1. law, govt and politics

379
THE AMERICAN LAW INSTITUTE
Continuing Legal Education
Limited Liability Entities
2015 Update
March 26, 2015
Video Presentation
Passthrough Finance Techniques Corner - Dass v. Yale: Members and
Managers of an Illinois LLC Are Not Liable for Their Tortious Conduct
By
Steven G. Frost
Jeff Close
Joe Lombardo
Chapman and Cutler LLP
Chicago, Illinois
Reprinted with permission from the Journal of Passthrough Entities May-June 2014.
© 2014 CCH. All Rights Reserved
380
Passthrough Finance
Techniques Corner
Dass v. Yale: Members and Managers of an Illinois
LLC Are Not Liable for Their Tortious Conduct
By Steven G. Frost, Jeff Close and Joe Lombardo
STEVE FROST is a Partner in the Chicago
office of Chapman and Cutler LLP. teve
Frost was an Advisor from the American
Bar Association to the Uniform Law
Conference drafting committee that
drafted the Uniform Limited Liability
Company Act. He was also a member
of the Illinois Secretary of State Business Services Advisory Committee that
drafted the amendments to the Illinois
LLC Act betwe
bbetween
een 11996 and 1997, and
hee worked
Legislative
w
worked with
witth thee Illinois
Il
Legislativ
Reference
the 1997
Refe
rencee Bureau
Bureeau to
o prepare
p
Illinois
legislation.
lino
ois leg
gislation
on.
JEFF CLOSE is a Partner in the Chicago
office of Chapman and Cutler LLP.
JOE LOMBARDO is a Partner in the Chicago office of Chapman and Cutler LLP.
MAY–JUNE 2014
O
n December 20, 2013, the appellate court of Illinois in Dass v. Yale1
affirmed a lower court decision holding that under section 10-10 of
the Illinois Limited Liability Company Act (the “Illinois LLC Act”)2
a manager who allegedly made misrepresentations and committed fraud in the
course of acting as a managing member of the LLC was not personally liable for his
misconduct. The decision is causing quite a buzz among members of the national
partnership bar,3 and it is conveying a message
g that is not good for Illinois or for
doing business
appears
bu ne in the state, as the decision
sion ap
pe to provide a shield for even the
most egregious
purposeful
Illinois
egr gious acts of purp
osefu fraud
ud ccommitted
m ted by owners of Il
linois LLCs.
LCs 4
Att tthee outset,
ut , it is iimportant
mp ant tto state
ate cle
clearly
ly the
he view
views of the au
authors.
thors. We
W believe that
decision
manager
LLC may no
not be per
personally
at the
he de
cision in
n Dass
ass, than
th a manag
er ooff an LL
on
liable for fraud or misconduct, is wrong. However, we are not suggesting that
Yale (the defendant) is liable without further inquiry, rather, we believe that when
an manager
of an LLC, or any agent for that matter, may be personally liable to
m
third parties for its own conduct when acting on behalf of a principal is a complex
matter that should have been considered and developed in this case. Further, we
are not suggesting or addressing in this column whether the decisions in Carollo
or Puello (cited and discussed below) are correct; we are only addressing why the
decision in Dass to not consider personal liability of the manager was wrong.
The facts in Dass are relatively simple. The plaintiffs, a married couple, owned
a condominium that they purchased in 2006 from Wolcott LLC, an Illinois LLC
(“Wolcott LLC”). The defendant, Yale, was the managing member of Wolcott
LLC. The condo flooded in 2007. Plaintiffs discovered after the flood that the
sewer lines to the condo were not as represented when they purchased the unit.
In 2008, plaintiffs sued the three entities involved in the sale of the unit, including the general contractor, the developer and the sales agent. Yale signed (as the
manager of the developer) the property report on the listing agreement for the
condo. Both a plumbing contractor retained by plaintiffs and another plumbing
contractor retained by the first three defendants concluded that a new sewer piping system was necessary to reduce the chance of future flooding. The property
report provided that (i) the contractor would conduct a closed-circuit television
©2014 CCH INCORPORATED. ALL RIGHTS RESERVED.
