Principal of Limited Liability Company can be Sued without Need to Pierce Corporate Veil

Where a property owner filed suit against a limited liability company and sued the individual principal of the company as well as the company itself, alleging negligence, fraud and violations of the state unfair practice act, it was held that the owners were not required to plead facts sufficient to pierce the corporate veil since the claim against the principal was that he was personally and individually liable in tort despite being a member or manager of the LLC.

In the case of Sturm v. Harb Devleopment, 298 Conn. 124, 2 A.3d 859 (2010), the allegations by the homeowner against the contractor were poor workmanship in the construction of their new home constituted breach of contract, negligence, fraud, and negligent misrepresentation.  The plaintiff claimed that the foundation for the house lacked an adequate concrete slab; the lot was not properly sloped – causing water to pool against the foundation; the dormer was incorrectly built; the floors varied from the plans; adjacent windows were not installed symmetrically;  and numerous other issues.  The trial court granted summary judgment for the individual defendant on the basis that the plaintiff failed to plead sufficient facts to warrant piercing the corporate veil.  That part of the decision was reversed on appeal.  The trial court also found that the allegations against the individual and company based on fraudulent and negligent misrepresentation must be dismissed for failure to plead sufficient facts to establish a viable claim.  That aspect of the trial court decision was affirmed on appeal.

On appeal, the homeowners argued that the trial court misconstrued the complaint against the individual defendant, failing to understand that it was asserting that the defendant was personally and individually liable in tort despite being a member or manager of the LLC, and that there was no need to pierce the corporate veil since they were attempting to prove individual liability based upon the individual’s actions rather than liability based upon the actions of the LLC.  In response, the individual defendant argued that he is immune from liability because of the protection afforded against personal liability under the relevant state statute applicable to LLC’s.   Specifically, he argued that “because the allegations against him not only arise from his membership in or management of Harb Development but also appear to be substantially similar to the allegations against Harb Development, the defendant contends that the plaintiffs must allege facts sufficient to warrant piercing the corporate veil.”

After briefly reviewing what would be required to pierce the corporate veil, the court stated that the question of whether the veil could be pierced was not relevant in this case.   Explaining the applicable state law, the court quoted from previous case precedent as follows:

“It is well established that an officer of a corporation does not incur personal liability for its torts merely because of his official position. Where, however, an agent or officer commits or participates in the commission of a tort, whether or not he acts on behalf of his principal or corporation, he is liable to third persons injured thereby…. Thus, a director or officer who commits the tort or who directs the tortious act done, or participates or operates therein, is liable to third persons injured thereby, even though liability may also attach to the corporation for the tort.”

The particular state statute at issue here provides in part:

“Any member, manager, agent or employee of a limited liability company rendering professional services … shall be personally liable and accountable only for negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional services on behalf of the limited liability company to the person for whom such professional services were being rendered….”

Because contractors do not provide “professional services” as defined in the state statute, the defendant contended that contractors therefore do not fall within the statutory exception to the corporate veil.

In analyzing the intent of the state statute, the court considered similar statutes from other states and concluded that the way courts had been interpreting such statutes was that a member of an LLC cannot be held liable for the malfeasance of an LLC by virtue of his membership in the LLC alone; but rather “he must do more than merely be a member in order to be liable personally for an obligation of the LLC.  The statute thus does not preclude individual liability for members of a LLC if that liability is not based simply on the member’s affiliation with the company.”   Tort liability against the individual member for his own actions therefore remains a viable exception to the protection afforded under the LLC act according to the court.

All was not completely lost for the individual defendant despite the above described holding, however, because the court went on to find that the plaintiff failed to plead in its complaint sufficient elements required to make a case against the defendant for negligence or fraud.  Of the five specific allegations of negligent acts, three of them concerned a violation of the LLC contract.  But the plaintiffs had not pleaded that the defendant was personally a party to the contract – only the LLC was alleged to be party to the contract with the plaintiff.  Consequently, the court found that the individual owed no contractual duty to the plaintiff.   In view of that, the court explained:  “There is no question that a duty of care may arise out of a contract, but when the claim is brought against a defendant who is not a party to the contract; the duty must arise from something other than mere failure to perform properly under the contract.”   Here, the plaintiff failed to please what the other “something” was.

As explained by the court:

“The two remaining allegations claim that the defendant failed to install correctly the concrete slab foundation and improperly instructed Harb Development to deviate from the contractual plans. These two allegations similarly fall short in establishing any duty on the part of the defendant. The plaintiffs failed to allege the source of the defendant’s duty to install the slab, such as a contract or an established building code. The plaintiffs further neglected to plead the manner in which the defendant instructed and caused Harb Development to deviate from the plans and specifications of the contract. Such an allegation is too general and unspecific to either support the conclusion that the defendant had a duty to avoid such instruction or allow the defendant to anticipate the harm claimed.”

With regard to the negligent and fraudulent misrepresentation claims, the court held that those must be dismissed because the plaintiff failed to sufficiently plead all essential elements of the actions, most specifically being that the defendant knew his statements were false.

Comment: This case note has been included in this newsletter because it may be an eye opener for members of limited liability companies who may have thought that they are completely protected against individual liability for their actions performed on behalf of the LLC.  This case shows that the individual may have personal tort liability (including, negligence, negligent misrepresentation and fraud) for his own actions, and is not protected against suit by virtue that he is part of a limited liability company.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 13, No.6  (May 2011).

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