III. When Will an LLC Member Be Liable for His Own Wrongful Acts Against Third Parties? ANSWER: ALMOST ALWAYS!
Start first with the very simple statement found in White v. Collins Building, Inc., 208 N.C. App. 48, 51, 704 S.E.2d 307, 310 (2011), where the court stated "It is well settled that an individual member of a limited liability company or an officer of a corporation may be individually liable for his or her own torts." In this case the individual defendant, as the president of his corporation, was liable as he was directly involved in the negligent construction of a house that the plaintiff bought from a developer.
Another important South Carolina cases regarding whether a manger (or member acting for the LLC) will be liable for his or her own acts is also a corporate case, Neeltech Entmt. Inc. v. Long.12 In this case Mr. Long by using his solely owed corporation blocked the view of the plaintiff's fireworks stand in an exit off I-95 at Walterboro. Plaintiff had posted billboard advertisement along route I-95 with his corporation's name, and defendant built his fireworks stand using a similar name, and blocking potential customers from seeing the plaintiff's business. The plaintiff sued Mr. Long individually for unfair trade practices. Mr. Long's defense was basically that you cannot sue me, you may only sue my corporation. The court disagreed. Those in control are liable if they personally commit, participate in, direct, or authorize a tortious act.13
The most important LLC case, as of the date of publication of this edition, is the initial opinion in 16 Jade Street, LLC v. R. Design Construction Co., LLC, 398 S.C. 338, 728 S.E.2d 448 (Sup. Ct. 2012).
R. Design was a two-member, husband and wife LLC. 16 Jade Street entered into a contract with R Design to build a condo. Mr. Aten was the sole operating owner of this two-person LLC, R Design. R. Design failed in its responsibilities and 16 Jade Street sued everyone, including Mr. Aten for among other things, negligence and negligent supervision. The trial court concluded that he was personally liable since he held the homebuilder license and license statute created personal liability.
Aten's defense was that he could not be personally liable, as he was protected by § 33-44-303(a):
A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being a or ACTING as a member or manager.
A three judge majority disagreed with this argument:
While we agree the language of the LLC act appears to insulate a member from personal liability, we hold that such a sweeping liability shield was not intended by the General Assembly.
If the statute is in derogation of a common law right, it "must be strictly construed and not extended in application beyond clear legislative intent. Therefore, a statute is not to be construed in derogation of common law rights if another interpretation is reasonable."
We note that a majority of states to examine 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.
Additionally, many scholars 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.14
On the other hand, a few courts appear to have concluded that their states' LLC statutes do shield a member from personal liability for at least some of his own tortious conduct.15
The court also compares this to the similar result with South Carolina corporations.
More importantly, this also has long been the rule with respect to shareholders and officers of corporations, an organizational structure from which LLCs borrow heavily. See S.C. Code Ann. § 33-6-220(b) ("[A] shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.")16
A majority of the court then concluded:
In sum, we conclude that section 33-44-303(a) only protects non-tortfeasor members from vicarious liability and does not insulate the tortfeasor himself from personal liability for his actions. We accordingly find the circuit court did not err in finding Aten personally liable for torts he committed in furtherance of R. Design's business. We note the circuit court did not reach Aten's argument that section 33-44-303(a) removed any personal liability on his part and instead found Aten's residential home builders' license rendered him personally liable. While we disagree with the circuit court's findings regarding Aten's license, the scope of section 33-44-303 was raised to the trial court and is an additional sustaining ground.17
The court also noted that while § 33-44-301(a) would not protect the husband who was the individual tortfeasor member, it would protected his wife who was a mere member.
Two justices dissented by simply concluding that the statute does in fact protect a member while acting as a member.
Unfortunately, this opinion was overruled by a second opinion that essentially found that the licensing statute did not create any liability, and thus there was no need to reach the question of whether the LLC statute protected the member.18 In spite of this, it seems likely that the South Carolina Supreme Court, when asked again whether the LLC statute protects members and managers who commit a tort while acting as a member or manager will apply similar language found in the first opinion to conclude that "run-of-the-mill" physical torts committed by a member or manager will not be protected by the statute.
The Uniform Comments that explain this section are also important and helpful.
Subsection (a)(2) - This paragraph shields members and managers only against the debts, obligations and liabilities of the limited liability company and is irrelevant to claims seeking to hold a member or manager directly liable on account of the member's or manager's own conduct.
EXAMPLE: A manager personally guarantees a debt of a limited liability company. Subsection (a)(2) is irrelevant to the manager's liability as guarantor.
EXAMPLE: A member purports to bind a limited liability company while lacking any agency law power to do so. The limited liability company is not bound, but the member is liable for having breached the "warranty of authority" (an agency law doctrine). Subsection (a)(2) does not apply. The liability is not for a "debt[], obligation[], [or] liabilit[y] of a limited liability company," but rather is the member's direct liability resulting because the limited liability company is not indebted, obligated or liable. RESTATEMENT (Third) of AGENCY § 6.10 (2006).
EXAMPLE: A manager of a limited liability company defames a third party in circumstances that render the limited liability company vicariously liable under agency law. Under subsection (a)(2), the third party cannot hold the manger accountable for company's liability, but that protection is immaterial. The manager is the tortfeasor and in that role is directly liable to the third party.
The article, What, Me Worry? Tort Liability Risks for Participants in LLCs,19 cited by the Supreme Court in the initial Jade Street opinion, is an excellent explanation of when a member or manager may be personally liable for actions she takes on behalf of the LLC. The article probably is the best explanation of when a member's or manager's wrongs will or will not be protected.
Matthew Doré in What Me Worry?20 reminds us as to the basic agency principles that will be at work in determining when an actor is personally liable to third parties.
An agent (Alice) is ordinarily not liable to a third party (Tom) when Alice contracts with Tom on behalf of Alice's principal (Paula). If Paula breaches the contract, Tom's claims are solely against Paula. Alice is liable to Tom only if she failed to disclose during contracting that she was acting for Paul, or if Alice otherwise agreed to be a party to Paula's contract with Tom....
But the landscape is fundamentally different for torts. If Alice qualifies as Paula's employee, and Alice commits a tort against Tom while in the scope of that employment, Paula is vicariously liable to Tom for Alice's tort. But Alice is also liable to Tom for the tort, not as Paula's agent, but as tortfeasor.21
Assume that Alice, a member, manager, or other agent of Paula LLC, commits a tort against Tom while working on the company's behalf. Applying Restatement [of Torts] Section 7.01 to the LLC environment, the fact that Paula LLC might be vicariously liable for Alice's tort does not diminish the wrongful nature of Alice's conduct vis-a-vis the victim, Tom. While Tom cannot recover twice for the same injury, his vicarious liability remedies against Paula LLC should not establish a roadblock to otherwise available avenues of direct recovery against Alice, the LLC participant who caused the harm.
The case for Alice's personal liability to Tom is particularly compelling when she commits a tort while working for Paula LLC. Paula LLC has only those assets and insurance that its owners have opted to provide, and these may prove insufficient to cover Tom's claim. In contractual transactions limiting recovery to company assets might be justified. First, Tom knows that he is contracting with an LLC and not its agent, Alice. As a voluntary creditor Tom has an opportunity to insist on Alice's personal guaranty before making the deal. That is simply not the case when Tom is a tort victim. As those critical of the extension of limited liability to LLCs have argued, 'Tort claimants are almost by
