Louisiana Supreme Court Overrules Third Circuit
In Ogea v. Merrit, 13-1085 (La. 12/10/13), — So. 3d —, the Louisiana Supreme Court overruled the appellate court’s holding that a member of a limited liability company (LLC) could be held personally liable for negligent design and construction.
The case deals with the construction of a new home and a defective foundation. The appellate court held that any contractor who negligently performed professional services, including design and construction work, could be held personally liable even though the services were performed through a limited liability company. You can read our previous blog on the appellate case here.
Personal Liability Determined by Four-Factor Test
In dismissing all claims against the defendant contractor, the Louisiana Supreme Court held that such an expansive exception to the limited liability afforded LLC’s would make the statute limiting the personal liability of LLC members meaningless. Instead, the court proposed a four-factor test to determine whether an individual acting under the auspices of an LLC should be held personally liable. The Court evaluated the four factors as follows:
- Whether the member’s conduct could be fairly characterized as a traditionally recognized tort. The Court explained that to find that a tort occurred under the first factor, the defendant must owe a personal duty to the plaintiff. This duty must be more than what was owed under the contract, and all elements of the tort must be proven. For example, a contractor could owe a personal duty if he injured someone in a motor vehicle accident.
- 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. If the LLC member committed a crime, that weighs in favor of finding personal liability.
- Whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC. If the LLC member’s conduct was in furtherance of a contract between the LLC and the plaintiff, that weighs against finding the member personally liable.
- Whether the conduct at issue was done outside the member’s capacity as a member. If the member was purely acting in his or her capacity as a member of the LLC and not in his or her personal capacity, that too weighs against finding the member personally liable.
Although the court instructed that each situation is to be determined on a case-by-case basis and each of the factors should be considered and weighed when determining whether to pierce the corporate veil of limited liability, a showing that the member breached a personal duty owed to the claimant and committed a tort can be dispositive.
Applying the test to the facts of the Ogea case, the court found that the defendant contractor was acting as a member of the LLC and not in his personal capacity in furtherance of a contract between the plaintiff and the LLC. Further, no criminal action had been committed, and the defendant owed no personal duty to the plaintiff that could give rise to a tort. As such, the court refused to hold the defendant contractor personally liable and dismissed the claims against him.
LLC Members should be aware of these factors when acting on behalf of an LLC. While piercing the corporate veil and assessing personal liability is an extraordinary remedy, the law is evolving and this case could pave a new avenue for finding personal liability.
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.