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Back to the Beginning - Veil Piercing

Published on: December 17, 2013

The longstanding rule that the analysis for "piercing the corporate veil" of an LLC is substantially the same as the analysis for piercing the veil of corporations has been called into question by the recent Louisiana Supreme Court decision in Ogea v. Travis Merritt and Merrit Construction, LLC, 2013-1085, --- So.3d ---. In Ogea, the Court addressed "the extent of the limitation of liability afforded to a member of an LLC" and the statutory basis for exceptions to this limited liability.

Typical of a veil piercing case, the Ogea Court began its discussion by citing familiar Louisiana cases on the topic: Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164 (La. 1991) and the more recent Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 11-2254 (La. App. 1 Cir. 7/10/12), 97 So.3d 595. However, the similarities stopped there.

The Court noted that traditional veil piercing doctrine was not invoked by the lower courts or the plaintiff. Instead, the Court's analysis turned on the interpretation of an infrequently cited statute within Title 12 that addresses the limitation of liability for LLC members. La. R.S. 12:1320(A) states that the liability of members and managers of an LLC "shall at all times be determined solely and exclusively by the provisions of this Chapter." Subsection (B) provides that members and managers are generally not liable for the debts, obligations, or liabilities of the LLC. Subsection (D) prescribes the exceptions to this limitation of liability, to include fraud, breach of professional duty, and any other negligent or wrongful act by the member or manager.

Addressing this statute as a matter of first impression, the Ogea Court applied the statute to the facts of the case. Merritt Construction, LLC was hired to build a home for plaintiff, Mary Ogea. As part of the process, Ms. Ogea requested that she have a friend prepare the site for the foundation. Travis Merritt, the sole member of Merritt Construction, LLC, informed Ms. Ogea that having someone else prepare the site would waive the warranty. Mr. Merritt subsequently operated the bulldozer to prepare the site for a subcontractor to pour the concrete slab. A dispute arose when a concrete contractor informed Ms. Ogea of problems with the home's foundation. Under these facts, the Court concluded Mr. Merritt was not personally liable under the exclusive exceptions to limited liability found in La. R.S. 12:1320(D).

The first exception, fraud, was rejected because no evidence in the record supported a finding that Mr. Merritt committed fraud.

Turning to the next exception, the Court also rejected the argument that plaintiff breached a professional duty as the sole member of the construction company. The professions recognized in Louisiana's corporate laws do not include individuals who perform construction work. Thus, Mr. Merritt could not breach a "professional duty" as contemplated by the statute. The Court also noted that the contract at issue only recognized Merritt Construction, LLC as a licensed contractor and did not reference any contractor's license held by Mr. Merritt personally.

Finally, the Court addressed the final exception to limited liability: "negligent or wrongful act." Plaintiff asserted that the term "negligence" in the statute only required proof of a tort by the individual. The Court quickly rejected this argument, noting that such an interpretation would improperly expand the liability of LLC members.

Rather, the Court set forth four factors to assist in the analysis under the last "negligence" exception: 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.

It appears from the Ogea Court's focus that the prior analysis for "piercing the veil" of an LLC has perhaps been set aside and replaced with a new analysis which considers the exceptions to limited liability listed in La. R.S. 12:1320. However, the Court failed to expressly state that the prior analysis is improper and therefore no longer applicable. For now, it appears that the rules for piercing the veil of an LLC have changed but the true impact of Ogea remains to be seen.

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Keogh Cox & Wilson, Ltd. provides this blog as a public service for general information only. The materials contained herein may not reflect the most current legal developments or even express the opinion of all or even most of Keogh Cox attorneys. Such material does not constitute legal advice or form any attorney-client relationship. Keogh Cox and all contributing author(s) expressly disclaim all liability to any person with respect to the contents of this Web site and Blog and expect that no reliance will be made upon the information provided.

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Did I pass? - A Terrifying Question Gets More Terrifying

The July 2013 Louisiana Bar Examination results are set to be announced on October 11, 2013. Until then, applicants have but a few remaining hours to ponder whether the recent changes to the bar examination will have the same negative effect on passage rates as they did last year.

On October 19, 2011, the Louisiana Supreme Court ordered the implementation of the first changes to the grading standards of the Louisiana Bar exam since the exam was instituted. These changes: began "compensatory scoring;" eliminated essay portions of the test; included "multiple choice" format portions; doubled the score value of the "Code subjects;" ended the "conditional failure" status; and, placed a five-time limit on unsuccessful attempts to pass. Under the new rules, an applicant must score a 650 or higher or will be required to retake the nine (9) section, week-long test encompassing over twenty one (21) hours of testing.

These changes did not go unopposed. The LSU Paul Hebert Law Center submitted a position paper to the Louisiana Supreme Court arguing against compensatory scoring. In support of its position, LSU cited the analysis of the Louisiana Supreme Court Committee on Bar Admissions which indicated that a sizable number of applicants could pass the bar under compensatory scoring, even though they failed two or more of the Code subjects.

