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Individual Member of LLC Subject to Personal Liability

Author: Ronald E. Lyons Date: 04/27/2010

Categories: Corporate and Business Law, Employment Law & Litigation

Section 4A-301 of the Corporations and Associations Article provides that a member of a Limited Liability Company (LLC) is not “personally liable for the obligations of the LLC, whether arising in contract, tort or otherwise, solely by reason of being a member of the LLC.” In what may prove to be a landmark decision, the Maryland Court of Appeals has held that an individual member of an LLC that owns a residential property may be subject to personal liability as an owner if he exercises control over the property, notwithstanding the well established liability shield of the LLC.

In the case of Allen v. Dackman, an LLC purchased a Baltimore City property with the intent to promptly flip it in hope of realizing a quick profit. At the time of the purchase, the LLC believed that the property was vacant and, when it was discovered that prior renters were occupying the property, the LLC took timely action to have the renters evicted. The prior renters had two young children who sustained elevated lead levels. It was alleged that this occurred from ingesting lead paint found upon the premises during a time that included when the premises was owned by the LLC.

The Court was called upon to assess whether personal liability could attach to the individual manager of the LLC for injuries sustained by the children after allegedly ingesting lead paint while living in the dwelling. The case interpreted the Baltimore City Housing Code which imposed a duty on those who “own, hold or control” the title to a dwelling. The Court determined that an individual member could be deemed to control the title to the dwelling where that individual made decisions regarding its purchase and sale. The Court effectively equated such control by the manager to ownership. The Court went on to find that if the manager’s control was, in fact, tantamount to ownership, then he owed a duty to the people in the dwelling.

In addition, the Court ruled that an individual member of an LLC may be held liable for the torts he personally commits or which he “commits, inspires or participates” in even where it is done in the name of the LLC. In this case, because the individual managed the LLC, the Court concluded that a jury or other trier of fact could find that the manager personally participated in the LLC’s decisions regarding the negligent maintenance of the property and that such participation would allow personal liability to attach. Determining whether there is liability in the first place would depend upon whether the manager acted reasonably under the circumstances.

Limited liability companies have long been effectively used for acquisition of investment property in part due to the perceived limitation of liability for its members including its manager. While this is a common law decision limited to the facts of this specific case, the holding is nevertheless troubling. In light of the Dackman case, individuals acquiring investment real estate through an LLC must now consider the extent to which they are assuming personal liability associated with the property as well as the nature of any due diligence they may need to now undertake for their own protection. Beyond that, consideration should be given to naming all LLC members involved in the management of the property as additional insured’s to the comprehensive liability policy.