Tuesday, July 30, 2013
An LLC is Separate From its Members, and Vice-Versa
Georgia Court Again Confirms that an LLC is Separate From its Members,
A recent decision by the Georgia Court of Appeals highlights the fact that the LLC and its members are legally distinct from one another; the obligations of one are not the obligations of the other. Primary Investments, LLC v. Wee Tender Care III, Inc., ___ S.E.2d ___ , 2013 WL 3665318 (Ga. App. July 16, 2013).
Primary Investments, LLC, formerly known as Primary Prep Academy, LLC (“Primary LLC”), sold its assets to N & N Holdings, LLC, which assets were then operated by Wee Tender Care III, Inc. The Asset Purchase Agreement included a non-competition clause providing that “neither Seller nor its agents” will operate a competing facility nor solicit from the parents of the children enrolled for the purpose of enrolling in a competing facility. After the sale was completed in March of 2008, the members of Seller opened a new daycare facility within the prescribed radius of that which had been sold. It was that new venture that precipitated this suit.
Initially, it was not contested that Primary LLC, the “Seller” under the Asset Purchase Agreement, was in any manner involved in the operation of the new daycare facility. Further, there was no evidence that the members of Primary LLC were acting on its behalf in opening the new facility. On that basis, it could not be found that Primary LLC had violated the non-competition provision of the Asset Purchase Agreement. The Court then turned to the language relating to the “agents” of Primary LLC. Initially, certain of its members, who were likewise involved in the new challenge venture, never signed the Asset Purchase Agreement. The member who did sign the Asset Purchase Agreement on behalf of Primary LLC did so in a representative capacity. On the basis of black letter agency law that when an agent acts on behalf of a disclosed principal, the principal is bound and the agent is not, the Court found that this member was likewise not bound to the non-competition agreement. In that they were not parties to the APA, the Court found that its non-competition agreement could not be enforced against the members of Primary LLC.
Seeking to salvage their case, the Plaintiffs alleged that the term “agents” should be read within the context of the Georgia LLC Act, it providing that managers are agents of the LLC, and from there those who were managers of Primary LLC should be bound by the non-competition agreement. While the managers may themselves have an agency authority of the LLC, the Court went on to note that the Georgia LLC Act provides that the members and managers of the LLC are not liable on its debts and obligations, the Court observing:
Accordingly, Primary LLC had no authority to bind [Primary’s managers] individually to the terms of the noncompetition agreement, and we find that under the Act, merely including the term “its agents” in a contract signed by a [LLC] does not bind its members or managers individually. Rather, if [the Purchasers under the APA] wished to bind the [managers of Primary LLC] to the terms of the noncompetition clause, they were required to make them parties to the APA and to obtain their signature in their individual capacities.
The Court of Appeals rejected a determination by the trial court that a pair of letters submitted to state regulatory authorities requesting transfer of the license had the effect of individually binding the members/managers of Primary LLC. At the same time, the Court rejected a request for rescission of the contract on the basis that the 10-mile radius of the non-competition limitation (it already interpreted to apply only to the Primary LLC and those acting on its behalf) but was improperly listed at 10 rather than 5.
The moral of the story is clear; if you intend the bind the members or managers of an LLC to a noncompetition or other agreement, it is necessary that they be named as parties to the agreement and sign it in their individual capacities. Absent doing so, the protections that may be sought are likely to be illusory.