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

AuthorThomas Bourgeois
PositionJ.D./D.C.L., 2016, Paul M. Hebert Law Center, Louisiana State University.
Pages1339-1381
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 liability3 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 ris k 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 busine ss. See infra Part I.B.
4. See infra Part I.A.
5. GLENN G. MORRIS & WENDELL H. HOLMES, BUSINESS ORGANIZ ATIONS
§ 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 o bligation 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.

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