to rely on the word of a trusted bank manager rather than the language of the contract.
The Udom case provides some useful takeaways:
- First, for LLC members and managers who execute documents in the name of the LLC and who wish to avoid being held personally liable for the LLC's debts:
- Trust but verify: if the language of the agreement does not align with oral statements made by the other contracting party, consult an attorney before you sign.
- Remember, there is a reason documents require more than one signature. Each signature line generally supports different promises, obligations, covenants, representations or acknowledgments. Be sure you understand what each signature line is supporting. If one signature line is for the entity, the presence of a second signature line should be a red flag.
- Don’t rely on the insertion of a title to protect you from personal liability. If the text of the document indicates an intent to bind anyone other than the LLC, you can expect that if your LLC defaults, the other party to the agreement may try and enforce personal liability. Signing while crossing your fingers and hoping for the best will not change the objective interpretation of the promises, obligations, covenants, representations or acknoweldgements in the text of the document.
- Second, for attorneys reading this blog: irrespective of your practice area, you are assumed to be a sophisticated business person. At a minimum, you will be expected to have read and understood any document you signed. You will not get the benefit of the customary judicial flexibility extended to ordinary consumers in their dealings with banks and other institutions.
The Washington legislature is currently considering a bill that would apparently require any contract that calls for the payment of money by an LLC or corporation, to include an extra signature by an authorized representative that would render the representative personally liable for any amounts due on the contract. HB 1535. In other words, under this bill any LLC or corporation making a contractual commitment that involves the payment of money would have to include a personal guarantee from a natural person.
This would be an extraordinary change to Washington law. No other state has anything comparable in its laws.
The Background. The bill would upend the familiar principle of the law that “when an agent makes a contract on behalf of a disclosed or partially disclosed principal whom he has power to bind, he does not thereby become liable for his principal’s nonperformance.” Griffiths & Sprague Stevedoring Co. v. Bayly, Martin & Fay, Inc., 71 Wn.2d 679 , 686, 430 P.2d 600 (1967). See Restatement (Second) of Agency § 320 (1958).
When an LLC manager (or a corporate officer) signs a contract on behalf of a company, the manager usually signs only as an agent of the company. The fact that the manager is signing as an agent is reflected in the typical signature block:
By: Wile E. Coyote
Vice President of Product Development
Under these well-accepted rules, LLC managers and corporate officers can sign contracts on behalf of their company without fear of becoming personally liable. If the rule were otherwise it would be exceedingly difficult to find a manager willing to sign for an LLC or corporation.
The Bill. The heart of the bill is a requirement that any “business payment contract” must contain an additional signature line, directly following and on the same page as any other signature line that the authorized business representative must sign. The additional signature line must be immediately preceded by the following legend in bold, 14-point or larger typeface:
By signing this contract you, the undersigned, agree to become PERSONALLY LIABLE for any sums due pursuant to this document, regardless of whether you are signing on behalf of a limited liability company, corporation, or nonprofit corporation.
This bill, if passed, will clearly make it difficult for LLCs to find managers willing to sign contracts for their LLC.
Drafting and Interpreting Statutes. The language of HB 1535 has some internal conflicts. I have described above the interpretation that I and other business lawyers that I have talked to have given to the bill. It is possible, however, that it was intended to simply require a warning legend on guarantee contracts, although that is a more difficult interpretation. In any event it needs to be clarified.
It is not an easy thing, to draft statutes so that they are clear, unambiguous and sufficiently detailed. This has repeatedly been driven home to me in my participation on a Bar committee that has reviewed proposed legislation.
HB 1535 is scheduled for public hearing in the Washington legislature’s House Committee on Business & Financial Services at 1:30 p.m. Tuesday, February 1, 2011, in Olympia, Washington. At the hearing I expect we will learn what is behind this bill and what the intent of its sponsors is. More information is available about the bill’s scheduled hearings here.
In the world of commerce, businesses routinely rely on the apparent authority of LLC managers to sign contracts on behalf of their LLCs. Generally that works well. But what happens if an LLC disavows an agreement, claiming the manager who signed the contract had neither actual nor apparent authority?
The Missouri Court of Appeals was recently faced with this scenario in Pitman Place Development, LLC v. Howard Investments, LLC, No. ED94456, 2010 Mo. App. LEXIS 1635 (Mo. Ct. App. Nov. 23, 2010).
Background. According to the court’s statement of the facts, the LLC was formed by three members, one of whom was the sole manager. The LLC’s operating agreement gave the manager authority to manage the LLC’s business, but the consent of the members was required for the manager to cause the LLC to encumber its property or to borrow more than $50,000. The manager, however, wanted to borrow $525,000, and at this point the facts get ugly.
The manager gave the bank a copy of the LLC’s operating agreement, but omitted the pages that limited his authority. On request of the bank’s loan processor, on the day of the loan closing the manager faxed the omitted pages to the bank, but only after fraudulently altering the key provisions. The alterations increased the limit of his authority from $50,000 to $750,000 and authorized him to encumber the LLC’s property. The $525,000 loan was closed, and portions of the loan proceeds were later used by the manager for his own purposes. When the other two members learned what had happened, the LLC sued the bank to set aside the loan and deed of trust.