31
381
PASSTHROUGH FINANCE TECHNIQUES
examination of the entire sewer system and confirm the
condition of the system, (ii) the existing waste lines would
be inspected and cleared of obstructions, and (iii) damaged
sections of the sewers would be removed and replaced. In
addition, a feature sheet incorporated into the property
report included a representation by the sales agent that
the building would have all new plumbing, which the
developer, through Yale, expressly affirmed was “true, full,
compete and correct.” In fact, at no time were any of the
inspections or repairs performed, and no permit for the
work was ever issued.
For various reasons not relevant to the purpose of this
column, plaintiffs did not add Yale to the litigation until
they filed their fifth amended complaint. At this stage
of the litigation, claims against other defendants were
resolved, and the only remaining defendant was Yale. The
complaint also alleged a number of other tortious acts
by Yale. Yale allegedly: (1) directed or approved work in
advance of a receipt of a construction permit, resulting in
a stop-work order from the city; (2) directed an application for a rehab permit (before the current construction
permit) with a number of inaccuracies; (3) directed an
unlicensed crew to do work on the property; (4) directed
or approved use of an unlicensed roofing contractor; (5)
directed completion of plaintiffs’ unit prior to applying
for proper
permits; (6) made misrepresentations in the
prop
per p
perm
drawings
plaintiff
raw
wing
i gs off plai
l int s’ unit submitted with the permit
application;
ppllicatiion; and
a ((7) directed
ted submission of a permit
rm aapplication
listing
diff
erent general
contractor
when
knew
atioon lis
stingg a di
ffer
eneral contra
ctor wh
n he kn
ew
that
unlicensed
would
perform
construction.
hatt an unlic
u
censed crew
c
ould perfor
m the co
ns uc n.
The com
complaint
also
alleged that Yal
Yale attempted
cover
mplaiint al
mplai
ls all
al
ttemp d tto cov
er
up his actions.
i
The plaintiffs sued Yale forr com
common-law
mmon
n-law and statutory
fraud. Yale filed a motion to dism
dismiss
complaint argumiss tthe
he co
ing that the counts alleging fraud against him should be
dismissed because, under the Illinois LLC Act, members
and managers are shielded from personal liability. Yale
also argued that another count alleging fraud under the
Consumer Fraud Act was time-barred and should also be
dismissed because Yale was not the seller of the property
or a merchant under the Consumer Fraud Act.
The trial court entered a written order granting Yale’s
motion to dismiss concluding that section 10-10 of the
Illinois LLC Act shielded him from liability while he
was acting solely as a manager of Wolcott LLC and that
the other claims under the Consumer Fraud Act were
time-barred. In support of its conclusions, the trial court
cited Puleo v. Topel5 and Carollo v. Irwin.6 The appellate court affirmed dismissal of the plaintiffs’ lawsuit. A
petition for review was denied by the State’s high court
March 26, 2014.7
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JOURNAL OF PASSTHROUGH ENTITIES
The Statute
Before discussing the appellate decision, it is helpful to
understand the history of the Illinois LLC statute. In 1992,
Illinois passed its initial limited liability company act,
which became effective on January 1, 1994. The provisions
addressing liability of members and managers were found
in section 10-10 of this act and provided:
(a) A member of a limited liability company shall be personally liable for any act, debt, obligation, or liability
of the limited liability company or another member
or manager to the extent that a shareholder of an
Illinois business corporation is liable in analogous
circumstances under Illinois law.
(b) A manager of a limited liability company shall be
personally liable for any act, debt, obligation, or liability of the limited liability company or another
manager or member to the extent that a director of
an Illinois business corporation is liable in analogous
circumstances under Illinois law.8
In 1997, Illinois substantially revised its LLC statute
when it adopted the Uniform Limited Liability Company
Act (1996) (“ULLCA”). When Illinois enacted its initial
LLC statute in 1992, less than half of the states had LLC
legislation. By 1997, when Illinois adopted ULLCA, all 50
states had enacted LLC statutes, and the nature of these
statutes had already evolved dramatically. Section 10-10
of the currentt Illino
Illinois L
LLC Act, which became effective
on January
1998, pro
provides:
Janua 1, 199
id
(a)
Except as otherw
otherwise
subsection
(a Excep
se provided
rovide in subsec
on (d) of this
Section,
Sectio the
he debts,
debts obligations,
ob gation and
nd liabilities
liabi es of a limited
m
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.
