II. Member or Manager Often Becomes Personally Liable when He or She Commits a Wrongful Act Against Either Another Member (or Manager) or Against the Llc as an Entity

• Library: South Carolina Limited Liability Companies (SCBar) (2020 Ed.)

II. Member or Manager Often Becomes Personally Liable When He or She Commits a Wrongful Act Against Either Another Member (or Manager) or Against the LLC as an Entity

Fights and squabbles among members are probably the most common reason that a member or manager will incur personal liability by reason of being involved in an LLC business. Sometimes the plaintiff in these squabbles is the LLC itself, and commonly it is just an argument between or among the individual members or managers. Arguments that a member or manager has violated a fiduciary duty, has engaged in fraudulent or illegal behavior, has breached a contract based duty owed to another, are typical and common. In this regard, the fundamental tort and contract principles that govern when any person may be liable to another apply in these LLC member/manager disputes. One of the excellent sources detailing the possible personal liabilities of LLC members and managers regarding breaching duties to other members/managers or to the LLC is 1 Larry E. Ribstein & Robert R. Keatinge, Ribstein and Keatinge On Limited Liability Companies, Chapt. 9. Duties of Members and Managers. This treatise is available on Westlaw.

Most important, Chapter 1 of this Manual discusses the duties imposed on members and managers and the complexities as to how such disputes are to be resolved, particularly when a dispute must be resolved as a derivative claim on behalf of the LLC or can more simply be brought and tried as a direct claim.

One such sample South Carolina dispute involved three brothers who owned initially as a corporation and ultimately as an LLC, a mini-mart and ABC liquor store in Richland County.³ Three of the brothers had for years essentially excluded the fourth from participation in the business, and when they dissolved the business, failed to pay him for his share. Essentially the court determined the brother owned 25% of the business, the amount he was entitled to, and further, that he was entitled to punitive damages. In another LLC dispute in Myrtle Beach, the court imposed punitive damages on two LLC members for their wrongful behavior against the other members.⁴ A third example, of the many similar disputes discussed in Chapter 1, is the saga of the multi-year fight between two sophisticated members over the proposed development of some Charleston properties that culminated in the Supreme Court confirming the enforcement of a charging order against one of the two members.⁵

Judge Waites has pointed out some important points regarding the duties of LLC members and managers:

In the Complaint the Trustee argues that Defendant (I) breached his fiduciary duty of loyalty to Debtors pursuant to S.C. Code Ann. § 33-44-409(b); (ii) breached his fiduciary duty of care to Debtors pursuant to S.C. Code Ann. § 33-44-409(c); and (iii) authorized unlawful distributions by Debtors for which he is liable pursuant to S.C. Code Ann. §§ 33-44-406 and 407. The Trustee asks the Court to enter a judgment in her favor for $3,503,836.
Defendant admits all of the factual allegations made by the Trustee in the Complaint and in the Trustee's Motion, and agrees that none of the facts set forth in the Complaint are subject to dispute. Defendant argues that he should not be held liable because he was not aware of his duties set forth in the South Carolina Limited Liability Company Act. The only issue raised by Defendant is whether his lack of knowledge constitutes a defense to the Trustee's causes of action. . . .
Pursuant to S.C. Code Ann. §§ 33-44-409(b) and (h)(2), a manager of a manager-managed company or member of a member[-]managed company owes the company and the other members a duty of loyalty. The duty of loyalty requires that the manager:

account to the company and to hold as trustee for it any property, profit, or benefit derived by the members in the conduct . . . of the company's business . . .; (2) refrain from dealing with the company in the conduct . . . of the company's business as or on behalf of a party having an interest adverse to the company; . . . . S.C. Code Ann. §§ 33-44-409(b)(1) and (2).

S.C. Code Ann. §§ 33-44-409(b) and (h)(2) do not require that a

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