Business Formation and Member Liability: 16 Jade Street v. R. Design Construction

April 12, 2012

When establishing a business, it is important to do a liability cost benefit analysis. There are different ways to structure your business, and a business law attorney can help you identify the right corporate or partnership structure for you.

A contingency business litigation attorney may also assist with litigation on a contingency-fee basis, a cost-effective way to protect your business interests in many situations.
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16 Jade Street v. R. Design Construction is a recent case decision regarding personal liability for company members.

Carl Aten (Aten) and his wife are the only members of a limited liability company called R. Design Construction Co., LLC. (R. Design). R. Design was a building company that was planning the development of a four-unit condominium project. The company was unable to obtain the financing for this project so a colleague (Green) created a new company (16 Jade Street) in order to enter a contract with R. Design to construct this project. Aten acted as the general contractor for this project and he was responsible for choosing subcontractors for this project and the supervision of all workers. Aten chose Catterson & Sons Construction (Construction Company) as the specialty subcontractor. Construction Company was run by Michael Catterson (Catterson) who acted as a liaison between the foreman and the workers and directed all questions to Aten.

When the structural engineer performed the property inspection, he found that there were several problems surrounding the area the Construction Company had worked on. These problems were not fixed and because of payroll disputes, Construction Company ceased working on the job site. Soon after this, conflicts arose between Aten and his colleague, and Aten left the project.

Green and 16 Jade Street sued R. Design, Aten, Construction Company, and Catterson for negligence and breach of implied warranties. The question for the court was whether a member acting within his capacity as a member of an LLC can be held personally liable for his actions associated with the business.

A limited liability company (LLC) is a hybrid company structure, combining elements of partnerships and corporations. This protection of company owners from personal liability is based on the primary characteristics of corporations. A company member cannot be held liable for actions taken in furtherance of the business unless the member breaches his or her fiduciary duties, such as by commingling personal funds with company funds.

The court in this case looked to the relevant statute to analyze the questions of liability in an LLC. The South Carolina Statute says that LLC members or managers are shielded from personal liability for any civil wrong committed while fulfilling obligations associated with their job position. Additionally, the court looked to the statute that says that the only way vicarious liability can be imposed on the company is if the negligent actions of a member were authorized or accepted by the other members.

However, the court felt that the legislative intent of the statutes was not to protect company members from liability for their negligent actions, as this would be an inequitable result. Thus they looked to the obligations placed on those who have a home builder's license.

The court held that liability would attach to Aten because of the civil liability imposed on license holders. Basically, Aten is held personally liable for his negligence not through the company but through the violation of his obligations in holding a home builders license.

As to Catterson, the court held that the law does not allow personal liability to attach to him. This holding was because the law states that a corporate shareholder is not personally liable for debts or acts of the corporation but is personally liable for his negligent actions. Because the negligence action involved the actions of the corporation as a whole, Catterson was not held personally liable.

How you organize and register your business is very important. You must understand the differences within corporate and partnership structures in order to make an informed decision about your business.

The Ferraro Law Firm provides comprehensive legal services, including business litigation on a contingency-fee basis. Call 1-800-275-3332 for a free and confidential consultation. Offices in Miami, Washington, D.C., and New York City.

Additional Resources:

16 Jade Street v. R. Design Construction Co., LLC., No. 27107 (S. Car S.Ct. Apr. 4, 2012).