“Limited Liability Company – Not a Protection Against Personal Liability” by John Carnahan

A recent case out of Louisiana, involving Regions Bank as Plaintiff and Ark-La-Tex Gardens, L.L.C., only serves as a reminder that Limited Liability Companies are not perfect.
In the summer of 2004, the R.W. Norton Art Foundation contacted John Cash to discuss the construction of a water feature on the Foundation’s Art Gallery properties located in Shreveport, Louisiana. Their proposal was accepted, and in December of 2004 a contract for construction of the water feature was entered into for a price of $292,616 to be paid in three installments.Time was of the essence, in that the Foundation wanted the project completed in time for the azalea blooming season, which was part of the Art Gallery’s marketing plan. The project was delayed and not completed on time, but Ark-La-Tex did receive final payment. However, within a short time, the Foundation discovered that the water feature was not holding water and there was inadequate water flow and apparently a leak in the system. Ark-La-Tex, the Contractor, was unable to remedy the situation and was discharged and a third party contractor brought in to correct the defects. Their billing was $202,878, in that they were required to substantially rebuild the entire water feature.
The Plaintiff, Regions Bank, the Trustee of the Art Foundation, filed a petition for damages against the Defendants, Ark-La-Tex, and John R. Cash, individually. A Judgment was rendered against bothDefendants, the LLC and Mr. Cash.
The Defendants appealed on a number of grounds, but Mr. Cash appealed on the basis of that the trial court erred in finding him personally liable for the damages.
TheMissouri Statutory language differs from the Louisiana language, but the underlying portion confirms that while a member is not liable for the acts of the LLC or other members, whether arising by contracts, tort, or otherwise, or for the acts or omissions of another member, manager, agent or employee, that does not mean that the individual member manager, agent or employee is not liable for their own acts or, where they agree to be personally liable, for example only, guarantying a bank loan.
Other situations which can rise to personal liability include:

1. Acting without authority, See §347.059 RSMo, dealing with persons who act without authority, and establishes the potential for personal liability. That follow up Section of Missouri law provides that:
   “All persons who assume to act as a limited liability company without authority to do so and without a good faith belief that they have such authority shall be jointly and severally liable for all debts and liabilities incurred by such persons so acting.”
2. Piercing the Veil. (See article in November, 2007 Newsletter) You cannot enjoy the benefits of an LLC, if you do not respect the form and requirements of doing business in that format.
3. Contractual liability – i.e., guaranty of a loan or account.
4. Failure to make agreed upon contribution to capital. See §347.099 (1) RSMo.
   “No promise by a member to make a contribution to the limited liability company is enforceable unless set out in a writing signed by the member. Upon the failure of a member to make a promised contribution when due, the limited liability company may enforce such member’s obligation by appropriate legal action for damages for breach of contract or for specific performance, and the limited liability company and other members may exercise and enforce such additional rights and remedies as may be provided under the operating agreement in the event of any such failure, subject to the applicable law regarding the enforcement of contracts.”
5. Return of distribution that cause insolvency: See §347.109 RSMo.
   “ 1. A limited liability company shall not make any distributions to one or more members with respect to their interests in the limited liability company, and no member shall be entitled to receive any such distribution, to the extent that, after giving effect to the distribution:
   (1)The limited liability company would not be able to pay its debts as they became due in the usual course of business; or
   (2) The limited liability company’s total assets would be less than the sum of its total liabilities to which such assets are subject plus, unless the operating agreement provides otherwise, the amount that would be needed, if the limited liability company were to be dissolved at the time of the distribution, to satisfy their preferential rights upon dissolution of members receiving the distribution, except that, for purposes of making such determination, liabilities to members or former members in their status as such shall be excluded. . . .
   4. If a member shall receive any distribution with respect to this interests in a limited liability company in violation of this section or the operating agreement, such member and the person or persons who are vested with authority under the operating agreement to make distributions to the members and who knowingly authorized or permitted such distribution to the member shall be liable, for a period of three years following the date of distribution, to the limited liability company for the value of the wrongful distribution, but only to the extent necessary to discharge the limited liability company’s liabilities incurred prior to the date of such distribution. If more than one such person who authorized or permitted such wrongful distribution is held liable therefor pursuant to this subsection, each such personal shall be entitled to contribution from the other persons who are held so liable therefor pursuant to this subsection.”

The Appellate Court in Region’s Bank v. ARK-LA-TexWater Gardens, LLC affirmed the Trial Court in finding that Mr. Cash was individually liable in that he had been personally negligent in designing and installing the water feature.
The moral of this story is that while the Limited Liability Company can protect the owners, i.e., members of the entity, the entity itself and its employees and agents, can be liable for their own individual acts of negligence. In this particular case, Mr. Cash a professional employee of the LLC, was personally responsible in his capacity as an employee or agent of the LLC, for the design and construction. His negligence was attributable to his employer, i.e., the LLC, and they were both liable.