provided with some guidance on how to potentially argue against individual liability to members of LLCs. In many instances, the easiest way to combat claims against individuals may be to demonstrate the individual owed no duty to the plaintiff.
The manner in which a duty is created is likely an important consideration in such an analysis. In Jade
Street, the duty arose from the contract between R
Design and Jade Street. Aten was not a party to that contract, which the court recognized when it dismissed the breach of contract claim against Aten. Therefore, Aten could not owe any duty to Jade Street through the contract, and Aten did not owe any common law duty to Jade Street. Therefore, once the Supreme Court determined that §40-59- 400 failed to create a duty, the claim against Aten had to fail.
Had Aten owed a common law duty to Jade Street, he may have been potentially liable to Jade Street. For example, if a member of an LLC injures another while the member is operating a motor vehicle, the member will likely be subject to personal liability, even if he was operating the vehicle in connection with his duties as a member of the LLC. The differ- ence results from the member owing a common law duty of safe operation of a vehicle, which is indepen- dent of his relationship with the LLC. By contrast, Aten’s involvement with Jade Street existed solely because of the contract between Jade Street and R Design, which does not create an individual duty owed by Aten.
As alluded to above, the creation of an LLC may not provide an absolute shield to individual liability. There is likely no protection afforded to an individ- ual LLC member when he breaches a common law duty owed independent of his participation in an LLC. However, in instances where a duty arises from a contract, two additional barriers potentially exist to the imposition of individual liability against a member. The first stems from principles of agency, which are implicated by virtue of the relationship between an LLC and its members. The Restatement (Second) of Agency provides that an agent owes a duty to his principal under a contract, and generally not to a third person.6 The Restatement further
provides that an agent who makes a contract on behalf of a (disclosed or partially disclosed) principal is not liable for nonperformance of that contract by the principal.7 Finally, “[a]n agent who intentionally
or negligently fails to perform duties to his principal is not thereby liable to a person whose economic interests are thereby harmed.”8 That leads to the
second barrier: the economic loss rule.
The economic loss rule states that there is no tort liability for a product defect when damage only occurs to the product itself. Our Supreme Court established an exception to that rule in Kennedy v.
Columbia Lumber & Mfg Co., Inc., determining that
purchasers of a new home would have a claim in negligence for defective construction, no matter the resulting damage.9 Following Kennedy, the excep-
tion to the economic loss rule expanded.10 More
recently, however, the Court confirmed the only exception to the economic loss rule is the narrow one established in Kennedy.
In 16 Jade Street, it was argued that Aten could not be held personally liable because the loss that resulted to Jade Street was to the product itself, and therefore liability could only rest in contract. It was further argued that because Jade Street was a devel- oper, and not a purchaser, it was not among the class of persons for who the exception to the economic loss rule was intended to protect. That distinction, while technical, is not inconsequential, as Kennedy plainly recognizes the lack of sophistication in construction by most homebuyers, while developers are more sophisticated in construction.
The Supreme Court did not have to address the principles of agency or the economic loss rule in 16
Jade Street. However, both issues can be useful to
defense counsel representing an LLC or an individ- ual member. Additionally, there is no automatic transfer of liability from an LLC to a member. Rather, there must be a showing that the member would be liable if he was acting in an individual capacity. Although the extent to which an LLC provides a member protection from individual liability remains an undecided question, 16 Jade Street demonstrates that the LLC form does provide some barrier to indi- vidual liability. As more cases involving the LLC form make their way through the appellate courts, it is incumbent upon defense counsel to ensure that indi- viduals are afforded as much protection as possible under the LLC Act.
Footnotes
1 Bill Young is an associate with Howell, Gibson & Hughes, P.A. in Beaufort. His practice focuses primarily on construction litigation, including defending claims against general contractors and subcontractors. He is admitted to practice in South Carolina, the United States District Court for the District of South Carolina, and the United States Court of Appeals for the Fourth Circuit.
2 16 Jade Street, LLC v. R Design Construction
Co., et al., 398 S.C. 338, 728 S.E.2d 448 (2012).
3 16 Jade Street, LLC v. R Design Construction
Co., et al., -- S.E.2d --, 2013 WL 4553851 (2013).
3 The statute provides:
(a) Except as otherwise provided in subsection (c), 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. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.
(b) The failure of a limited liability company to