New Jade Street Opinion

The case arose from a dispute over the construction of a four-unit condominium project in Beaufort, SC in which 16 Jade Street, LLC had retained R. Design Construction Company, LLC to construct the units.

At trial, Circuit Court found Mr. Aten, a Member of R. Design Construction Company, LLC, negligent for failing to supervise the subcontractors based on Section 40-59-400 of the South Carolina Residential Home Builders Act which requires every residential homebuilder to have a “Resident licensee” who “assumes professional responsibility for the building services”.

Mr. Aten appealed on the grounds that under the South Carolina Uniform Limited Liability Company Act he was not personally liable for the torts committed by R. Design Construction Company, LLC.

The Supreme Court, in considering Mr. Aten’s appeal, structured the issue before it as “whether the General Assembly intended the Uniform Limited Liability Company Act to generally shield Members from personal liability for acts they commit in furtherance of the Company’s business.” While the Court later concluded in its opinion that the South Carolina Uniform Limited Liability Company Act only insulates Members of a limited liability company from personal liability for a tort committed by the Company in which they were not also a tortfeasor, the opinion raised a firestorm of concern and misunderstanding about limited liability companies and their ability to provide liability protection to their Members. Additionally, concerns were raised about the efficacy of a single member LLC to provide liability protection to its Member.

Perhaps as a result of the concerns raised, the Supreme Court granted a petition for rehearing a May 4, 2012. As a result of that rehearing, the Court withdrew its original opinion and issued a new opinion on August 28, 2013 (“16 Jade II”). In its new opinion, the Court reversed the Circuit Court’s finding Aten personally liable under the South Carolina Residential Home Builders Act on the grounds that the Residential Home Builders Act only imposes a regulatory liability on the licensed practitioner, not civil liability. As to the protection provided Members of a limited liability company for the tortious actions of the limited liability company, the Court declined to address the issue.

So what is the law in South Carolina as it relates to the liability protection afforded Members of a limited liability company?

First, as the Supreme Court stated in 16 Jade I, a Member of a limited liability company who commits a tort while acting on behalf of a limited liability company will be liable for his own tort. Because the tort was committed by an agent of the limited liability company, the limited liability company will also be liable for the tort. Thus, if a Member of a limited liability company negligently injures a third party while driving a delivery truck for the LLC, both the Member and the LLC will be liable for the tort.

Second, without more, a Member of an LLC is not personally liable for the tort or contractual obligations of the LLC. The Act makes this clear:

The 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.

Thus, as in our prior example, if a Member of an LLC commits a tort while acting on behalf of the LLC, the LLC and that Member may have liability, but the remaining Members will have no liability.

Third, is the question of vicarious liability.* Is a Member or Manager liable for the acts of the limited liability company when, for example, the Member or Manager has not committed a tort?

The answer is and should be that a Member or Manager of an LLC is not vicariously liable for the acts of the LLC. The annotations to the Uniform Limited Liability Company Act make this clear:

A Member or Manager, as an agent of the Company, is not liable for the debts, obligations, and liabilities of the Company simply because of the agency. A Member or Manager is responsible for acts or admissions to the extent these acts or omissions would be actionable in contract or tort against the Member or Manager if that person were acting in an individual capacity.
Where a Member or Manager delegates or assigns the authority or duty to exercise appropriate Company functions, the Member or Manager is ordinarily not personally liable for the acts or omissions of the officer, employee, or agent if the Member or Manager has complied with his duty of care.

In the case of a single member LLC, the rule is and should be exactly the same. It is complicated somewhat by the fact that if the tort is committed by the individual Member of the LLC, both the individual and the LLC will be subject to liability, but if the tort is committed by an employee or agent of the LLC, the individual Member, as a general rule, should have no personal liability. Further, in the case of contracts, a single Member of a limited liability company should not be held personally liable on a contract entered into by a limited liability company. Our Supreme Court has recently held in Dutch Fork Development Group II, LLC v. SEL Properties, LLC No. 27139 (August 22, 2012) that the Manager of a limited liability company was not liable for tortious interference with contract. In reaching that conclusion, the Court looked to an established body of corporate law which holds that a corporate officer can be liable for tortious interference only if he was acting in a personal capacity or outside the scope of his authority.

*Vicarious liability has been defined as where one person is liable for the negligent actions of another person, even though the first person was not directly responsible for the injury.