LLC Member Not Liable For Fraud Carried Out On Behalf of LLC

The First District expansively construed Section 10-10 of the Illinois LLC statute (805 ILCS 180/10-10) to immunize LLC managers and members from personal liability for misdeeds carried out on the LLC’s behalf.

In Dass v. Yale, 2013 IL App (1st) 122520, the plaintiffs sued an LLC member (along with a general contractor and sales agent) for construction defects in their Chicago condominium.  They alleged the defendant LLC member made multiple misrepresentations in various written sales documents concerning the property’s roof and plumbing condition and past problems with leaking. 

After getting an uncollectable default judgment against the dissolved general contractor, the plaintiffs focused their case on the individual LLC member.  The Court granted the LLC member’s section 2-619 motion and the plaintiffs appealed.

Held: Affirmed.  Section 10-10 of the LLC Act provides that LLC members are not individually liable for actions taken on behalf of the LLC.

Rules/Reasoning:

Section 10-10 of the Illinois LLC Act plainly provides that liabilities of an LLC – arising in contract or tort – belong solely to the LLC and that LLC members or managers aren’t personally liable for LLC liabilities. 

Members of an LLC can only be personally responsible for LLC liabilities where (a) the LLC articles of organization explicitly provide for personal liability; and (b) the member(s) consents in writing to be personally bound by the articles’ section that imposes personal liability on the member(s). 

In addition, an LLC’s failure to follow corporate formalities in its business is not a basis for imposing personal liability on LLC members or managers. ¶37

Here, the plaintiffs’ fraud allegations against the defendant LLC member were premised on conduct he engaged in while carrying out his marketing efforts on behalf of the LLC.  The plaintiffs’ assertion that the defendant misrepresented the property’s condition and its construction materials alleged conduct occurring in the course of the LLC trying to sell the property.

 Since there was no evidence that the LLC’s organizing papers provided for personal liability or that the defendant consented in writing to liability, Section 10-10 of the LLC  Act clearly immunized the defendant from the plaintiffs’ fraud claims.  (¶¶38-39).

Two cases that figure prominently in the Dass analysis are Carrollo v. Irwin, 2011 IL App (1st) 102765 and Puleo v. Topel (368 Ill.App.3d 63) which, respectively, hold that LLC members aren’t individually liable for obligations occurring prior to LLC formation (Carrollo) or after LLC dissolution (Puleo).  

Dass, Carrollo and Puleo form a three-part case continuum on the issue of an LLC member’s liability for actions taken before, during and after an LLC’s formation and dissolution.  The synthesized holding of the three cases underscores that actions of LLC personnel will not give rise to personal liability; even for intentional torts (i.e., fraud). (¶¶ 39-44).  The LLC Act gives members of unformed LLCs more protection than officers of unformed corporations).

Take-away: A harsh result for plaintiffs trying to sue LLC members for acts taken under the auspices of the LLC.  Dass stands for clear proposition that until the legislature amends the LLC Act, LLC members and managers’ acts are protected – as long as they’re taken in connection with the carrying out the LLC’s business.

 Had the plaintiffs claimed that the LLC member committed fraud individually (and unrelated to his LLC duties), the result may have been different.  

 

Published by

PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.