October 3, 2016
PERSONAL LIABILITY OF LLC MEMBERS – Nunez v. Pinnacle Homes
Louisiana Supreme Court, 2015
In October 2015, the Louisiana Supreme Court issued a ruling clarifying the narrow exception to the general rule of limited liability for members, managers, employees, and agents of an LLC. If you own an LLC or work for one, you are likely familiar with the limited liability its members enjoy, hence the name. However, the Revised Statute that grants limited liability to an LLC also features an important exception that took prominence in this case – La. Rev. Stat. 12:1320(D).
What is the exception?
La. Rev. Stat. 12:1320(D) reads:“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.” [emphasis added] This statute creates an exception that allows for an LLC member, who is a professional or committed a negligent or wrongful act, to be held personally liable regardless of the LLC designation and protection. The Pinnacle case established that the exception is meant to be extremely limited.
What happened in this case?
A home owner signed a contract with a construction company for the construction of a home. The company consisted of one state-licensed construction contractor. After her home was completed, the home owner learned that it did not meet the elevation levels required by her permit and flood insurance rate maps for her parish. She filed suit against the company and the contractor, personally, based on the exception in 12:1320(D).
Both the trial and appellate courts agreed that the contractor breached his professional duty and should be held liable, regardless of the company’s status as an LLC.
The Louisiana Supreme Court disagreed. The personalities of an LLC and its members are completely separate under the law. When the legislature created limited liability companies, it clearly wanted to promote business by limiting personal liability for some of the debts incurred on behalf of businesses. Limited liability is the general rule – personal liability is a very strict exception.
Who are professionals?
For an LLC member to breach a professional duty, they must be a member of certain fields that the legislature deemed “professional.” These include lawyers, doctors, dentists, accountants, chiropractors, nurses, architects, optometrists, psychologists, vets, architects and engineers.
The home owner argued that the contractor was a professional as he had his construction contractor’s license from the state. The Supreme Court disagreed. Allowing the roughly fifty-seven other professions and occupations that are licensed by the state of Louisiana to fall into the exception as professionals would allow the exception to become so all-encompassing that it would essentially swallow the rule, which is not what the Legislature intended.
What is a negligent or wrongful act?
After the Court determined that the contractor did not fall within the Professional Duty Exception, they considered a multitude of factors to determine if he committed a negligent or wrongful act and should still be held personally liable. The factors included whether the contractor committed a tort, whether he committed a crime, whether there was a contract involved and whether he acted outside of his capacity as an LLC member. Yet again, the Court found that to allow personal liability for “poor workmanship” would make the exception so broad that it would overpower the general rule of limited liability for LLCs.
In conclusion, always be cautious that two significant exceptions exist that may cause an LLC member to lose limited liability protection.
October 3, 2016