(b) (Blank).
(c) The failure of a limited liability company to observe
the usual company formalities or requirements
relating to the exercise of its company powers or management of its business is not a ground for imposing
personal liability on the members or managers for
liabilities of the company.
(d) All or specified members of a limited liability company
are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:
(1) a provision to that effect is contained in the articles of organization; and
(2) a member so liable has consented in writing to
the adoption of the provision or to be bound by
the provision.9
MAY–JUNE 2014
382
The changes to the Illinois LLC Act are discussed at
length in the court opinions and considered in greater
detail below.
The Appellate Court Decision
The appellate court began its analysis with the following
statement.
As an initial matter, it is important to note what plaintiffs are not arguing: plaintiffs do not argue that Yale
defrauded them in his individual capacity and do not
argue that Yale should be liable through the doctrine
of piercing the corporate veil. Instead, plaintiffs argue
that section 10–10 of the LLC Act does not exempt
LLC members or managers from personal liability for
torts or fraud committed in their capacity as members
or managers of the LLC. Plaintiffs argue that, “[g]iven
that Yale would be liable to plaintiffs for fraud based
on plaintiffs’ allegations if Yale acted individually, that
he defrauded plaintiffs while a member/manager of
Wolcott LLC should not provide him protection.”10
It is clear from the appellate court’s initial comments
that it believed the key to this decision is the fact Yale
committed
mitted tthe alleged acts in his capacity as a manager
off Wolc
Wolcott
which, in its view, foreclosed the ability
W
l ott LLC,
LLC w
L
too rrecov
recover
from
ver fro
om Y
Yal individually.
Yale
ividually
court also
relevant
The appel
The
aappellate
llate co
so listed fivvee releva
nt rules of
statutory
construction:
tatutoryy con
nstru
uction
1. A co
court’s
goal
ect to tthe
ourt’ss go
ourt’
a iss to “ascertain
certain aand give eff
ffec
he
true iintent of the legislature”;
2. “The best evidence of legislative
gislative intent
intent is
i the language
used in the statute, which
must
given its plain and
ch m
ust be give
ordinary meaning”;
3. “When the plain language is unambiguous, the legislative intent discernible from the language must prevail
and to resort to other interpretive aids is unnecessary”;
4. “Statutes should be read as a whole with all relevant
parts considered, and they should be construed, if
possible, so that no term is rendered superfluous or
meaningless.”11
The appellate court then addressed the plaintiffs’ arguments. First, plaintiffs argued that the trial court’s conclusion was inconsistent with section 303 of ULLCA, the
wording of which is identical to section 10-10. ULLCA
includes the following comment:
A member or manager, as an agent of the company, is
not liable for the debts, obligations, and liabilities of
the company simply because of the agency. A member
MAY–JUNE 2014
or manager is responsible for acts or omissions to the
extent those acts or omissions would be actionable
in contract or tort against the member or manager if
that person were acting in an individual capacity. 12
The plaintiffs argued that this comment explaining
ULLCA was “incorporated” by the Illinois LLC Act. The
appellate court noted that while ULLCA and the comment
are persuasive authority in interpreting section 10-10, it
concluded that the comment has not been adopted by
the Illinois legislature. Therefore, the cases interpreting
section 303 of ULLCA and the comment are, according
to the appellate court, of “little value.” Further, prior Illinois cases interpreting section 10-10 must be taken into
account (e.g., Puleo and Carollo), and the appellate court
concluded that the history of the Illinois Act establishes
that the Illinois legislature intended the result reached by
the appellate court.
[T]he decision appears to provide a
shield for even the most egregious
acts of purposeful fraud committed
by owners of LLCs.
Th
the
Thee appellate
ap ate ccourt
rt observed
bserved that “a cchange
hange to th
unambiguous
language
statute
createss a reb
rebuttable
u
mbig
langu
ge of a st
ute creat
tt
presumption
amendment
intended
p
ump
that the am
ndme was inte
ed to change
ha
the law.”13 Therefore, because the new statute removed the
affirmative references to personal liability of a member or
manager, the appellate court concluded that the legislature intended to remove any basis for personal liability.
