Obligation Assumed by LLC’s Member is Enforced Against the Member

Obligation Assumed by LLC’s Member is Enforced Against the Member
(no big surprise here)

      A decision handed down last Thursday by the Sixth Circuit Court of Appeals affirmed the decision that an LLC’s member who “jointly and severally” agreed to indemnify the issuer of a surety bond would be required to do exactly that.  Lexon Insurance Co. v. Aziz Naser, No. 14-1844 (6^th Cir. March 19, 2015).

      Naser was a member in Michigan Orthopedic Services, LLC (“Orthopedic Services”); the opinion is unclear as to whether he held a 15% or a 20% interest therein.  Regardless, it is clear that the balance of the company was held by MOS Holdings, LLC.  Changes in Medicare regulations required that Orthopedic Services have in place a surety bond for each location.  Naser and MOS Holdings filed with Lexon Insurance an application for the required bonds, and they were issued pursuant to an agreement providing in part “I agree to indemnify Lexon Insurance Company… in connection with any bond executed on behalf of the person or entity named as ‘applicant’ below.”

      Naser completed one of the three signature blocks, it identifying Michigan Orthopedic Services, LLC as the “applicant.”  He likewise signed another block, it for Aziz Naser.  A representation of MOS Holdings signed the third signature block.

      Orthopedic Services entered bankruptcy in August, 2011.  Apparently thereafter Medicare began challenging claims it had previously paid.  Lexon advised Naser of the claims, asking if he would pay them or for a basis for assisting the claims to be invalid.  He responding by simply saying the claims were false and should not be paid; he proffered no evidence in support thereof.

      Lexon paid (it would seem) $256,913.64 to Medicare, then sued Naser under the agreement to provide indemnification.  A verdict was rendered in Lexon’s favor, and this appeal followed.

      On appeal, Naser asserted that he never in his individual capacity signed the agreement with Lexon.  The Court cited the rule that while typically a “corporate officer or shareholder” is not liable for the “corporation’s engagements” unless they personally undertake liability, where that is intended “the nearly universal practice is that the officer signs twice – once as an officer and again as an individual.  Slip op. at 7, citing Livonia Bldg. Materials Co. v. Harrison Coauster Co., 742 N.W.2d 140, 146 (Mich. Ct. App. 2007).  Noting that this “nearly universal practice” had been followed, the 6^th Circuit noted as well the absence of a reasonable explanation as to why Naser signed the agreement twice.

      Turning to a substantive objection to liability, Naser asserted that Lexon acted in bad faith by paying on the bond in the absence of proof of the validity of the claims.  Initially, this defense was rejected as it had not been raised in the trial court below.  Further, “when Lexon asked Naser for evidence that the claims were invalid, Naser declined to provide it.”