Prior to implementation of the new rules, many feared that the changes would cause an artificial increase in the number of applicants who passed the bar. However, the exact opposite has occurred. The first examination under the new method was administered during July, 2012. The overall applicant passage rate was 61.32%, an 11.08% drop in the passage rate. The February 2013 examination demonstrated a similar decline. The February 2013 examination passage rate was 40.65%, a 12.95% drop from February 2012.

At this time, it is unknown whether the decline in the overall passage rate will become the "new norm." It has been suggested that passage rates will return to historical levels over time. Until then, applicants will continue to ponder, and the attorneys at Keogh Cox will continue to wish them luck.

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Louisiana COVID-19 Immunity Laws

In response to the COVID-19 pandemic, the Louisiana legislature enacted and modified several statutes to limit the liability of individuals, businesses, and government agencies for exposure claims. However, the immunity is not absolute. While the immunity applies to “ordinary” negligence claims, it does not apply where acts are grossly negligent, wanton, or involve reckless misconduct. Further, as a condition to the protection afforded, the entity must show substantial compliance with the applicable COVID-19 procedures established by government authorities.

La. R.S. 9:2800.25, entitled “Limitation of liability for COVID-19” (the general immunity statute) provides that no person, business, or government entity shall be liable for injury or death resulting from exposure to COVID-19 through the performance of its business operations unless the entity failed to substantially comply with at least one set of procedures established by the federal, state, or local agency that governs the business operations, or the injury was caused by gross negligence or wanton, reckless misconduct. With respect to employer immunity, the statute provides that, regardless of whether an employee’s COVID-19 illness is covered under workers’ compensation law, the employee shall have no tort-based remedy against his employer unless the exposure was caused by an intentional act.

The exception to immunity in the general immunity statute calls into question the type of conduct that would rise to a level of gross negligence. Gross negligence is defined in Louisiana case law as “willful, wanton, reckless conduct that falls between intent to do wrong and ordinary negligence,” “lack of even slight care and diligence,” and “utter, complete or extreme lack of care.” While the definition does not provide a bright line rule, it reflects that the conduct must move well beyond simple negligence to defeat immunity.

For a business seeking to manage the risks arising from COVID-19, some best practices emerge: (1) monitor the COVID-19 procedures of government authorities to keep informed of the latest recommended or mandated procedures, (2) institute compliance protocols, (3) document and administer those procedures to show compliance, and (4) most obviously, avoid actions or omissions that may be construed as grossly negligent, wanton, or reckless.

Mary Anne Wolf is an engineer/attorney with a construction background who represents design professionals, contractors and others in construction litigation. She also gives seminars on the subject. She enjoys travel, yoga and encouraging her husband in his gardening and cooking endeavors.

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Louisiana Supreme Court Now Allows Direct Negligence Claims Against Employer

In a previous blog, we outlined developing law in the Louisiana appeals courts, and federal district courts in Louisiana on the issue of whether a claimant may maintain a separate cause of action against an employer for independent negligence when it is stipulated that the employee was in the course and scope of employment.¹ Most courts held a claimant could not maintain a separate action against the employer under these circumstances, reasoning that the employee’s fault would impute to the employer, and therefore, additional inquiry was not appropriate. However, the Louisiana Supreme Court recently addressed the issue and stated:

“(A) plaintiff may pursue both a negligence cause of action against an employee for which the employer is vicariously liable and a direct claim against the employer for its own negligence in hiring, supervision, training, and retention as well as a negligent entrustment claim, when the employer stipulates that the employee was in the course and scope of employment at the time of the injury.” (Emphasis added) See Martin v. Thomas et al., 21-1490 (La. 12/21/21), 328 So. 3d 1164.

This holding notably overturned the 1^st Circuit Court of Appeal ruling in Elee v. White, - - So.3d - - (La. App. 1 Cir 7/24/20), 2020 WL 4251974 and other Louisiana 5^th Circuit Court of Appeals decisions. The Supreme Court in Martin reasoned that “the initial assessment of fault required by the law is not bypassed due to the employer-employee relationship” and “shielding a potential tortfeasor from liability is not compatible with a comparative negligence regime.” The Court further stated that the possibility that both the employee and employer may be at fault is not “subsumed” by the employer’s admission on course and scope. In fact, if the fault of the employee is shown, then the issue of whether there is also fault on the part of the employer remains and must be decided by the evidence on a case-by-case basis.

The consequences of this decision remain to be seen, but it is expected that claimants may also pursue employers separately on theories such as negligent hiring, supervision, and entrustment. The scope of such discovery will remain within the sound discretion of the trial judge.

By: John P. Wolff, III and Richard W. Wolff

¹Louisiana Appeal Courts Prohibit Direct Negligence Claims Against Employer; US District Court Uses Rule to Limit Discovery - Keogh Cox