The trial court found after a bench trial that the manager acted with apparent authority when he executed the loan documents, and enforced the note and deed of trust against the LLC. The LLC contended on appeal that apparent authority was lacking because neither of the other two LLC members took any action to create the appearance that the manager had authority.
Apparent Authority. The Missouri rule is that to establish apparent authority, it must be shown that a principal has either manifested consent to the agent’s exercise of authority or knowingly permitted the agent to assume the exercise of authority. Additionally, the party relying on the apparent authority must have known the facts and believed in good faith that the agent had authority, and must have changed its position in reliance on the appearance of authority. Id. at *12. The Missouri rule is consistent with the Restatement of Agency. Restatement (Second) of Agency § 27 (1958).
The court found that the lender relied on the express language of the LLC’s operating agreement. “Pitman cloaked Burghoff with apparent authority when it manifested its consent for Burghoff to act as ‘Manager’ of Pitman in the Operating Agreement, and gave the ‘Manager’ general authority to enter into transactions such as the Rockwood Bank loan transaction.” Pitman Place, 2010 Mo. App. LEXIS 1635, at *14. Although the manager lacked actual authority and acted to defraud the LLC, the court relied on prior rulings that the act of an agent with apparent authority, even if in furtherance of a fraud on the principal, will bind the principal. Id.
The LLC argued that the manager had no apparent authority here because he fraudulently created the appearance of authority. The court acknowledged that an agent cannot create its own authority and that it was troubled by the manager’s “fraudulent and dishonest conduct.” Id. at *11, 19. But in the end the court found that the LLC’s general statements of authority in the operating agreement vested the manager with the apparent authority to carry out the loan transaction. The LLC was therefore responsible for the manager’s acts and agreements with the bank as if the acts were the LLC’s own. Id. at *19.
The court glosses over the fact that by fraudulently deleting the operating agreement’s limits on his authority, the manager essentially was creating his own authority. The court implicitly treats the fraudulent pages of the operating agreement as a detail that does not impair the members’ broad grant of authority.
Statutory Defense. The LLC also contended that even if the manager did have apparent authority to bind the LLC under agency common law principles, the manager’s conduct did not bind the LLC because the execution of the loan documents was not apparently for carrying on in the usual way of business or affairs of the LLC, as required by the Missouri LLC Act. Id. at *20. The statute provides, in relevant part, that “the act of any manager for apparently carrying on in the usual way of the business or affairs of the limited liability company of which he is a manager binds the limited liability company,” and that an “act of a member or manager which is not apparently for the carrying on the usual way of the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with the terms of the operating agreement.” Mo. Rev. Stat. § 347.065.
The court did not address why the manager’s lack of authority under this statute, if it applied, would trump the manager’s apparent authority. Instead, the court found in the language of the operating agreement and in the LLC’s past practices sufficient evidence that the loan transaction was “carrying on in the usual way of business.” Pitman Place, 2010 Mo. App. LEXIS 1635, at *23-24. The court accordingly rejected the LLC’s argument, and after affirming the trial court’s other rulings, affirmed the lower court’s judgment. Id. at *42.
Protective Steps. What else could the Pitman members have done to prevent the manager from fraudulently having apparent authority in excess of the limits in the operating agreement? Perhaps they could have written their operating agreement so that the language granting broad authority to the manager had the limitations tightly woven into it. If the manager had provided altered versions of those pages, retaining only the broad granting language, what result? Or if the agreement had no broad grant of authority to the manager but instead simply granted certain enumerated, limited powers, what result if the altered pages added some additional powers?
In any event, there are other, practical steps that could be taken to forestall chicanery. For example, the Missouri LLC Act allows an LLC’s articles of organization, which must be filed to create the LLC, to optionally contain provisions from the LLC’s operating agreement. Mo. Rev. Stat. § 347.039.2. The organizers of an LLC could include in the articles of organization the limits on the manager’s authority. Articles of organization are publicly available, and banks and title companies can and often do obtain a copy from the Secretary of State prior to closing a real estate or loan transaction. That would make them aware of the limits on the manager’s authority expressed in the articles.
Alternatively, the LLC could file a memorandum with the county where its real estate is located, referencing the LLC’s real estate and describing the limits on the manager’s authority. Any transaction involving the LLC’s real estate would almost certainly involve a title company and a title search, which would then address the manager’s authority.
The LLC could also require signatures in addition to the manager’s on all checks, or all checks above a limit, in the banking resolutions when it sets up its bank accounts. Once in place, those resolutions would require additional signatures from members other than the manager to change the authorized account signatories. That would result in oversight of withdrawals from the LLC’s bank account.
A structural approach would be for the LLC to have two or more managers, and in their operating agreement’s grant of authority require that the managers act jointly.
These measures are often not adopted, frequently because they are inconsistent with the trust most LLC organizers have in their managers. LLC organizers won’t usually appoint someone to be their manager unless they have substantial trust in them. Lawyers, though, can’t assume that the other (non-client) parties will always act benevolently, and must write agreements to cover contingencies including bad acts. The Pitman Place case is a good example of why lawyers must try to anticipate unauthorized or improper acts by the other parties.