AREAS OF INTEREST: Personal liability of limited liability company member; piercing the corporate veil to hold member liable.
LEGAL IMPACT: 1) a member or manager of an LLC may be held personally liable when he commits a tort while acting on behalf of the LLC; 2) the transfer of assets from an LLC to a new LLC during a pending action may be sufficient to justify piercing the corporate veil to hold an individual member personally liable for the acts of the LLC.
CASE CAPTION: Regina Mbahaba, individually and as m/n/f of Benita Nahiman v. Thomas Morgan d/b/a Property Management Services a/k/a Property Services Company, LLC, No. 2010-710 (May 11, 2012)
The minor plaintiff suffered lead poisoning while living in an apartment in a building owned by Biren Properties, Inc. The defendant, Thomas Morgan, owned Property Management Services, a limited liability company that managed the apartment building. The plaintiff filed suit against both Biren and Morgan.
Morgan moved to dismiss the action against him individually arguing that he could not be held personally liable for the actions of the LLC. The plaintiff claimed that she sought to hold Morgan liable not because of his official position in the LLC, but because he “personally participated” in the activity that caused the injury. The trial court dismissed the claims against Morgan individually and allowed the claims against the LLC to proceed.
While the litigation was pending, Morgan formed a new LLC with a different name, but operating from the same location with the same telephone number. Morgan was the managing member of the new LLC. He contacted the clients of the original LLC to transfer their business to the new entity and also had the original LLC sell its assets to the new entity before it ceased operations.
Due in part to the original LLC’s lack of assets, the plaintiff amended her writ to include a claim seeking to pierce the corporate veil to hold Morgan individually liable. However, the trial court granted summary judgment in favor of Morgan on this claim.
HOLDING: Affirmed in part, reversed in part, and remanded.
The Court first addressed the dismissal of the claims against Morgan individually. Under RSA 304-C:25, no member or manager of an LLC is personally obligated for any debt, obligation or liability of the LLC solely by reason of being a member or acting as a manager. The Court ruled that although a member of an LLC is not liable for torts committed by or contractual obligations acquired by the LLC, he can be held liable when he commits or participates in the commission of a tort whether or not he is acting on behalf of the LLC. According to the Court, liability may be imposed because the member has personally committed a wrong and is subject to common law liability. The Court noted that a member who discloses that he is contracting on behalf of an LLC is not personally liable under a contract that he signs on behalf of the LLC, however, because it is the LLC and not the individual member that is a party to the contract.
In this case the plaintiff claimed that Morgan owed a duty to maintain the apartment in a habitable condition and that he breached this duty by failing to remedy or warn of peeling and flaking lead paint. The Court rejected Morgan’s argument that this duty was assumed by the LLC and not by him personally. It ruled that Morgan owed the plaintiff a tort duty independent of any contractual obligation due to his involvement in the management of the apartment and his superior knowledge of the hazardous condition.
The Court then considered the plaintiff’s corporate veil piercing theory. Ordinarily, corporate owners, like LLC members, are not liable for a company’s debts. However, where the corporate entity has been used to promote an injustice or fraud the court will treat the owners as the corporation’s “alter egos.” The Court concluded that the fact that the defendant established a new LLC and transferred all of the assets and clients to it while the litigation was pending could permit a finding that the LLC was used to promote an injustice or fraud. Therefore, the trial court erred in granting summary judgment to the defendant.