As the court in Puleo noted, “[a]s we have not found any
legislative commentary regarding that amendment, we
presume that by removing the noted statutory language,
the legislature meant to shield a member or manager of
an LLC from personal liability.”14
The appellate court also cited Puleo for the proposition
that “[s]ection 10-10 clearly indicates that a member or
manager of an LLC is not personally liable for debts the
company incurs unless each of the provisions in subsection (d) is met.”15 Because the conditions in subsection (d)
were not satisfied, the appellate court agreed Yale could
not be personally liable for a tort claim against Wolcott.
The plaintiffs distinguished Puleo and Carollo because
neither of those cases involved a tort or fraud of the
member or manager, each only involved the member
or manager acting without authority because the LLC
©2014 CCH INCORPORATED. ALL RIGHTS RESERVED.
33
383
PASSTHROUGH FINANCE TECHNIQUES
in question was not in existence. In Puleo, the appellate
court concluded that a defendant could not be personally
liable for obligations incurred on behalf of the LLC after
the company was involuntarily dissolved. The appellate
court used the same analysis and concluded that subsection (d) was the exclusive way for a member or manager
to be liable for debts or obligations of Wolcott LLC. The
appellate court reached the same conclusion in Carollo,
where it considered whether the defendant could be liable for debts of an LLC prior to its formation. There, the
court noted that under general principles of agency, the
defendant would ordinarily be personally liable under a
contract executed on behalf of an entity not yet formed,
but it again relied on section 10-10 to conclude the member was not liable. The plaintiffs argued that unlike Carollo
and Puleo, this case involved the member’s or manager’s
fraud while Wolcott LLC was in existence, but the court
did not agree.
The appellate court’s statutory
analysis failed to address the plain
language of the statute, [and] all
of the Illinois courts have ignored
certain
errtaiin sp
specifi
peccific language in the
statute,
sta
taatutte,
te whi
w
which
ich directly
rectly undercu
undercutss
their
the
heeir hold
hholdings.
dinggs
Discussion
It is difficult to understand the reasoning of the Illinois
courts for various reasons. First, it is unclear why the appellate court went through a tortured analysis to determine
legislative intent. The appellate court’s statutory analysis
failed to address the plain language of the statute. Most
importantly, all of the Illinois courts have ignored certain
specific language in the statute, which directly undercuts
their holdings. The appellate court seems to have ignored
a number of more logical reasons and simple explanations
for the changes to section 10-10, and its conclusions appear to fail the same statutory interpretation tests set forth
in its opinion. Second, the appellate court improperly
found that section 10-10(d) is the exclusive way that a
manager or member of an LLC may be liable for debts
and obligations of the LLC.
In 1995, the Uniform Law Conference adopted
ULLCA. In 1996, the Uniform Law Conference revised
34
JOURNAL OF PASSTHROUGH ENTITIES
ULLCA to take into account changes in federal income
tax regulations governing the tax treatment of partnerships
and LLCs. Shortly after adoption of ULLCA, the Illinois
Secretary of State Business Services Advisory Committee
began to consider changes to the Illinois Act and worked
with the Illinois Legislative Reference Bureau (“LRB”) to
draft revisions to the Illinois statute to adopt ULLCA. To
minimize confusion, rather than adopting ULLCA in its
entirety, the Illinois Secretary of State Business Services
Advisory Committee suggested incorporating most provisions of ULLCA into the footprint of the then-existing
Illinois legislation. One of the sections taken from ULLCA
is section 10-10 of the Illinois LLC Act.
The plain language of section 10-10 insulates the
member or manager from personal liability from “a debt,
obligation or liability of the company [imposed] solely by
reason of being or acting as a member or manager.”16 The
alleged liability for Yale’s fraudulent conduct was neither a
liability of Wolcott LLC (except to the extent Wolcott LLC
was liable as principal for its agent’s conduct) nor were
the plaintiffs seeking to impose liability solely by reason of
Yale’s being or acting as a member or manager of Wolcott
LLC. Plain language analysis is driven by common sense.
It is common sense that a member or manager is not personally liable for the contracts of an LLC. This liability
shield is the purpose for the LLC and distinguishes LLCs
from partnerships where a general partner is liable for
debts or obligations
ations ooff tthe entity solely by reason of being
general
Nor sshould
thee member oorr man
manager
a ge
neral partner.
ner. N
ould th
ger bbe
personally
LLC
liable
p
nally liable
ble if tthe L
C is lia
le in tort because of the
anotherr memb
member,
manager or emp
employee
(agent)
aacts of an
er manag
ee (ag
n of
the LLC. Mere position as a member or manager cannot
sensibly insulate the member or manager from liability for
his or her own tortious conduct, whether it is negligently
driving a company car, telling a lie, committing fraud or
robbing a bank in the name of the LLC.
