UPDATE: THE LOUISIANA SUPREME COURT HAS REVERSED THE APPELLATE COURTS ON THIS ISSUE. CLICK HERE TO READ MORE.
No Matter What Type of Entity You Choose, You Can Still be Personally Liable for Negligent Professional Services
Limited Liability Companies (LLC’s) generally offer their members insulation from personal liability. This means that a court cannot order an LLC member to pay for LLC debts and obligations, including judgments, from the personal assets of a member. The limited liability feature of an LLC is one of many factors that result in an LLC being the favored choice of business organizations. However, it is important to keep in mind that no matter what business entity you may choose, individuals who provide professional services in connection with construction will still have personal liability for their own negligence and cannot hide behind the corporate veil of the legal entity. Two Louisiana courts recently held individuals who are members of an LLC liable for construction and design defects because of their individually negligently performed professional services.
Contractors Held Liable for Defective Design and Construction
In Matherne v. Barnum, 94 So. 3d 782 (La. Ct. App. 1st 2012), the plaintiff-homeowners hired the defendant-contractor to design and build a bulkhead, boat slip with lift, and a deck to their waterfront property. The bulkhead construction was defective and caused a sinkhole, cracking in the landscaped areas around the construction, and damage to the deck and boat slip. After several failed repair attempts, the homeowners sued the contractor. Even though the contractor performed all of his services through his LLC, the court held him personally liable for the replacement of the entire construction.
The court explained its actions by saying, “Members of limited liability companies generally may not be assessed with personal liability for the debts and obligations of their limited liability company to third parties, unless there is proof of negligence or wrongful conduct of that person.” So while this contractor would not have been held liable for a debt the LLC owed or claims arising out of performing purely administrative services for the LLC, the contractor can be held liable for negligently providing professional design and construction services. Because the contractor was “engaged in the construction profession when he designed and constructed the work” and “was not acting solely in his capacity as a member of the limited liability company,” the court held the contractor personally liable for his negligence in performing the construction.
More recently, the Third Circuit Court of Appeal has joined the First Circuit in holding contractors personally liable for defective construction and design services. In Ogea v. Merritt, 109 So. 3d 516 (La. Ct. App. 3d 2013), the homeowner hired a contractor to build a new house. The plaintiff-homeowner alleged severe problems with the foundation of the home. The court mirrored the logic in Matherne, holding that the contractor could be held personally liable despite being the sole owner of the LLC through which the work was performed.
The court explained, the “LLC law defines an LLC as an unincorporated association, not as a corporation, and specifically provides that LLC members are liable for their own negligent or wrongful acts…In our view, the legislature limits the personal liability of an LLC member for the debts, obligations, or liabilities of the LLC, unless the debt, obligation, or liability at issue is the result of the member’s own personal actions.”
Limited Liability Still Important When Forming Entity
Confused? Isn’t an LLC supposed to combine the ease of running a partnership with the pass-through taxation and limited liability of a corporation? Well yes, it does just that. However, keep in mind that you can almost always still be held liable for your own personal, negligent actions, no matter what type of business entity you choose.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.