South Carolina Supreme Court Holds Member of LLC Personally Liable for Negligent Construction
By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.
It’s Monday. Time for another pop quiz.
A developer hires a home builder to construct a four-unit condominium project in South Carolina. The home builder is a limited liability company (“LLC”), with one of its two members holding a residential home builder’s license. As the project progresses, the relationship between the developer and the LLC deteriorates and the LLC ultimately leaves the project. The developer uncovers a number of construction defects and sues the LLC and the license-holding member for nearly $1 million for negligence and breach of warranties.
May the individual member of the LLC be liable for negligent construction of the condominium?
Yes, because the protection provided by the LLC will not shield a member from his own negligent acts, even if those acts are committed in furtherance of the LLC’s business.
In 16 Jade Street, LLC v. R. Design Constr. Co., LLC, Opinion No. 27107, the Supreme Court of South Carolina held that a member of a limited liability company (“LLC”) may be liable for torts committed in furtherance of the LLC’s business. In a 3-2 decision, the court split over the meaning of section 33-44-303(a) of South Carolina’s LLC statute, which provides:
“[T]he debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.”
Conceding that the statute is open to differing interpretations, the three-justice majority concluded that the LLC statute does not expressly shield a member from his own torts. (The term “tort” includes claims like negligence, fraud, battery, and other societal wrongs.) Finding no clear legislative intent to the contrary, the majority applied the traditional “common law” rule that a person will be liable for his own torts. To make the point, the majority quoted a federal judge’s observation that “[y]ou don’t buy immunity from suits for your own torts by being a member of a business corporation.”
Before I cause a panic, note that an LLC member will not be liable simply because another LLC member committed a tort in furtherance of the LLC’s business. In this way, the LLC offers greater protection than, say, a good old fashioned business partnership because you actually have to do something wrong before you can be liable.
We’ve covered the legal part–fine and dandy–but what did the individual member, Mr. Aten, actually do wrong? Its not very clear from the court’s written opinion. In the summary of facts, the court writes: “As the general contractor, it was Aten’s job to supervise the project.” Is simply holding a contractor’s license while acting as general contractor enough to create an automatic statutory liability? Based on the opinion, the answer is “No” because the supreme court expressly disagreed with the trial court on that very point. After going through the opinion and corralling all of Mr. Aten’s activities, we learn that Mr. Aten selected the subcontractors, set design standards, and answered subcontractors’ questions about their work. Pretty vague.
With its decision in 16 Jade Street, South Carolina joins other states holding that a business organization structure such as a corporation or LLC will not protect an active tortfeasor from personal liability for his own torts. In last May’s post, Builder Beware! NC Court Holds Corporate Officer Personally Liable for Defects, I told you about North Carolina’s holding in White v. Collins Building, Inc., 704 S.E.2d 307 (N.C. App. 2011), where the North Carolina Court of Appeals held that an officer of a closely held general contracting company could be individually liable for the company’s defective work. The plaintiff in that case successfully argued that the president of the home builder corporation negligently supervised the construction of the home.
My takeaways on the 16 Jade Street case: First, we probably haven’t heard the last of this issue, as is evidenced by the 3-2 split of the supreme court. Second, officers, employees, and members of business organizations should expect to be sued personally for the negligent acts they commit while at work. And third, as one’s involvement in a project or task increases, so increases their exposure to liability. Good documentation practices and procedures have never been more important.
For those of you seeking more information about the White decision, and for those of you seeking a better understanding of the legal concepts involved in South Carolina’s 16 Jade Street decision, please refer to my article in the May 2011 edition of Change Order entitled Water Water Everywhere.
(Procedural Note: Defendant has formally requested that the supreme court reconsider its holding.)