The Texas case, Morello v. State, demonstrates how LLC members and managers are liable for company liabilities and are not liable for company liabilities.
Business and property investors form corporations and, more commonly, limited liability companies to shield themselves from personal liability for company expenses, debts and judgments. However, many business owners learn that they have to guarantee company bank loans and company building leases, and even sometimes trade accounts. In addition, everyone is responsible for his own tortious actions.
For example, if a 10 percent business owner is driving to a client meeting and causes a wreck and damages, then the business is liable because the action occurred “while on the job,” but the driver is also personally liable, because she caused the wreck. The same is true for a business owner who purposefully, negligently, or fraudulently misrepresents facts in a business transaction – it is a personal action, leading to personal liability. The personal liability shield of a LLC does not help here.
In Morello, a company called White Lion Holdings, managed by Morello, acquired a property out of bankruptcy that had environmental problems, a hazardous waste pollution on the property. White Lion Holdings was to follow a compliance program to clean the site. The state of Texas filed suit against White Lion Holdings and Morello, alleging violations of rules of the TCEQ and the compliance program.
The State of Texas alleged that Morello was personally liable for civil fines for not following the compliance plan, because he solely controlled the LLC. The state received an easy summary judgment against White Lion Holdings, and then it later sought one against Morello and received it. Morello appealed, asserting that the state did not assert that he conducted tortious or fraudulent activity, or that it was attempting to pierce the veil of the LLC and seek personal liability against him.
Morello won on appeal. The Appeals Court in Austin reasoned, first, that the state did not seek to pierce the veil in its pleadings. The Texas Business Organizations Code (“TBOC”) provides that a member or manager of an LLC is not liable for the debts, liabilities or obligations of the LLC, unless otherwise provided in the LLC operating agreement.
Also, the TBOC provides that a member or manager can only be sued by a third party in a suit against the LLC to enforce the member’s rights or obligations to the LLC. Since the state did not assert liability via piercing the veil, the court did not have to address that issue.
In the appeal, the state relied on the principle that a company agent is liable for his tortious and fraudulent actions; however, the state did not allege any such actions. Instead, the State said Morello was liable, because he was a company agent who committed “wrongful acts.”
The State was unable to persuade the Court of Appeals to expand individual liability to “wrongful actions,” which were alleged violations of the compliance plan and the Texas Water Code, which made it a violation to cause or to allow a Water Code statute or law governed by the TCEQ. The court ruled against the State, because the State was unable to point to tortious or fraudulent activity that could lead to individual liability. The court also distinguished cases cited by the State for individual agent’s liability under the Water Code.
This case demonstrates the important principles behind the protection of LLC members and managers from liabilities. First, LLC members and managers are not liable for LLC obligations, unless the LLC operating agreement otherwise provides so. With an operating agreement, to a large extent, an LLC member or manager can control personal liability.
Second, company agents, even members and managers of LLC, are always liable for their own conduct, even if committed in the scope of acting for the company. Third, to pierce the veil of an LLC, a plaintiff must show that the member used the LLC to perpetuate an actual fraud on the plaintiff, and possibly, a plaintiff may have to assert that in the case, as opposed to a post-judgment remedy.
Case: Morello v. State, No. 03-15-00428-CV, 2016 (Tex. App. Austin, May 6, 2016).