The Oregon Supreme Court recently decided a case with serious implications to the liability of LLCs and their members. Taking note of the case, Cortez v. Nacco Material Handling Group will enable aggrieved homeowners and their attorneys to practice more effective construction defect litigation.
The plaintiff, Antonio Cortez, worked for a lumber mill organized as an LLC. He was badly injured when a forklift struck him during a stroll across company premises. Cortez received worker’s compensation benefits and then opted to go up the chain, suing the LLC’s owner and sole member manager, a company called Swanson Group, Inc.
Cortez’s principal allegations were twofold, only one of which is addressed here. He argued that Swanson was liable in negligence and under Oregon’s Employer Liability Law for failing to take safety precautions to protect employees. The trial court offered a cold reception, entering summary judgment in favor of Swanson. The court of appeals reversed and affirmed the trial court, each in part.
Not to be deterred, Cortez appealed again, and the Oregon Supreme Court stepped in to finally resolve the question.
Swanson argued that ORS 63.165(1) makes the member-managers of LLCs immune from personal liability. The Oregon Supreme Court rejected this contention after analyzing the statute’s text and legislative history.
ORS 63.165(1) provides that the “debts, obligations and liabilities” of an LLC belong to the LLC, and that none of the above trickle down or attach to members or managers “solely by reason of [their] being or acting as a member or manager.” Thus, no personal liability will attach to members or managers of LLCs “solely” because they are member-managers or, by extension, solely because they act in that capacity (the Court understood the word “act” in the statute as assuming the same meaning as when one refers to the “acting” manager of a thing–a meaning essentially synonymous with “being”). However, the Court held that “a member or manager [of an LLC] remains responsible for his or her acts or omissions to the extent those acts or omissions would be actionable against the member or manager if that person were acting in an individual capacity.” Cortez v. Nacco Material Handling Group, Inc., 356 Or 254, 268-9 (2014). In other words if, as a member-manager, you participate in or are individually responsible in some way for wrongful conduct, ORS 63.165 does not prevent you from being held liable for it.
The final outcome of Cortez is significant for those litigating against contractors, many of whom opt for the LLC form of business organization. Until Cortez, there may have been some question about the extent of liability protection afforded by an LLC to the individual contractors who serve as its member-managers. The question is especially significant when dealing with LLCs that have less than a handful of members and are thus functionally identical to the small group of individuals who operate them. The Cortez rule suggests that the LLC will afford no immunity when the member-managers personally participate in legally actionable conduct. In such cases, personal liability will be cognizable without an extravagant effort by plaintiff-homeowners to “pierce the veil.” The result is that Oregon law prevents individual or small groups of contractors from using undercapitalized LLCs–and the high standard for piercing the veil–to immunize themselves from the disastrous consequences of their negligent, unlawful conduct.