Limited Liability Companies -- Put to the Test

I've written previously about North Carolina Limited Liability Companies, a form of entity which, I believe, offer greater ease of use than corporations and which appear, according to case law, to offer better liability protection than corporations. My theory is getting ready to be put to the test!

I've been hired to represent a member/manager of a three-man LLC. Mr. X had been the silent partner in a Limited Liability Company set up to build spec houses in a subdivision Mr. X owned. He put up some land and some money, but otherwise stayed out of the day to day operations of the business.

The LLC, due to apparent mismanagement by other managers and their employees, collapsed, and in the process, left owing numerous bills and unhappy customers, who had already paid the company down payments to purchase spec houses. One unhappy customer, who has allegedly lost a sizeable down payment, has now sued not only the company, but the company's three owners, alleging breach of contract, breach of fiduciary duty, and fraud--among other things. During the discovery process that we're now in, what has quickly come to light is that Ms. Plaintiff has had no dealings whatsoever with Mr. X, and admittedly only dealt with one member of the company, and some of the company's employees.

Ms. Plaintiff's lawyer is proceeding under the theory that if one member of the company has defrauded Ms. Plaintiff, then he is entitled to pierce the corporate veil to reach out and get all owners/members of the company.

If this were a corporation, I'd likely agree. If it were found that the corporation's owners had not followed formalities (see the previous blog entry), and that fraud had been committed, I think a judge would not dismiss the action against the corporation's owners.

Under North Carolina's limited liability company law, however, I tend to disagree. North Carolina's law has held that members are not liable for the acts of the company--regardless of any corporate formalities--unless the specific member actually committed the act. In other words, a member who stole $10,000 from a customer cannot hide behind the LLC's shield; however, a member of an LLC whose employee stole $10,000 could hide behind the LLC's shield.

Many cases, thankfully, resolve themselves or settle before a trial. However, if this one does not, it will be an interesting case for a motion to dismiss and, failing that, an appeal to the Court of Appeal to help set precedent.