The liability shield of LLCs is a fundamental attribute that investors, members, and managers routinely rely on. But sometimes an LLC’s shield is porous and fails to protect a member or manager. A pair of recent cases show how claimants against an LLC can sometimes impose personal liability on an LLC’s member or manager.
Montana – Signature Problems, But No Personal Liability. Aspen Trails Associates, LLC did business under the assumed name Windermere Real Estate – Helena. Aspen entered into equipment leases with Empire Office Machines, Inc., and later entered into a letter agreement with Empire that replaced and revised the leases. The letter agreement indicated that it was with Empire and “Windermere,” but the signature lines had no indication that Windermere’s manager or the Empire signatory were signing on behalf of their entities.
Aspen later defaulted on the letter agreement, and Empire sued both Aspen and the Aspen manager that signed the letter agreement. Empire obtained a judgment against Aspen, but Aspen’s manager moved for summary judgment on grounds that Empire’s contract was with Aspen and not with the manager. The trial court ruled in favor of the manager on his motion for summary judgment, and Empire appealed. Empire Office Machs., Inc. v. Aspen Trails Assocs. LLC, 322 P.3d 424 (Mont. Apr. 8, 2014).
Empire argued that Aspen’s manager was personally liable on the letter agreement because (a) it did not indicate that the manager was acting in an agency capacity, and (b) the letter agreement’s reference to “Windermere” did not identify Aspen as the principal.
The court, however, found that Empire had notice that the manager was acting as Aspen’s agent because of the long-term business relationship between Aspen and Empire, which included the two leases that were replaced by the letter agreement and lease payments by Aspen that were sometimes made by “Windermere” or “Windermere of Helena.” Id. at 425-426.
Relying on the long-term business relationship, and the fact that the letter agreement was drafted by Empire and any ambiguity in it must therefore be interpreted against Empire, the court concluded that Empire had reason to know that Aspen was the manager’s principal. The court accordingly affirmed the trial court’s ruling that the manager was not personally liable on the letter agreement. Id. at 428.
Louisiana – Member’s Personal Tort Liability. Allen Lenard was the owner, sole member, and licensed contractor of Pinnacle Homes, L.L.C., a home construction company. Pinnacle entered into a contract and built a home for Jennifer Nunez, but the completed home was below the base flood elevation required under federal and state law.
Nunez sued Pinnacle and Lenard for violations of Louisiana’s New Home Warranty Act. The trial court found that Pinnacle violated the New Home Warranty Act by not complying with the required elevation standards, and awarded damages of $201,600 for the cost to elevate the home to the proper elevation. The trial court also ruled that Lenard was personally liable for the damages because of his professional negligence in not properly calculating or supervising the grading and fill dirt required to bring the property to the proper elevation. Lenard appealed and the Court of Appeal affirmed the trial court. Nunez v. Pinnacle Homes, L.L.C., 135 So.3d 1283 (La. Ct. App. Apr. 2, 2014).
The Court of Appeal first approved the trial court’s reliance on Section 1320(D) of the Louisiana Limited Liability Company Law, which limits the liability of LLC members and managers but also carves out an exception for fraud or torts:
Nothing in this Chapter shall be construed as being in derogation of any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person, or in derogation of any right which the limited liability company may have against any such person because of any fraud practiced upon it by him.
La. Rev. Stat. Ann. § 1320(D).
Lenard argued that the trial court improperly found him personally liable merely because he held a contractor’s license. The Court of Appeal, however, referred to the trial court’s findings of fact: “The trial court, however, found personal involvement and inaction by Lenard which it found constituted a ‘breach of professional duty or other negligent or wrongful act.’” Nunez, 135 So.3d at 1289 (quotingtrial court findings of fact). The court found no basis to overturn the trial court’s findings of fact, and affirmed the judgment against Lenard.
The majority’s opinion was not clear whether the court was treating the trial court’s findings as a determination that Lenard breached a professional duty, or that Lenard committed an “other negligent or wrongful act.” The dissent by Judge Amy, on the other hand, viewed the trial court as having found that Lenard committed “professional negligence,” that a licensed general contractor is not a “professional” as the term is used in Section 1320(D), and that because Lenard had no separate, non-contractual duty to Nunez, he was not personally liable. The dissent quoted a recent Louisiana Supreme Court decision:
[A] showing of poor workmanship arising out of a contract entered into by the LLC, in and of itself, does not establish a “negligent or wrongful act” under La.R.S. 12: 1320(D). To hold that poor workmanship alone sufficed to establish personal liability would allow the exception in La.R.S. 12:1320(D) to negate the general rule of limited liability in La.R.S. 12:1320(B).
Id. at 1291 (quoting Ogea v. Merritt, 130 So.3d 888, 905 (La. Dec. 10, 2013)).
Comment. These two cases are examples of situations that can lead to personal liability for an LLC member or manager that is carrying out the company’s business. Empire shows how informality when signing a contract, or inconsistency between the terms of a contract and the signature, can lead to unexpected personal liability for the individual that signs the contract. Although the manager escaped personal liability in Empire, I have written about similar cases that did not turn out so well for the signatory, here, here, and here.
A manager or member can also be tagged with personal liability when acting for an LLC, if the member’s or manager’s conduct can be characterized as a tort such as fraud, malpractice, or negligence. The more clear-cut cases involve conduct such as fraud or negligence that results in personal injury, such as an LLC’s delivery driver that negligently drives the company’s truck and injures someone. Whether the driver is a member, manager, or simply an employee of the LLC, the driver will be personally liable.
The theory is less clear where the member’s or manager’s conduct simply involves carrying out the LLC’s contract and does not involve a recognized and regulated profession such as medicine, law, or architecture. The dissent in Nunez viewed Lenard as not being a recognized professional, saw his conduct as simply carrying out the LLC’s performance of the contract in a way that resulted in a defective product, and would have applied the liability shield of Section 1320(B).
For an example of a case similar to Nunez with a similar result, see my post on a South Carolina case, here. For an example of an outlier from New Jersey that shielded an LLC manager from liability for his fraudulent statements on behalf of the LLC, see my post here.