Wednesday, November 16, 2011

Waiving Limited Liability

Waiving Limited Liability
       A recent case from a North Carolina Court of Appeals highlights how easy it may be to waive limited liability.  Consolidated Electrical Distributors, Inc. v. Wieltech Electric Co., LLC, No. COA 11-96 (N.C.) (Ct. App. Oct. 18, 2011).
      In September, 2006, Wieltech Electric Company was reorganized into an LLC; the opinion is silent as to its earlier form of organization.  In connection therewith, a letter was sent to Wieltech’s vendors and customers advising them as to the change and stating in part that the debts and obligations of the predecessor organization “shall be transferred wholly into the newly formed LLC and the two individual organizers.”  Slip op. at 2, emphasis added.  Jennifer Fortenberry and Benjamin Wieland had been identified as the organizers of the LLC.  When the claim of Consolidated Electrical Distributors, Inc. against the LLC was not satisfied, it initiated suit, including against Fortenberry and Wieland, the suit against the individuals being based upon the letter stating that the obligations were “transferred” to them.
      Fortenberry’s defense focused on the Statute of Frauds, asserting that the letter was insufficient to constitute an agreement to be responsible for the LLC’s debt.  Distinguishing the writing from that in a prior dispute to the effect that the individual would “try” to pay off an obligation, which was found to be insufficient under the Statute of Frauds to create a binding obligation, in this instance the letter stated that the accounts would be transferred to the LLC’s organizers including Fortenberry.  On that basis, the court found that the letter was sufficiently detailed to satisfy the Statute of Frauds and on that basis the trial court’s grant of summary judgment to the plaintiff was affirmed.
      Under the reasoning of this decision, it is obviously not going to require much in the way of formality for an individual to waive the limited liability they otherwise enjoy from the debts and obligations of an LLC.  Whether it reflects, however, the law that would be applied in Kentucky is open to question.  See Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 659 (Ky. 2010) (“To reiterate, assumption of personal liability by a member of an LLC is so antithetical to the purpose of a [LLC] that any such assumption must be stated in unequivocal terms leaving no doubt  that the member or members intended to forego a principal advantage of this form of business entity.”)

No comments:

Post a Comment