The Supreme Court of Louisiana, in Ogea v. Merritt, 2013 WL 6439355 (La. 12/10/13), provided guidance regarding the personal liability of members of an LLC, reversing a lower court decision and finding a member of an LLC not personally liable for damages resulting from that member’s performance of a contract in the name of the LLC.
Travis Merritt, the sole member of Merritt Construction, LLC, signed a contract with Mary Ogea to build a home on an undeveloped parcel of land owned by Ms. Ogea. After problems with the foundation became apparent, Ms. Ogea filed suit against the LLC and against Mr. Merritt individually. Following trial, the district court rendered judgment against both Mr. Merritt, personally, and the LLC “in solido” for various items of damages. The district court found that Mr. Merritt personally performed some of the foundation work and failed to properly supervise the subcontractor who actually poured the concrete, providing grounds for Mr. Merritt’s personal liability. The court of appeal affirmed, but the Supreme Court then granted a writ to address the extent of the limitation of liability afforded to a member of an LLC.
The Supreme Court’s analysis focused on La. R.S. 12:1320, which addresses the liability of members, as such, of an LLC. The statute provides that no member of an LLC is liable in such capacity for a debt, obligation, or liability of the LLC, but the statute also recognizes fraud, breach of professional duty, and other negligent or wrongful acts as exceptions to the general rule of limited liability.
After finding no evidence of fraud, the Court turned to “breach of professional duty.” The Court noted that, at the time the LLC statutes were enacted, “professional” had a clearly defined technical meaning within the law of business entities, which included professional law corporations and professional medical corporations, as well as professional corporations for the dental, accounting, chiropractic, nursing, architectural, optometry, psychology, veterinary medicine and architectural-engineering professions. The Court found no evidence that Mr. Merritt was a member of one of these legislatively-recognized professions. Also, the Court declined to reach the question of whether personally holding a contractor’s license elevates an individual to the status of a “professional” since it was the LLC that held a contractor’s license, not Mr. Merritt individually, and since the contract described this fact. The Court noted, however, that mere licensure does not necessarily result in one being considered a professional, but it may be one factor to consider.
The Court then introduced a four-factor test for determining the applicability of the “negligent or wrongful act” exception: 1) whether a member’s conduct could be fairly characterized as breaching a duty owed in tort, beyond any contract duties that may be owed by the LLC; 2) whether a member’s conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member’s capacity as a member, such as when acting as an undisclosed agent on behalf of the LLC.
Application of the four-factor test must be done on a case-by-case basis, explained the Court, and the tort factor alone may be sufficient to find personal liability. In the instant case, the Court found all four factors to weigh against a finding of personal liability. First, there was no evidence of a tort duty owed to Ms. Ogea by Mr. Merritt, as his conduct consisted of acts that fell within the contract. Second, the Court found no evidence of criminal conduct. Third, the Court found that Mr. Merritt’s actions in preparing the “pad” and supervising the concrete subcontractor were in furtherance of a contract binding the LLC. Finally, the Court noted that Ms. Ogea testified that she understood her contract was with the LLC. Based on this analysis, the Court found that Ms. Ogea failed to carry her burden at trial to rebut the presumption that Mr. Merritt is protected by a limitation of liability and is not personally liable in connection with the construction defects.