As many of you know, one of the greatest advantages of forming an LLC is that it offers protection from personal liability for business debts and liabilities. As we explained in our previous blog series “Personal Liability of Business Owners,” however, the liability shield is not absolute, and there are limited circumstances in which courts will impose personal liability on LLC owners. One such situation is where a member or manager commits a tort (wrongful act) while acting in furtherance of LLC business, the consequence of which is often misunderstood by LLC owners (and even some lawyers). In 16 Jade Street, LLC v. R. Design Construction Co., LLC, [1] a 2012 case, [2] the South Carolina Supreme Court had an occasion to address this question.
The case involved a dispute arising out of a construction of a four-unit condominium project with multiple layers of subcontractors. Specifically, 16 Jade Street, LLC (“Jade Street”) hired R. Design Construction Co., LLC (“R. Design”) to serve as the general contractor for the project, which in turn hired Catterson & Sons as a subcontractor for framing. A couple of months into construction, problems arose concerning the work done by Catterson & Sons, and in the ensuing months, subsequent inspections revealed numerous additional problems, which eventually caused the project to halt. Jade Street sued R. Design, its member Aten, Catterson & Sons, and Catterson & Son’s sole shareholder Catterson for negligence and breach of implied warranties, among other things. The trial court found in favor of Jade Street, holding, among other things, that R. Design, Catterson & Sons, and Aten were liable, but that Catterson was not, as he did not actually perform any construction but served mainly as the liaison between the foreman and his own workers. Aten appealed.
In South Carolina, as in many other states, the LLC statute provides that generally speaking, 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, and a member or manager is not personally liable solely by reason of being or acting as a member or manager. Aten argued that this provision insulated him from personal liability for ordinary negligence he committed (i.e., defective construction work) while working for his LLC. The court, however, surveyed the laws of other states and scholarly articles and concluded that a member is always liable for his or her own tort and cannot rely on his or her status as a member as a shield, notwithstanding the above provisions. Even in South Carolina, the court noted, the statute governing corporations, from which LLCs borrow heavily, explicitly state this rule that “[a] shareholder of a corporation is not personally liable . . . except that he may become personally liable by reason of his own acts or conduct.” In other words, as the court quoted one famous judge, “[y]ou don’t buy immunity from suits for your torts by being a member of a business corporation.”
So, if an LLC does not protect a member from personal liability for torts committed in the course of his or her work for the LLC, what is the point of forming an LLC? The court noted that it still protects other members of the LLC from personal liability resulting from an act committed by the wrongdoing member. Aten’s wife, for example, who was the other member of the LLC, was not personally liable for Aten’s negligence by virtue of being a member. Likewise, if the negligence had been committed by an employee of the LLC, Aten would not have been personally liable by virtue of being a member or manager (just like Catterson was found not to be personally liable). Still confused? Think about this typical situation where someone forms an LLC for his or her delivery business. If that member hits and kills someone with the company vehicle while driving for the LLC (in a legally negligent manner), that person would be personally liable to the victim—regardless of whether the LLC has one or multiple members. After all, the law is going to hold someone responsible for their wrongful conduct, whether they are driving for themselves, their own company, or third-party employer. And in all these cases, it goes without saying that the LLC itself would be liable for the torts committed by the LLC’s member, manager, or employee in furtherance of the LLC business.
If you have any questions regarding the content of this blog or other LLC law issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
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About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or <a ” ” target=”_blank” href=”http://www.rshawnmcbridelaw.com”>www.mcbrideattorneys.com.
[1] See generally 16 Jade Street, LLC v. R. Design Constr. Co., LLC, No. 27107 (S.C. Apr. 4, 2012). Unless otherwise noted, all references to the case in this post are based on the aforementioned citation.
[2] Subsequently, the court held a rehearing, as a result of which it withdrew the above original opinion and issued a new opinion in August 2013. See generally 16 Jade Street, LLC v. R. Design Constr. Co., LLC, No. 27305 (S.C. Aug. 28, 2013). In the new opinion, the court reversed the trial court’s finding that Aten was personally liable, on the grounds that the relevant construction statute only imposes a regulatory liability, not civil liability; the court declined to address the issue of an LLC member’s personal liability for torts. Nevertheless, the general consensus among practitioners seems to be that the court’s analysis on this issue still holds.