It is helpful to think of the potential personal liability of members of Tennessee LLC’s falling into two categories. The first category is the personal liability of a member to the LLC itself for the member’s breach of the duty of care, breach of the duty of loyalty, or the breach of the duty of good faith and fair dealing. The personal liability of a member for breaches of those duties (which duties are set forth in T.C.A.§ 48-249-403) is typically addressed in a derivative proceeding brought by another member of the LLC on behalf of the LLC. The second category of personal liability of an LLC member involves claims by a non-member third party against a member, individually, for some action or omission related to the business of the LLC. That second category of potential personal liability is the subject of this blog.
The Tennessee Revised Limited Liability Company Act (the “Act”) expressly codifies a rule which limits the personal liability of LLC members related to LLC business (the “Limited Liability Rule”). (See T.C.A. §48-249-114) The Limited Liability Rule is set forth in three subparagraphs which provide, generally, that: (a) The obligations and debts of the LLC, regardless of whether they originate from a contract or from tortious activity, are “solely” the obligation of the LLC; (b) a member has no personal liability for debts of the LLC just because of his or her membership; and (c) a member is not liable for the acts or omissions of other members, or employees or agents of the LLC.
The limited liability rule for LLC members provides broad protection to members. If the LLC fails to pay a creditor, the LLC’s members are not personally responsible to that creditor. If an LLC employee causes a serious personal injury to a third party while doing his or her job for the LLC, the LLC’s members are not personally liable for it.
There are quite a few exceptions, however, to the rule of limited liability for LLC members. The exceptions fall into, at least, the following categories: (1) Where an LLC member commits an intentional tort, such as misrepresentation; (2) where the LLC’s veil is pierced; (3) where the LLC member has engaged in a fraudulent transfer of LLC assets to himself or herself; (4) where the member is held personally liable under the theory that he or she did not disclose that he or she was acting on behalf of the LLC; and (5) where the LLC member has personally guaranteed debts of the LLC.
It has long been the law in Tennessee that an LLC member is not insulated from personal liability, even when he or she is acting for the exclusive benefit of the LLC, if the LLC member engages in an intentional tort. Many years ago, we had a client who had purchased a substantial amount of lumber from an LLC based on the express representations of an officer/member of the LLC about the quality of the lumber. The representations were so blatantly false that they amounted, not only to breaches of the applicable Uniform Commercial Code warranties, but also, to intentional misrepresentations. We, properly and justifiably based on Tennessee law, brought suit against the LLC and, against the member, individually, who had made the misrepresentations. The most common intentional tort I have seen result in personal liability, or potential personal liability, to LLC members is the tort of intentional misrepresentation (formerly, and for centuries, called the tort of “fraud” in Tennessee).
LLC members may also lose the shield from personal liability where a court determines that the corporate veil should be pierced. Although it is still referred to as piercing the “corporate veil,” the very same theory can be applied to pierce the veil of an LLC. It is not easy to pierce the veil of an LLC under Tennessee law and the circumstances under which it can be done have been discussed in a previous blog.
The Act also contains a statute, T.C.A. §48-249-307, which makes it unlawful, under certain circumstances, for a member to consent to, or to receive, a distribution from the LLC. This statute, essentially, codifies the common law prohibition against fraudulent transfers. Generally speaking, this statute is designed to make members personally liable when they make distributions to themselves which leave the LLC unable to pay creditors.
In some instances, a third party may be able to hold an LLC member personally liable for a contractual obligation that was meant, at least by the LLC member, to be only a contractual obligation of the LLC. For an LLC member to avoid personal liability on a contract, he or she must prove that the other party was made aware that the member was acting on behalf of the LLC. In most cases, there can be no dispute that the member was acting on behalf of LLC because the member signed the contract in a way that indicated that he or she was signing for the LLC. That is not always the case, though. If the contract itself does not indicate that the LLC is a party and the member signs his or her name without any indication that the member is signing on behalf of the LLC, the member may face a credible contention that he or she is personally liable.
Lastly, and pretty obviously, an LLC member can be personally liable for a debt of the LLC which he or she has personally guaranteed.
Tennessee LLC lawyers should also be aware that, if the LLC is a Professional Limited Liability Company or “PLLC,” the rule of limited personal liability is not applicable with respect to liability resulting from a member’s rendering of “professional services.” For example, if a lawyer member of a PLLC commits even mere negligence in the rendering of professional services, not only can the PLLC be held liable, but also, the lawyer can be held personally liable.