Judicial exceptions to limited liability protection provided by Florida LLCs.

• Author: Wells, Thomas O.
• Position: Limited liability companies

Florida law generally provides for limited liability for owners and managers of an entity. For example, Florida law provides that a "member or manager [of a limited liability company] is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager." (1) The separation of a legally organized entity from its owner and the prohibition of piercing the corporate veil, absent proof that the entity was organized or used to mislead creditors or to work a fraud on them, has been Florida's common law for decades. (2) The Florida Revised Limited Liability Company Act (the LLC Act) goes further and even protects the owners when corporate formalities are not observed. (3) The ability of a member or manager to evade personal liability for the obligations of a limited liability company (LLC) is a fundamental principle of LLC law, and is one reason why attorneys comfortably suggest--and clients choose--the LLC form of ownership.

This article discusses well-known exceptions that impose personal liability on a member or manager and explains the developing law that extends personal liability of a managing member or manager of an LLC (and other parties who indirectly control the LLC) based upon a breach of a fiduciary duty. This liability is imposed without the need to pierce the corporate veil of the LLC. This article also examines ways to minimize such potential personal liability.

General Exceptions to Limited Liability

Well-known exceptions to the general rule of no personal liability include 1) a member's written obligation to make future contributions; (4) 2) execution of an agreement for a to-be-formed LLC prior to its organization; (5) 3) the two-year clawback for distributions approved and made, including by way of purchase, redemption, or other acquisition, in violation of [section]605.0405, which liability can be imposed on the transferee as well as the members of a member-managed LLC (managing members) or the managers of a manager-managed LLC who consented to the distribution; (6) 4) responsible person liability for taxes owed to the United States; (7) 5) similar responsible party liability for Florida sales or use taxes; (8) and 6) tortious conduct individually committed by a member or manager. (9) Two Florida bankruptcy courts have also extended an officer or director's fiduciary duties to the creditors of a company that operates in the "vicinity of insolvency" creating another exception for potential personal liability. (10)

Developing Law Exception to Limited Liability Applicable to Control Persons

Lesser known court-created exceptions to the general rule of no personal liability also exist and have been applied to structured LLCs. A "structured LLC" has an operating LLC that is owned and operated by one or more other entities creating multiple entity layers before an individual decision-maker exists. Entities are intentionally used in this manner to legally protect each entity from having personal liability for the obligations of the lower-tier entities within the structure that it owns or manages. Faced with a corporate trail of entities and trying to determine responsibility without abrogating the law regarding the separateness of entities, courts have crafted exceptions to the general rule of no personal liability for members and managers. They have expanded fiduciary duties owed at the lower entity level to an individual officer, director, or manager at a higher entity level that is the ultimate decisionmaker or have extended the tortious conduct exception to the ultimate decision-maker regardless of the fact that the person serves as an officer, director, or manager of a different entity.

In re USACafes, L.P. Litigation, 600 A.2d 43 (Del. Ch. 1991), started the expansion of fiduciary duties in the context of a limited partnership managed by a corporate general partner. (11) At issue was whether the individual directors of the corporate general partner owed the fiduciary duties of loyalty and due care to the limited partnership and the limited partners when, as a matter of corporate law, their duty of loyalty ran to their own corporate general partner and its shareholders. The directors argued that the assertion that they owed a fiduciary duty to the limited partners was a legal nullity inconsistent...