In evaluating the potential for personal liability of members or managers of limited liability companies under Tennessee law, it is first helpful to determine into which of two broad categories the conduct at issue falls. The first category is conduct of a member or manager that has harmed members of the LLC or the LLC, but not third parties. The second category is conduct of a member or manager that has harmed a third party who is not a member of the LLC.
- Conduct Affecting the LLC or LLC Members
If the manager’s or member’s conduct affected members of the LLC or the LLC, the liability of that manager or member will be determined by §48-249-403 of the Tennessee Revised Limited Liability Company Act (the “Act”) (this assumes the LLC in question was formed after January 1, 2006 and is, thus, governed by that Act). §48-249-403 limits the liability of managers and members by expressly limiting their duties to the LLC and to other members to the duties of care and loyalty.
- Duty of Care
The duty of care set forth in §48-249-403 incorporates the “Business Judgment Rule.” The Business Judgment Rule allows managers and members of LLCs to make decisions about the operation of the business without having to face liability if the decisions turn out to be bad. That Rule, as reflected in §48-249-403, provides that managers and members are not liable for their conduct in operating the business except where it amounts to “grossly negligent or reckless conduct, intentional misconduct or knowing violation of law.” If a manager or member makes a risky investment that turns out poorly, but had some possibility of an upside, he or she will probably not be liable. On the other hand, if he or she wired all of the LLCs’ funds to an alleged Nigerian prince or paid a bribe to a government official, he or she will probably face liability.
- Duty of Loyalty
Broadly speaking, the duty of loyalty prohibits a member or manager from competing with the LLC or usurping an opportunity of the LLC. It also prohibits a manager or member from using LLC assets for his or her own benefit and from otherwise misappropriating LLC funds or assets.
- Conduct Affecting Third Parties
The Act contains a “limited liability rule” (T.C.A. §48-249-114) which provides that a member or manager of an LLC, just because he or she is a member or manager, is not personally liable for the acts or omissions of any other member and is not personally liable for the debts or liabilities of the LLC. So, for example, if the LLC is liable for a loan or judgment, no members or managers are also personally liable just because they are members or managers.
There are, however, circumstances in which a member or manager may be held personally liable to third parties. The Act provides that, notwithstanding the above provision limiting the liability of LLC members and managers, a member or manager may become personally liable “by reason of such person’s own acts or omissions.”
Two Tennessee cases which provide good examples of situations in which an LLC member or manager might be held personally liable are Hatfield v. Allenbrooke Nursing and Rehabilitation Center, LLC (Tenn. Ct. App. 2018) and Dolan v. Poston (Tenn. Ct. App. 2005). In the Allenbrooke case, members of an LLC were held personally liable for conduct involving understaffing and negligence at a nursing home that resulted in injuries to a resident.
In the Dolan case, a corporate officer wrote a letter that the plaintiff alleged defamed him. Although the officer wrote the letter on corporate letterhead and signed it in his corporate capacity, the Court of Appeals held that he could be personally liable for his tortious conduct.
For Tennessee lawyers who handle LLC cases, understanding the parameters of personal liability of LLC managers and members is critical. This blog is a good starting point to understand those parameters broadly and generally, but it is not a substitute for a careful review of the Act and case law interpreting it.