More importantly, the analysis of the appellate court
contains several fatal flaws. First, the appellate court does
not consider the meaning of the word “solely” in the
second sentence of section 10-10(a), which provides that
a member or manager of an LLC “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.”17
The only possible explanation of the placement of “solely”
in that sentence is that certain other facts may result in
member or manager liability. Second, the appellate court
does not consider why the legislature included section
10-10(c) in the statute, which provides that failure to
observe company formalities is not a basis for imposing
personal liability on members or managers for liabilities
of the LLC. If the Illinois courts are correct and section
MAY–JUNE 2014
384
10-10(a) includes an absolute bar on member and manager
liability, why is section 10-10(c) necessary?
Further, only the first sentence of section 10-10(a) begins with “[e]xcept as otherwise provided in subsection (d)
of this section ...” Thus, the second sentence of section 1010(a) is not limited by subsection (d), and there could be
many reasons that a member or manager is liable to third
parties. As noted, if the Illinois appellate courts are correct
and section 10-10(a) eliminates any basis for member or
manager liability, it would not have been necessary for
the legislature to include subsection (c) in section 10-10.
Reviewing the rules of statutory construction cited
by the appellate court, the Illinois courts must discern
legislative intent from the statute if the plain language is
unambiguous; thus, they may not read the second sentence
of section 10-10(a) in a manner that renders superfluous
or meaningless the reference in the second sentence to
“solely.” Similarly, they may not interpret section 10-10(a)
in a manner that makes section 10-10(c) superfluous or
meaningless. Finally, as discussed below, the Illinois courts
may not read into section 10-10(d) “only” or “exclusive”
when those words are not in the statute.
The trial court and appellate court noted that Illinois
did not adopt the comment to ULLCA, which explains
the meaning of section 303 of ULLCA. However, neither
court fo
focuses
cuses oon the fact that the text of section 10-10 as
enacted
the
legislature
is identical to the text of section
naccted
d by
b th
h lleg
he
gi
ULLCA.
Not onee word is differ
erent. Instead,
303
3 of ULLC
U
CA. No
CA
te d, both
Illinois
courts
focused
on
changess to sec
section
10-10
llin
nois cour
rts fo
ocu
n the change
ion 1010
and
that
eliminated
nd
d the factt tha
at tthe
he new
w language eliminat
ed existing
xi ng
provisions
focusing
director
behavovvisions fo
ocusiing on
o shareholder
reholder and
d dir
tor beha
v
ior for iidentifying
when a member or manager is liable.
d if
According to both courts, becau
because
the
revised language
use th
he rev
does not specify an instance whe
where
member or manager
re a m
memb
is liable other than in subsection (d) of section 10-10,
subsection (d) must be the exclusive way that members
or managers of Illinois LLCs may be liable. This logic is
faulty for several reasons.
