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In a case of first impression, a First District Panel of the Appellate Court of Illinois issued an opinion confirming immunity from liability arising from fraud under the Illinois Limited Liability Company Act (“LLC Act”) (805 ILCS 180/10-10). Careful lawyers must consider the Illinois law before forming an LLC in another state.  In Dass v. Yale, 2013 IL App (1st) 122520 (Ill. App. Ct. 1st Dist. 2013), the Court firmly established that a member’s personal immunity for “debts, obligations, and liabilities…whether arising in contract, tort, or otherwise” includes immunity for acts of fraud committed while acting as a member of the LLC. (This article also appeared in Law360.)

In doing so, the Court rejected the exceptions to member manager immunity found in the model Uniform Limited Liability Company Act’s (1996) (“Uniform Act”) commentary, which excludes from the Uniform Act’s “safe harbor” liability “on account of the member’s or manager’s own conduct.”  It found that the Illinois LLC Act has no such exception, even in a case where the member manager commits fraud.  This is a material advantage to member managers who form their LLCs in Illinois—and raises the possibility that malpractice claims might arise when an LLC doing business in Illinois is formed in a state that instead follows the Uniform Act.[1]

In Dass, plaintiffs filed their fifth amended complaint before being dismissed on a 2-619(a)(5) and (a)(9) motion based, in part, on the immunity provisions of the LLC Act.[2]  There, plaintiffs were a married couple who purchased a rehabbed condominium from developer Wolcott, LLC (“Wolcott”), of which defendant Yale was the sole member and manager. After moving in, plaintiffs suffered flooding from the unit’s sewage system and later inspection showed that numerous representations by the seller were fraudulently false—both as to the existing condition of the sewage system and promises to reconfigure it. Specifically, Yale signed a fraudulent property report with full knowledge that the condition of the sewer system was not as represented and that Yale knowingly made false promises to have competent, licensed work done on it.[3] His signature was made “as manager” of Wolcott.

Importantly, plaintiffs did not plead that Yale’s fraud was committed outside of his role as member/manager of Wolcott; nor did they plead to pierce the corporate veil. Instead, plaintiffs held to the theory that Section 10-10 of the Act simply did not extend a limitation upon liability to acts of fraud committed by a manager in the course of doing company business.  They relied on a comparison with the Uniform Act which, unlike the LLC Act, contained a comment to the effect that personal liability could attach to a member manager if his alleged wrongful acts would have resulted in liability to him had he acted in an individual capacity. See, Uniform Act, Sect. 303 Comment.

Both the trial court and the appellate court soundly rejected that theory.  Both courts looked no further than the plain language of the immunity section, which reads: “the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.” [4]

The courts rejected application of the Uniform Act’s limiting commentary, noting that the Illinois legislature did not expressly adopt that language and that the “historical and statutory notes” are not part of the LLC Act but merely added by West, the publisher of the annotated statutes.  It further noted that a 1998 amendment to the LLC Act removed limiting language to the immunity, which had imposed liability on LLC managers “to the extent that a director of a…corporation is liable in analogous circumstances under Illinois law.”  Taken together with earlier cases which found LLC members’ immunity with regard to unformed and dissolved LLC’s, the Court affirmed the trial court’s dismissal.

The Court did, however, stress that no effort was made to plead a piercing of the corporate veil or to allege that Yale acted outside of his capacity as member manager. Such allegations, if factually supported, should be de rigueur whenever a plaintiff seeks to attach personal liability to an LLC member/manager for an LLC formed under Illinois law.

The flip side to that is that the standard of care for attorneys who form LLCs for their clients requires that they take advantage of the breadth of Illinois immunity for member managers.  Formation of the LLC under the laws of a state following the Uniform Act leaves the member managers exposed to personal liability not only for fraud but for a host of claims arising from the member managers’ “own conduct”—including defamation and exceeding agency authority. Such claims might in turn give rise to malpractice claims against the attorney—for which there is no ready “safe harbor.”


 

[1] Currently, the Uniform Act is the law in ten states, including California, and is pending in South Carolina.
[2] Because Yale’s alleged fraud extended to concealing his identity from the plaintiffs, he was not named until the plaintiffs’ fifth amended complaint.   The court’s ruling regarding a statute of limitations defense under the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.) is not treated here.
[3] Yale was also alleged to have fraudulently concealed his identity as the manager of Wolcott, using another individual as a front—fraud in the concealment of the wrongdoing which was directly relevant to the statute of limitations defense.
[4] Unless, per subsection (d), the articles of incorporation provide differently and the manager has consented to liability exposure.