XIV. State Statute or Common Law May Impose Liability on Member - But Which State's Law Should Apply?
Probably on of the most helpful resources in determining which state law should apply when the LLC is formed in one state but the cause of action may relate to a second state is Carter G. Bishop & Daniel S. Kleinberger, 1 Limited Liability Companies: Tax and Business Law ¶ 6.07 The Shield and Members In Foreign Jurisdictions (2017). This treatise is available on Westlaw.
As is noted in above, whether the veil of an LLC will be pierced to hold a member personally liable for a wrong attributed to the LLC, the court will apply the internal affairs principles and almost universally apply the law where the LLC is organized to determine if the veil should be pierced.
However in other circumstances, the court may have more difficulty in determining whose law should apply. One opinion that has been widely noted because of the complexity of the facts is Matjasich v. State of Kansas, Dep't Human Resources, 271 Kan. 246, 21 P.3d 985 (Kan. 2001). The question was whether members of the Utah LLC operating a nursing home in Kansas would be liable for unpaid wages of the nursing home employees. In Kansas, LLC members of a Kansas LLC would not be personally liable. However, the court concluded that the law of Utah would apply. Utah imposes personal liability on members for unpaid wages, and thus the members would be personally liable for the unpaid wages incurred, even in Kansas. Kansas statutes require that courts look to the laws of the jurisdiction where the limited liability company is organized to determine the liability of the company's members for unpaid wages. The court must look not only at the Utah LLC enabling laws, but also other laws bearing on member liability. Members of the LLC should not be surprised to find that they are liable in Kansas for the same conduct they are likable for in Utah.
A. Unique Statutory Language Determined Whose Law Should Apply
In White v. Longley, 358 Mont. 268, 244 P.3d 753 (Mont. 2010), the Whites hired Tom Longley and his solely owned LLC, Castle Homes, LLC to build their home in Montana. The court concluded that Longley and the LLC committed constructive fraud. Longley asserted that he was a civil engineer when in reality he had a degree in agricultural engineering, he informed the Whites that he could construct the home they wanted within their budget, he refused to hire an architect after the Whites requested him to do so, and failed to disclose that the structure was inadequate to support the roof, that the roof was not properly engineered, and that the materials he bought for the roof were inadequate. The court ultimately found that what was constructed was worthless and had to be torn down.
The LLC was organized as a Washington LLC but filed and qualified to do business in Montana. A critical question was whether Washington or Montana law would control as to whether Longley could be held personally liable, should Washington or Montana law control? The court stated the following.
Because Castle Homes was a foreign LLC operating in Montana, we apply Montana law to this issue. Under § 35-8-1008(2), MCA, a foreign LLC with a certificate of authority to do business in Montana is subject to the same "duties, restrictions, penalties, and liabilities imposed on a domestic limited liability company of similar character."
South Carolina apparently does not have a similar provision, but rather has the more common statement that "the laws of the State or other jurisdiction under which a foreign limited liability company is organized govern its organization and internal affairs and the liability of its managers, members, and their transferees." § 33-44-1001(a). As discussed elsewhere, this...
