Mirror, Mirror: Amending Louisiana's LLC Statutes Related to Personal Liability of Members to Reflect Corporate Counterparts After Ogea v. Merritt

• Author: Thomas Bourgeois
• Position: J.D./D.C.L., 2016, Paul M. Hebert Law Center, Louisiana State University.
• Pages: 1339-1381

Mirror, Mirror: Amending Louisiana’s LLC Statutes Related to Personal Liability of Members to Reflect Corporate Counterparts After Ogea v. Merritt TABLE OF CONTENTS Introduction ................................................................................ 1340 I. The History of LLCs and the Protections of the Limited Liability Shield ........................................................................... 1343 A. The Need for LLCs .............................................................. 1343 B. The Limited Liability Shield ................................................ 1345 II. Louisiana’s Contrasting Limited Liability Statutes for Corporate Shareholders and LLC Members ............................... 1348 III. Jurisprudence on Personal Liability of LLC Members ............... 1352 A. Comparing Pre- Ogea LLC Cases with Corporate Cases ..... 1352 1. Traditional Corporate Analysis of Shareholder Liability ......................................................................... 1353 2. Lower Courts’ Attempts at Analyzing LLC Member Liability ........................................................... 1354 B. The Breaking Point: Ogea v. Merritt ................................... 1357 1. The Fraud Exception ..................................................... 1359 2. The Breach of Professional Duty Exception ................. 1360 3. The “Negligent or Wrongful Act” Exception ................ 1360 a. The Tort Factor ....................................................... 1361 b. The Criminal Conduct Factor ................................. 1363 c. The Contract Factor ................................................ 1364 d. The Capacity Factor ................................................ 1364 4. Limitations and Holding ................................................ 1365 IV. Misguided Statutory Drafting Leads to Misguided Interpretation .............................................................................. 1366 A. How the Problems with Revised Statutes Section 12:1320 Led to Ogea ............................................... 1366 1. The Overreaching Drafting of Revised Statutes Section 12:1320 ............................................................. 1367 2. The Overreaching Language Leads to Ogea ’s General Rule-Exception Framework ............................. 1368 3. The Negligent or Wrongful Act Factors ........................ 1372 a. The Tort Factor ....................................................... 1372 b. The Criminal Conduct Factor ................................. 1373 1340 LOUISIANA LAW REVIEW [Vol. 76 c. The Contract and Capacity Factors ......................... 1374 B. Potential Applications of the Court’s Ruling ....................... 1375 C. Policy Problems Created by Ogea ....................................... 1376 V. Why the Legislature Must Mirror the LLC and Corporate Statutes ....................................................................................... 1378 Conclusion .................................................................................. 1380 INTRODUCTION One of the most important and risky investments a person can make is deciding to start a business. With so much potentially at risk, knowledge of exactly what features each type of business entity provides to owners— including liability, taxation, and management flexibility—is essential to prospective business owners. Unfortunately, after the Louisiana Supreme Court’s decision in Ogea v. Merritt , 1 the issue of personal liability for limited liability company (“LLC”) members is anything but clear. For instance, consider the following example involving two new Louisiana business owners—Lucky and Savvy. Lucky chooses to form an LLC and believes that the entity will provide the benefits of flow-through taxation, 2 flexible management requirements, and limited liability 3 for the debts of his business. 4 Savvy chooses to form a corporation, which he elects to be taxed as an “S Corporation,” so he also expects to receive flow-through taxation and limited liability. 5 Both operate construction Copyright 2016, by THOMAS BOURGEOIS. 1. Ogea v. Merritt, 130 So. 3d 888 (La. 2013). 2. Flow-through taxation allows the income of the partnership to be taxed only once. The individual partners report the income of the partnership on their personal income tax returns, and the partnership itself does not pay income taxes on its income. 1 ARTHUR B. WILLIS & PHILIP F. POSTLEWAITE, PARTNERSHIP TAX ¶ 9.01[2] (7th ed. 2013). This avoids the problem that corporate shareholders have with double taxation—taxation of the income and taxation of the distributions to shareholders. Id. at ¶ 3.01[1]. 