There were several other reasons to change section 10-10
when Illinois adopted ULLCA. First, in adopting ULLCA,
the intent was to receive the benefit of uniformity. It seems
incongruous to adopt the same words used in ULLCA
but to intend a different meaning for Illinois because of
previous statutory language. Second, the original version of the Illinois LLC Act was a hybrid statute that
included corporate and partnership principles; ULLCA is
a partnership-based statute. In revising the original Illinois
LLC Act, the intent was to adopt the partnership model
(eliminate corporate concepts) and make the revised statutory provisions internally consistent.18 As such, a review
of the changes indicates that most if not all references to
MAY–JUNE 2014
corporate concepts contained in the initial Illinois LLC
law were eliminated from the Illinois LLC Act. Third,
the initial Illinois LLC law created confusion regarding
fiduciary duties. Some argued that the earlier “liability”
language in section 10-10 implied that managers would
have the same fiduciary duties as directors of corporations,
and the changes to section 10-10 and other provisions of
the statute eliminated this confusion. Finally, the basis for
liability in the prior version of section 10-10 was simply
wrong. It provided that managers and members of LLCs
should have the same liability as directors and shareholders, respectively, of a corporation. However, a director or
shareholder of a corporation is not, by reason of being
a director or being a shareholder, vested with apparent
authority to bind the corporation. Managers of a managermanaged LLC and members of a member-managed LLC
under ULLCA (and under the Illinois LLC Act) have
apparent authority to bind the LLC and are agents of the
LLC. The basis under agency law for imposing personal
liability on agents is different than the basis for imposing
liability on directors or shareholders of corporations, and
the statute was changed to reflect this distinction. As noted
below, the revisions to the Illinois LLC Act also made clear
that agency principles apply to Illinois LLCs. Accordingly,
there were several reasons for eliminating the references
in section 10-10 to directors and shareholders, and the
courts did not have to resort to protection of tortfeasors
and those whoo commit fraud as the basis for the change.19
Maybe additional evidence of the
statutory interpretation problem
is highlighted by the difficulty in
identifying how the legislature would
need to revise [the statute] if it wanted
to address the [courts’] conclusions ...
The role of section 10-10(d) is also important, and
the conclusion that it is the exclusive way a member or
manager may be liable is critical to the analysis. Interestingly, subsection (d) was added to ULLCA at the request
of one of the authors of this column. When ULLCA
was drafted, the federal tax law considered four factors
to determine whether an unincorporated entity (e.g., an
LLC) would be treated as a partnership or as an association (taxed as a corporation) for federal tax purposes. To
be taxed as a corporation, an entity had to have more
©2014 CCH INCORPORATED. ALL RIGHTS RESERVED.
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385
PASSTHROUGH FINANCE TECHNIQUES
corporate characteristics than partnership characteristics.
One corporate characteristic, i.e., limited liability, focused
on whether any member of the entity was liable to third
parties for debts and obligations of the entity solely by
reason of being a member. A partnership would lack the
corporate characteristic because a general partner of a
general partnership or limited partnership is jointly and
severally liable for debts and obligations of the partnership simply by reason of being a general partner. Without
more, an LLC would have the corporate characteristic of
limited liability. The author asked the reporter of ULLCA
to include an option in section 303 for a member to elect
to be liable for debts and obligations of the entity so that
an LLC could more easily qualify as a partnership for federal tax purposes. The year after ULLCA was adopted, the
federal tax rules were changed eliminating the four-factor
test, and ULLCA was revised to reflect the changes, but
the drafting committee left the ability in ULLCA for a
member to elect to be liable for debts and obligations of
the LLC solely by reason of being a member to maintain
drafting flexibility. Subsection (d) was a tax-planning tool
and was never intended to be the sole basis for liability of
members or managers of an LLC.
It is also worth noting that none of the Illinois courts
in the decisions cited in this column addressed Section
1-43 of the
t IIllinois
llin LLC Act, which is identical to section
104(a)
ULLCA,
04
4( ) of
4(a)
of UL
LLCA
A, and provides that “[u]nless displaced
particular
of this [Act], the principles
byy p
parti
cularr provisions
proovis
ovi
n pl of
law
equity
supplement
[Act].”” The ccomment
aw and equi
ity su
upp
nt this [Act]
mment to
ULLCA
number
principles
ULL
LCA
A lists a nu
umber of supplementary
upplemen ry princ
pl oof law
aw
intended
notes that the
these princip
principles
e d to apply
ended
a y and
nd
dn
es iinclude,
clude
but are not lli
limited to, agency law. Significantly, the appellate court in Dass observed
ed that
that in Carollo
Caro : “we noted
that, under general principles
agency,
les ooff age
ncy, tthe defendant
would ordinarily be personally liable under a contract he
executed on behalf of the unformed LLC.”20 The Carollo
appellate decision explains the law in Illinois, noting that
when an agent signs a document and indicates his affiliation to a principal, then, absent evidence of contrary intent
in the document, the agent is not personally bound, but
an unauthorized agent purporting to enter into a contract
for a principal is personally liable.21 The Dass court would
36
JOURNAL OF PASSTHROUGH ENTITIES
likely argue that section 10-10(a) displaces agency law as
it relates to liability of agents, but it is more plausible to
apply the final relevant rule of statutory construction cited
by the appellate court in Dass and read these statutes as a
whole, with all relevant parts considered, to conclude that
members and managers may not avoid liability for fraud
and tortious conduct.
