Members, managers, directors, and executives of limited liability companies (“LLC”) are provided protections under North Carolina law which limit their personal responsibility for obligations incurred by the LLC. This limitation includes liabilities incurred for professional negligence, malpractice, and other wrongdoing attributable to the LLC and other employees or members of the LLC. There is, however, a limit to the limited liability protection provided under North Carolina General Statutes § 57C-3-30; and plaintiffs continue to attempt to impose personal liability on members and employees in LLCs. So, what are the limits on the protection provided? The recent North Carolina Superior Court opinion in Revolutionary Concepts, Inc. v. Clements Walker PLLC, et al., 2012 NCBC 14 (March 8, 2012) explores this question and points to previous North Carolina court opinions that address the same issue. Below are five critical principles we can take away from the courts’ analyses in these cases:
1. Status as a Member, Manager, Director or Executive of an LLC is not sufficient to incur personal liability for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive.
N.C. Gen. Stat. § 57C-3-30 provides:
A person who is a member, manager, director, executive, or any combination thereof of a limited liability company is not liable for the obligations of a limited liability company solely by reason of being a member, manager, director, or executive…
Citing § 57C-3-30, the Revolutionary Concepts court looked beyond the mere status of the individual defendants as members of the law firm to determine whether they had any liability related to the failure of a patent agent employed by the firm to file a patent application. Revolutionary Concepts, 2012 NCBC 14 at ¶ 39. Similarly, the court in Babb v. Bynum & Murphrey, 182 N.C. App. 750, 643, S.E.2d 55, cert. denied, 362 N.C. 233, 659 S.E.2d 434 (2008) looked beyond the status of the defendant lawyer as a member of the law firm to determine any liability related to the transactions made by his partner that amounted to fiduciary fraud, embezzlement, conversion and other unlawful conduct.
2. A Member, Manager, Director or Executive does not become liable for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive of the LLC simply by participating in the management or control of the business.
N.C. Gen. Stat. § 57C-3-30 further provides:
A person who is a member, manager, director, executive, or any combination thereof of a limited liability company … does not become [liable for the obligations of the LLC] by participating, in whatever capacity, in the management or control of the business.
In citing the statute, both the Revolutionary Concepts and Babb courts, recognized that more than general participation in management or control of the LLC law firms was required to impose individual liability on the defendants for the wrongdoing at issue. Revolutionary Concepts, 2012 NCBC 14 at ¶ 39; Babb, 182 N.C. App. at 753.
3. A Member, Manager, Director or Executive becomes personally liable for wrongdoing attributable to the LLC or another Member, Manager, Director or Executive only by that individual’s “own acts or conduct”.
N.C. Gen. Stat. § 57C-3-30 also provides:
A member, manager, director, or executive may, however, become personally liable by reason of that person’s own acts or conduct.
The critical inquiry the court will engage in is whether the plaintiff’s basis for attempting to impose personal liability on a defendant implicates that defendant’s own acts or conduct. Plaintiffs may allege that an individual’s affirmative acts constitute the basis for liability or, as in Babb and Revolutionary Concepts, that an individual’s failure to act constitutes the basis for liability.
4. Acts of Other Members: A Member, Manager, Director or Executive of an LLC does not have an affirmative duty to investigate the actions of another member in the LLC if they do not have actual knowledge of the wrongdoing.
In Babb, one member of a law firm affirmatively engaged in transactions that amounted to fiduciary fraud, embezzlement, conversion and other unlawful conduct. Plaintiffs sued another member of the law firm for (1) for negligence in supervising an employee of the firm; (2) for negligence in carrying out his responsibilities in the firm; and (3) for breach of fiduciary duty, gross negligence, malpractice and willful and wanton conduct, all related to the wrongful transactions of the other member attorney. Plaintiffs conceded that there were no direct acts committed by the defendant attorney, but rather based their claims on his failure to act. The court rejected the plaintiffs’ attempt to impose liability on the defendant attorney, finding that § 57C-3-30 does not impose a duty on a member of the LLC to investigate wrongdoing of another without having actual knowledge of the wrongdoing. Babb, 182 N.C. App. at 753.
5. Supervision of Employees: A Member, Manager, Director or Executive of an LLC cannot be held liable for malpractice, failure to supervise, or respondeat superior if (1) they had no knowledge that the individual at issue required supervision and/or (2) they had not been assigned or accepted responsibility to supervise the individual at issue.
In Revolutionary Concepts, one attorney was deemed responsible for supervising the activities of the patent agent working for the law firm. The plaintiff attempted to impose liability on two other defendant attorneys who were members of the law firm based upon the defendant attorneys’ failure to detect and supervise the activities of the patent agent. “The critical inquiry then is whether [the defendant attorneys’] failure to supervise [the patent agent] can be considered their ‘own acts or conduct’ within the meaning of the statute.” Revolutionary Concepts, 2012 NCBC 14 at ¶ 40. There was no evidence that the defendant attorneys had accepted or had been assigned the responsibility to supervise the patent agent. Further, consistent with Babb, the Revolutionary Concepts court held that without evidence of actual knowledge of the need for supervision, the failure to supervise does not constitute one’s “own acts or conduct” within the meaning of the statute. Revolutionary Concepts, 2012 NCBC 14 at ¶¶ 41-42.
Although Revolutionary Concepts and Babb analyze the liability of lawyers, the principles we glean from these cases are not limited to law firms operating as LLCs. And these principles even extend to corporate members of LLCs. For example, see Spaulding v. Honeywell Int’l, Inc., 184 N.C. App. 317, 646 S.E.2d 645 (2007), in which the court found no liability for a corporate defendant member of an LLC because the corporate defendant member had not affirmatively acted and had not undertaken an independent duty to guarantee worker safety at the LLC’s plant. Understanding these cases will help individual and corporate members, managers, directors and executives of LLCs protect against attempts to circumvent the limited liability protections provided under N.C. Gen. Stat. § 57C-3-30.