Tag: member

Illinois LLC Manager Liability For LLC Contract Obligations – Some Basics

This unpublished case is dated (2011) but still post-worthy for its discussion of the nature of limited liability company (LLC) contract obligations and when someone is privileged to intentionally tamper with an existing contract.

In 6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion tanked.

The plaintiff sued when the defendants terminated the condo conversion agreement because of their displeasure with the plaintiff’s handpicked real estate broker and marketing firm.

The plaintiff sued claiming the defendants tortiously interfered with plaintiff’s contracts with the broker and marketing firm and caused the plaintiff to breach those contracts.  The trial court granted summary judgment for the defendants.

Held: Affirmed.

Reasons: the court first held that an individual LLC member could conceivably interfere with a contract entered into by that LLC.  The elemental LLC rules relied on by the court:

– An LLC is a separate entity from its principal members and can sue and be sued and make contracts in its own capacity.

– An LLC is a hybrid form of doing business that combines the advantages of a corporation’s limitation on personal liability with a partnership’s pass-through tax treatment (i.e., the LLC pays no entity level state or federal income tax.)

– The Limited Liability Company Act (the Act) (805 ILCS 180/1-1 et seq.) requires an LLC to have one or more members and is a separate legal entity from its members.

– An LLC can be member-managed or manager-managed and LLC members owe an LLC’s other members a fiduciary duty of loyalty and care. The same holds true for managers of manager-managed companies.

– The debts of an LLC, whether arising in contract, tort, or otherwise, are solely the debt of the LLC; not its managers or members;

– 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.

– An LLC member can only be responsible for LLC debts where: (1) the articles of organization provide for individual liability; and (2) the member has consented in writing.

See 805 ILCS 180/10-10; 180/1-30; 180/15-1, 15-3.

Afterwords:

This case provides detailed discussion of the LLC business entity and the scope of an LLC member’s liability for contract obligations.

 

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.