Maybe additional evidence of the statutory interpretation problem is highlighted by the difficulty in identifying
how the legislature would need to revise section 10-10 if it
wanted to address the conclusions reached by the Illinois
courts. One solution would be to add a sentence to section 10-10(a) explaining what the use of “solely” in the
second sentence of that subsection means. It would seem,
however, that a change is not necessary if the courts consider more fully the language that is already in the statute.
ENDNOTES
1
2
3
4
5
6
7
8
9
Dass v. Yale, 2013 IL App (1st) 122520, 3 NE3d 858.
805 ILCS 180/1-1, et seq.
A few blog and commentator examples:
“This is a strange case. Its interpretation removes a long-standing
common law remedy for injured parties, enabling a fraudster to escape
liability simply because the fraud was committed in the name of an LLC.
This would not be the outcome in Arizona. Arizona courts would conclude that a member or manager is always liable for his or her own torts
and cannot rely on his or her status as an LLC member or manager as a
shield.” The Holt Law Group, at http://holttrust.com/blog-14-LLC%20
Manager%27s%20liability.
“This is a surprisingg and puzzling
uz
case. It is surprising because it is so far outside the majorityy view and gives
iv such short shrift to NCCUSL’s comment. It is
puzzling because
b
e its interpretation
int
eta on of Section
Sec on 10-10 removes
removes a long-standing
long tandin
common
mmon law remedy
medy for injured
nju d partie
parties, enabling a to
tort-feasor
t-feasor tto eescape
liability
bility si
simply because tthee to
tortt was co
committed
mitted in th
the name o
of an LLC.”
The LLC Law Monitor
it published
b h bby St
Stoel Rives LLP
LLP, at www.llclawmonitor.
ll l
com/tags/dass-v-yale/.
In a column published in Law360, the author suggests, amazingly, that
forming an LLC in a state that has adopted ULLCA other than Illinois may
subject the attorney “to a later malpractice claim if the client is subjected
to personal liability for fraud-related acts.” Marconi, “Ill.’s Limited Liability
is Unlimited,” www.law360.com/employment/articles/524347.
The LLC Law Monitor titled its report on the decision—“Illinois's the Place
to Be—LLC Managers Are Not Liable for Fraudulent Statements on Behalf
of LLC.”
Puleo v. Topel, 368 Ill.App.3d 63, 856 NE2d 1152, 306 Ill. Dec. 57 (2006).
Carollo v. Irwin, 2011 IL App (1st) 102765, 959 NE2d 77, 355 Ill. Dec. 49 (2011).
Dass v. Yale, 5 N.E.3d 123 (Ill. 2014).
805 ILCS 180/10–10 (1996).
Id.
MAY–JUNE 2014
386
10
11
12
13
14
15
16
17
18
Dass, 3 NE3d at 865.
Id. at 866 (italics in original).
ULLCA §303, Comment (1996).
Dass, 3 NE3d at 867.
Puleo v. Topel, 856 NE2d at 1157, 355 Ill. Dec. at 69.
Dass, 3 NE3d at 866.
805 ILCS 180/10–10 (1996) (emphasis added).
Id. (emphasis added).
For a discussion of this and other changes to the original Illinois LLC Act,
19
20
21
see Stephen G. Frost, New Revisions to the Illinois Limited Liability Company
Act, 85 Ill. B.J. 592 (Dec. 1997).
While the issue of whether eliminating liability for committing fraud would
be void as against public policy is beyond the scope of this column, it was
discussed in a clear and coherent way by the court in In re Suhadolnik, 2009
Bankr. LEXIS 2184, at *12–*13 (C.D. Ill. Bankr. Aug. 20, 2009).
Dass, 3 NE3d at 867-68.
Carollo, 355 Ill.Dec. at 4, 959 NE2d at 92. Again, whether the decisions in
Carollo or Puleo are correct is not specifically addressed in this column.
This article is reprinted with the publisher’s permission from the JOURNAL OF PASSTHROUGH ENTITIES,
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MAY–JUNE 2014
©2014 CCH INCORPORATED. ALL RIGHTS RESERVED.
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