LLC’s Members
Waived Limited Liability,
Held Liable on LLC’s Debts and Obligations
Held Liable on LLC’s Debts and Obligations
In a decision rendered last Friday,
the Kentucky Court of Appeals affirmed a determination that, consequent to the
wording of a particular operating agreement, the members in the LLC assumed and
are liable to satisfy the LLC’s debts and obligations. VanWinkle v. Walker, No. 2016-CA-000097-MR, 2018 WL 404-3388 (Ky. App.
August 24, 2018).
VanWinkle, Walker and Crawford
formed TLC Developers, LLC in 2004, executing an operating agreement in
connection therewith. That operating agreement provided, in part:
The profits
and liabilities of the Company shall be divided as follows: Carl David Crawford
= thirty-three and one third (33 1/3%),
Lyle A. Walker = thirty-three and one third (33 1/3%) percent and Troy Van Winkle
[sic] thirty-three and one third (33 1/3%).
When the company fell upon hard
times, Walker and Crawford contributed additional amounts in order that the
company could meet its business expenses. As recited by the court, “in their
view, in the event TLC did not have the cash on hand to pay the liabilities
itself, the operating agreement mandated that the three members would pay the
liabilities of TLC equally.” VanWinkle did not make those contributions,
apparently of the belief that the operating agreement did not require him to do
so. He did, however, on two occasions contribute one-third of the amount
necessary to satisfy TLC’s property taxes.
Ultimately, Walker and Crawford
filed a complaint seeking a declaration of rights with respect to the
obligation to satisfy TLC’s liabilities and the interpretation of the operating
agreement. After a bench trial, the circuit court held that “the operating
agreement unambiguously stated that the three members agreed to split the
liabilities of the company in thirds,” and ultimately ordered VanWinkle to pay
$87,300 has his share of the company’s liabilities. This appeal followed.
VanWinkle had essentially two
arguments. First, the operating agreement, and the LLC Act, protected him from
liability for the LLC’s debts and obligations. Second, he would argue that
personal liability for the LLC’s debts and obligations is antithetical to the
very notion of an LLC and for that reason could not be enforced. Both arguments
would fail.
While the operating agreement
recited that the members enjoyed limited liability from the debts and
obligations of the LLC, essentially repeating the language of KRS § 275.150(1),
the court went on to note, however, that while not recited in the operating
agreement, the LLC Act continues with KRS § 275.150(2), which provides:
Notwithstanding
the provisions of subsection (1) of this section, under a written operating
agreement or under another written agreement, a member or manager may agree to
be obligated personally for any of the debts, obligations, and liabilities of
the limited liability company.
Applying
this language, the court found that “that is exactly what TLC’s members did
when they agreed to split the liabilities of the company in the ‘Division of
Profits and Liabilities' provision.” of the operating agreement.
As for the argument that
imposition of liability for company obligations is antithetical to the very notion of an LLC,
the court noted as well KRS § 275.003(1), it providing that it is the public
policy to give maximum effective principle of freedom of contract and the
enforcement of operating agreements. As to this point, the court wrote:
While
holding the members personally liable for the TLC’s liabilities may seem
contrary to the very point of establishing an LLC, it adheres to the intent of
the General Assembly: namely, to allow business partners the freedom to
contract and establish an LLC that fits the needs of the respective members.
Here, following a meeting of the minds, TLC’s three members each decided to
split the liabilities of the company in equal shares.
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