Back to the Beginning – Veil Piercing

The longstanding rule that the analysis for “piercing the corporate veil” of an LLC is substantially the same as the analysis for piercing the veil of corporations has been called into question by the recent Louisiana Supreme Court decision in Ogea v. Travis Merritt and Merrit Construction, LLC, 2013-1085, — So.3d —. In Ogea, the Court addressed “the extent of the limitation of liability afforded to a member of an LLC” and the statutory basis for exceptions to this limited liability.

Typical of a veil piercing case, the Ogea Court began its discussion by citing familiar Louisiana cases on the topic: Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164 (La. 1991) and the more recent Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 11-2254 (La. App. 1 Cir. 7/10/12), 97 So.3d 595. However, the similarities stopped there.

The Court noted that traditional veil piercing doctrine was not invoked by the lower courts or the plaintiff. Instead, the Court’s analysis turned on the interpretation of an infrequently cited statute within Title 12 that addresses the limitation of liability for LLC members. La. R.S. 12:1320(A) states that the liability of members and managers of an LLC “shall at all times be determined solely and exclusively by the provisions of this Chapter.” Subsection (B) provides that members and managers are generally not liable for the debts, obligations, or liabilities of the LLC. Subsection (D) prescribes the exceptions to this limitation of liability, to include fraud, breach of professional duty, and any other negligent or wrongful act by the member or manager.

Addressing this statute as a matter of first impression, the Ogea Court applied the statute to the facts of the case. Merritt Construction, LLC was hired to build a home for plaintiff, Mary Ogea. As part of the process, Ms. Ogea requested that she have a friend prepare the site for the foundation. Travis Merritt, the sole member of Merritt Construction, LLC, informed Ms. Ogea that having someone else prepare the site would waive the warranty. Mr. Merritt subsequently operated the bulldozer to prepare the site for a subcontractor to pour the concrete slab. A dispute arose when a concrete contractor informed Ms. Ogea of problems with the home’s foundation. Under these facts, the Court concluded Mr. Merritt was not personally liable under the exclusive exceptions to limited liability found in La. R.S. 12:1320(D).

The first exception, fraud, was rejected because no evidence in the record supported a finding that Mr. Merritt committed fraud.

Turning to the next exception, the Court also rejected the argument that plaintiff breached a professional duty as the sole member of the construction company. The professions recognized in Louisiana’s corporate laws do not include individuals who perform construction work. Thus, Mr. Merritt could not breach a “professional duty” as contemplated by the statute. The Court also noted that the contract at issue only recognized Merritt Construction, LLC as a licensed contractor and did not reference any contractor’s license held by Mr. Merritt personally.

Finally, the Court addressed the final exception to limited liability: “negligent or wrongful act.” Plaintiff asserted that the term “negligence” in the statute only required proof of a tort by the individual. The Court quickly rejected this argument, noting that such an interpretation would improperly expand the liability of LLC members.

Rather, the Court set forth four factors to assist in the analysis under the last “negligence” exception: 1) whether a member’s conduct could be fairly characterized as a traditionally recognized tort; 2) whether a member’s conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member’s capacity as a member.

It appears from the Ogea Court’s focus that the prior analysis for “piercing the veil” of an LLC has perhaps been set aside and replaced with a new analysis which considers the exceptions to limited liability listed in La. R.S. 12:1320. However, the Court failed to expressly state that the prior analysis is improper and therefore no longer applicable. For now, it appears that the rules for piercing the veil of an LLC have changed but the true impact of Ogea remains to be seen.

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