Nunez V. Pinnacle Homes, LLC: Louisiana Supreme Court Narrows Professional Duty Exception To Personal Liability of LLC Members
January 31, 2016
The members of a Louisiana limited liability company (“LLC”) typically enjoy limited liability for work performed in the course of LLC business. However, in 2013 the Louisiana Supreme Court shockingly found that a licensed contractor may be held individually liable as a member of an LLC under the “breach of professional duty” exception – an exception which was thought to apply only to doctors, lawyers, engineers, and the like. The ramifications of this holding were immense – thousands of Louisiana contractors were suddenly exposed to personal liability for work performed on behalf of an LLC. Recently, however, the Louisiana Supreme Court addressed this very issue, concluding that a licensed contractor is not a “professional” and is accordingly not subject to the “breach of professional duty” exception.
The Louisiana legislature intended for the LLC to offer the best attributes of the partnership and the corporation. That is, a business entity that could be taxed as a partnership – with flow-through taxation – while also providing members with limited liability for debts of the business similar to that of a corporation. Conforming to this purpose, Louisiana law provides that a member of an LLC cannot be liable in that capacity for a debt, obligation, or liability of the LLC. La. R.S. 12:1320(B). Nonetheless, certain narrow carve-outs for personal liability are outlined in La. R.S. 12:1320(D):
Nothing in this Chapter shall be construed as being in derogation of any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person, or in derogation of any right which the limited liability company may have against any such person because of any fraud practiced upon it by him.
Unfortunately, Louisiana courts have interpreted this language to create causes of action against LLC members for personal liability on debts of the LLC.
In the oft-criticized Ogea v. Merritt, the Louisiana Supreme Court read the language of 12:1320(D) to create liability for LLC members that would not be available against shareholders of a corporation. 2013-1085 (La. 12/10/13), 130 So.3d 888. In Ogea, an LLC, solely owned by the defendant, was hired to build a home on an undeveloped parcel of land. After the foundation and frame were completed, the defendant hired a concrete contractor to pour a driveway and patio. The concrete contractor noticed problems with the concrete foundation on the home. After a licensed engineer inspected the foundation, it was revealed that the foundation deviated from acceptable flatness standards, featured excessive and deep cracks, and was inadequately thick. The homeowner sued the LLC and the member in his individual capacity to recover the $94,000 she had already invested in the home.
The court in Ogea held that La. R.S. 12:1320(D) provides for three exceptions to the limited liability typically enjoyed by members of an LLC: (1) fraud; (2) breach of professional duty; and (3) a negligent or wrongful act. In analyzing the defendant’s conduct, the court created a four-factor framework for determining whether the member of an LLC has engaged in a “negligent or wrongful act”:
1) whether a member's conduct could be fairly characterized as a traditionally recognized tort; 2) whether a member's conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member's capacity as a member.
Id. at 900–01. Under this analysis, the court found the member personally liable for the defective foundation.
Notably, the issue was raised whether the defendant could be liable for “breach of professional duty,” as the member’s role as a contractor could be equated to a “professional role.” Id. at 899. Nevertheless, the court declined to address the issue because it was the LLC that held the contractor’s license, not the member himself. Thus, whether an individual holding a contractor’s license—as opposed to an LLC that holds a contractor’s license—could be deemed a “professional” under 12:1320(D), thereby exposing the individual to liability for “breach of professional duty,” remained an open issue.
The Louisiana Supreme Court finally resolved whether a contractor is a “professional” in Nunez v. Pinnacle Homes, L.L.C., 2015-0087 (La. 10/14/15), 2015 WL 5972529. In Nunez, the contractor, on behalf of his solely-owned LLC, entered into a cost-plus contract for the construction of a home. The contract provided, among other things, that the construction would comply with applicable building codes and laws. After the house was built, a survey discovered that the house did not meet the elevation requirements under certain permit and flood insurance rate maps. The estimated cost to elevate the home was $201,600. As a result, the homeowner sued the LLC and the contractor in his individual capacity. Unlike the defendant in Ogea, the contractor individually held the contractor’s license, and the trial and appellate courts found him personally liable on that basis.
The Louisiana Supreme Court correctly reversed, holding that an individually licensed contractor is not a “professional” within the meaning of La. R.S. 1320(D). Noting that contracting is not included among the list of professional corporations in Title 12 of the Revised Statutes, the court believed that expanding the definition of “professional” to any licensed occupation “would lead to absurd results, and extend the narrow professional duty exception to limited liability to situations the legislature never intended to be covered thereby.” Id. at *5. Also notable is that the court determined the contractor did not commit a negligent or wrongful act under any of the four factors listed in Ogea, stating that “[t]o hold poor workmanship alone suffice[s] to establish personal liability would allow the exception in La. Rev. Stat. 12:1320(D) to negate the general rule of limited liability La. Rev. Stat. 12:1320(B).” Id. at *9.
In sum, after Nunez, an individual holding a contractor’s license is not a “professional” and thus cannot be liable in that capacity under La. R.S. 12:1320(D) and Louisiana LLC law. The holding in Nunez likely extends to any individual holding a state-issued license to engage in a specified trade or occupation. Indeed, for the time being, the narrow “breach of professional duty” exception appears to be limited to persons who owe separate, non-contractual duties to clients under the professional corporations law in Title 12, namely, lawyers, doctors, dentists, accountants, chiropractors, nurses, architects, optometrists, psychologists, veterinarians, architectural-engineers, and occupational therapists.
If you have any questions regarding potential personal liability as member of an LLC, or corporate law in general, please do not hesitate to contact our firm.Author: George P. Holmes Practice Area: Corporate Law Date: January 31, 2016
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