Making the Case for Arbitration of Commercial & Construction Disputes

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.

In the wake of recent hurricanes, Louisiana courts were flooded with cases property owners filed against their insurers alleging improper denial or underpayment of hurricane claims. Many of those cases were stayed and the parties were compelled to arbitration, despite Louisiana law prohibiting arbitration provisions in insurance contracts, La. R.S. 22:868(A)(2).

In a typical case involving commercial property, a property owner filed suit against its insurers, often including both domestic and foreign companies. One or more insurance policies contained an arbitration agreement requiring all disputes to be resolved by arbitration in a specified U.S. city. Undeterred, the insured filed suit in Louisiana state court. The insurers removed the case to federal court and filed a motion to compel arbitration.

The foreign insurers sought to enforce the arbitration agreement under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (aka the New York Convention). The New York Convention is an international treaty that requires signatory countries to enforce an arbitration agreement where four requirements are met: (1) a written arbitration agreement exists, (2) that provides for arbitration in a signatory country, (3) which arises from a commercial legal relationship, and (4) at least one party is not a U.S. citizen. These conditions are met where a foreign insurer issues a commercial policy that contains an arbitration provision to a U.S. property owner. Under such circumstances, the courts were bound to compel the parties to arbitration.

The cases presented some interesting questions. For example, could domestic insurers also compel arbitration? Yes. Under the doctrine of equitable estoppel, where the claims against the insurers are interdependent, the domestic insurers, even if they were not signatories to the arbitration agreement, could compel arbitration.

Does the McCarran-Ferguson Act, a federal law that maintains the states’ power to regulate the insurance industry, cause Louisiana’s law prohibiting arbitration in insurance contracts to reverse-preempt the Convention? No, the Act does not apply to treaties.

What about the arguments that the contract was not freely negotiated, or that under conflict of laws principles Louisiana law should apply, or that the federal courts should abstain because the state has a vital interest in regulating insurance? The courts rejected these arguments as well.^

Recently, the U.S. Fifth Circuit Court of Appeals, in Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., affirmed that equitable estoppel applied to allow domestic insurers to compel arbitration under the New York Convention even where the insured dismissed the foreign insurers with prejudice.* However, the U.S. Second Circuit has held the opposite in two recent cases involving insurance contracts between foreign insurers and Louisiana property owners – that Louisiana law applied to prohibit the enforcement of the arbitration provision in the insurance policy.^^

With the exception of the Second Circuit split, the numerous cases arising from recent hurricanes confirm a strong policy favoring arbitration under the New York Convention, which overrides potential state law obstacles to enforcing arbitration provisions in insurance policies.

Mary Anne Wolf is an arbitrator on the commercial, construction and large, complex cases panels of the American Arbitration Association and is a neutral at Perry Dampf Dispute Solutions.

References:

^ See for example, General Mill Supplies, Inc. v. Underwriters at Lloyd’s, London, et al, 23-6464, 2024 WL 216924 (E.D. La. 1/19/2024), - F.Supp.3d – (2024); Dryades YMCA v. Certain Underwriters at Lloyds, London, et al, 23-3411, 2024 WL 398429 (E.D. La. Jan. 31, 2024); Parish of Lafourche v. Indian Harbor Ins. Co., et al, 23-3472, 2024 WL 397785 (E.D. La. Feb. 2, 2024).

* Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., et al, 96 F.4th 726 (5th Cir. Mar. 26, 2024).

^^ See Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd. LLC, 22-9849, 2023 WL 5237514 (S.D.N.Y. Aug. 15, 2023); and Certain Underwriters at Lloyd’s, London v. Mpire Properties, LLC, 22-9607, 2023 WL 6318034 (S.D.N.Y. Sept. 28, 2023) (appeal filed).

Louisiana law protects building contractors from liability for past projects that otherwise could extend for an indefinite period of time. La. R.S. 9:2772 prohibits any lawsuit against a contractor for damages arising from a construction project five years after: (1) the date project acceptance was filed into the public records; or, if no acceptance was filed, (2) the date of occupancy. This five-year period is referred to as the "peremptive" period.

This law is broad enough to bar untimely claims of breach of contract and negligence, as well as failure to warn of dangerous conditions. It also covers all conceivable building activities: design, construction, consultation, planning, evaluation, construction administration, and land surveying. It applies both to residential and commercial construction. It also covers claims of property damage, personal injury, and wrongful death brought by any person. The only noted exception is where a contractor’s fraud caused the damages.

The law is meant to establish a specific date to cut off the contractor’s liability. Under the law, nothing can interfere with the running of a peremptive period. After it expires, the claim no longer exists.

Construction litigation in this area often focuses on commencement of the peremptive period. For instance, in Celebration Church, Inc. v. Church Mutual Insurance Company, 16-245 (La.App. 5 Cir. 12/14/16), the owner of a shopping center sued its property insurer for roof damage related to Hurricane Isaac. The insurer prevailed in defending the claim based on defective roof repairs made following Hurricane Katrina. The owner then filed suit against the roofer who made the repairs after Hurricane Katrina. To avoid the peremptive defense, the owner argued that peremption did not begin to run until substantial completion of the entire shopping center. The court rejected this argument and held that the law is specific in defining the date of commencement of the peremptive period. It began to run when the tenants first occupied the space. By the time suit was filed, the owner’s claim no longer existed.

Because construction defects may not surface for years, a claim may be barred before the owner even discovers the problem.