Monday, August 20, 2012

Failure to Disclose LLC Precludes Claim for Limited Liability

Member Who Does Not Disclose That They Are Acting
on Behalf of an LLC Does Not Benefit From Limited Liability

      A recent decision of the North Dakota Supreme Court has again confirmed the rule that, inter alia, if you do not tell people you are acting on behalf of an LLC, you cannot subsequently claim the benefit of the LLC’s liability shield.  Bakke v. D&A Landscaping Company, LLC, __ N.W.2d __, 2012 WL 3516859 (N.D. Aug. 16, 2012).
      Randall and Shannon Bakke (“Bakke”) visited a landscape supply company, Rocks and Blocks, Inc., who in turn recommended Andrew Thomas of D&A Landscaping for certain work to be done at their home.  The Rocks and Blocks representative gave the Bakkes Andrew’s business card, it reciting “D&A Landscaping” and as well including e-mail and website addresses.  Ultimately, Andrew provided the Bakkes with an estimate and a drawing “[r]espectfully submitted D&A Landscaping, 426-4982 Per Andy Thomas.”  Several months later, a second proposal was submitted, this one by “D&A Landscaping Per Andy Thomas.”  The work was subsequently performed, but in a manner not satisfactory to the Bakkes.  Thereafter, they received an invoice from “D&A Landscaping, Inc.”; in fact, the proper legal name was “D&A Landscaping Company, LLC.”
      Not being satisfied with the work performed, the Bakkes filed suit against numerous business organizations including D&A Landscaping, LLC, and against Andrew Thomas individually.  Ultimately, a jury would hold Thomas, individually, liable on the claim to the Bakkes.  On appeal, he asserted that there were insufficient facts to justify piercing the veil of D&A Landscaping, LLC.  In response, the Bakkes noted that they were not attempting to pierce the LLC’s veil, but rather seeking to enforce the jury’s determination that Andrew Thomas “was personally liable for transacting business in his individual capacity.”   2012 WL 3516859, *2.
      In considering this position, the North Dakota Supreme Court recognized that while members of an LLC enjoy limited liability:
The Bakkes’ theory of Thomas’ liability was that he acted individually and that Thomas never disclosed he was acting as an agent for D&A Landscaping, LLC.
Upholding the jury’s determination, the Court noted that:
The evidence includes a business card, an estimate, a drawing and proposals, none of which indicated that D&A Landscaping Company, LLC was a limited liability company or that Thomas was acting as an agent for the company.
      Under the rules of agency, an agent acting on behalf of a disclosed principal is not a party to the agreement and is not liable for its performance.  Where, in contrast, the agent does not disclosure the existence of the principal, the agent is himself a party to the agreement, subject to liability for its breach.  See Restatement (Third) of Agency §§ 6.02, 6.03 (2006).  Having not made clear that he was acting on behalf of his LLC, Andrew Thomas, the individual, was properly held liable to the Bakkes.
      Cases of this nature are, somewhat curiously, not rare.  In the Colorado decision Water, Waste & Land, Inc. v. Lanham, 1998 WL 1112869 (Co. March 9, 1998), the Colorado Supreme Court held Lanham, a member and manager of the LLC, personally liable for work done on behalf of the undisclosed LLC.  In Perry v. Ernest R. Hamilton Associates, Inc., 485 S.W.2d 505 (Ky. 1972), an individual retained an engineering firm to lay out a proposed subdivision but without disclosing that the proposed subdivision was owned by a corporation.  Ultimately, fees due the engineering firm were not paid, and they brought suit to collect.  In response, the individual with whom they had dealt cited the existence of the corporation as a defense to his personal liability.  Rejecting that notion, the then Kentucky Court of Appeals held the individual personally liable for the fees as he had failed to disclose the existence of the corporation or otherwise put the engineering firm on notice that it was dealing with other than him.

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