3. The phrase “limited liability” is a bit misleading. Although the phrase seems to imply that a business owner will have limited personal liability for the debts of the business, the shield actually provides limited risk to business owners. The owner is not personally liable for any amount of the debts of a business— save a veil-piercing exception—and the owner’s risk is limited to his or her capital investment in the business. See infra Part I.B. 4. See infra Part I.A. 5. GLENN G. MORRIS & WENDELL H. HOLMES, BUSINESS ORGANIZATIONS § 41.01, in 8 LOUISIANA CIVIL LAW TREATISE 405–07 (1999). 2016] COMMENT 1341 contracting businesses and enter into contracts on behalf of their respective companies to build new homes for two individuals. Lucky and Savvy both forget to pay their renewal fees for their state contractor’s licenses and therefore are not properly licensed, constituting a misdemeanor criminal offense. 6 During construction, both Lucky and Savvy—sole owners and employees of their respective businesses—personally perform work that results in cracked foundations for each of the homes they contracted to build. Both homeowners sue, and Lucky and Savvy’s businesses become liable for damages under claims of breach of contract. Both companies have few assets, so the plaintiffs seek to recover against Lucky and Savvy personally for the damages. Louisiana Revised Statutes section 12:1-622(B) makes clear that corporate shareholders in Louisiana are protected against personal liability for the debts of the corporation. 7 Thus, absent a theory of recovery rendering him personally liable, such as a tort or the use of a veil-piercing theory, Savvy himself will not be liable for any of the damages. 8 The contract was an obligation of Savvy’s business, not one he owed personally. 9 Lucky is, well, not so lucky. Although the LLC statute was intended to provide the same—if not stronger—protections to LLC members that its corporate counterpart provides to shareholders, the Louisiana Supreme Court interpreted and applied Revised Statutes section 12:1320 by creating a different and potentially weaker test for determining personal liability in Ogea . A lower court applying the test from Ogea could find Lucky personally liable under an “exception” to the limited liability shield provided to LLC members. One of the “factors” used to determine if one of the exceptions is met is “criminal conduct.” 10 Therefore, a court could use Lucky’s misdemeanor improper licensing offense to find him personally liable for the damages resulting from his work on the home. Further, because Lucky personally performed the poor work, a court could find that his actions were tortious in nature even though the homeowner would likely not be capable of establishing a prima facie case under tort law. 11 Thus, although Lucky’s facts are similar to those in Ogea , a lower 6. LA. REV. STAT. ANN. § 37:2160(B), (C) (2007 & Supp. 2015). 7. LA. REV. STAT. ANN. § 12:1-622(B) (2015). 8. See infra Part I.B (discussing the limited liability shield afforded to corporate shareholders and LLC members). 9. See Donnelly v. Handy, 415 So. 2d 478 (La. Ct. App. 1982); see also infra Part I.B (explaining the concept of limited liability, which provides protections to corporate shareholders as well as LLC members in most states). 10. Ogea v. Merritt, 130 So. 3d 888, 902–04 (La. 2013). 11. See infra Part IV.A.3.a. 1342 LOUISIANA LAW REVIEW [Vol. 76 court could weigh the factors differently than the Supreme Court, imposing personal liability on Lucky despite the plaintiff’s failure to prove all required elements of a cause of action. The reason for this discrepancy is because the Ogea Court’s test employs a case-by-case inquiry and, instead of using true causes of action, looks at “crime” and “tort” factors that are potentially present. 12 Although no justification exists for the contrasting theories of personal liability, 13 this example illustrates what is now true in Louisiana: LLC members are treated differently from corporate shareholders for purposes of personal liability. 14 This contradictory treatment creates a cloud of uncertainty for LLC owners and threatens to undermine the limited liability shield—one of the major advantages the LLC was created to provide. 15 Thus, to supply clarity and certainty to current and prospective business owners, the Louisiana Legislature should amend Revised Statutes section 12:1320—which provides for the personal liability of LLC members—so that it mirrors Revised Statutes section 12:1-622 and the rules on personal liability of corporate shareholders. This Comment will explain the problems with Revised Statutes section 12:1320 and how the statute led to the Court’s unfortunate decision in Ogea . Part I will provide a brief history of LLCs and explain the advantages they provide to members. This Part will illustrate how the limited liability shield typically protects members in certain scenarios. Part II describes the Louisiana LLC and corporate statutes that determine personal liability of owners of those respective business entities. Part III will first explain how Louisiana courts wrestled with the language in Revised Statutes section 12:1320 before the Supreme Court’s first examination of limited liability in relation to LLCs in Ogea v...