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Personal Liability for LLC Debts

By Nancy J. Glidden

In re LMcD, LLC, 405 B.R.555 (M.D. PA, 2009), is a good read for its analysis of several theories of liability, because it underscores the importance of being mindful of the capacity in which business dealings are conducted, and because it illustrates the consequences that flow from blurring the distinctions between actions by a member of an LLC and the LLC proper.

LMcD, LLC was formed by a Kevin and Helen McDonald.  Mr. McDonald was a chef and restaurateur with an interest in ice sculptures.  The LLC was formed for the limited  purpose of promoting the public display of ice sculptures, and the LLC sponsored an ice sculpture festival in 2005, which showcased ice sculptures created by master carvers from all over the world.    When the festival failed to generate enough income to cover the costs, the LLC filed a voluntary Chapter 7 bankruptcy petition in the Middle District of Pennsylvania.

The Trustee filed an adversary complaint against the McDonalds seeking to hold them personally liable for certain of the LLC’s debts.  The Trustee advanced theories of piercing the corporate veil, reverse piercing, enterprise or single entity theory, and quantum meruit.  All of these theories stemmed from the fact that the McDonalds, in particular Mr. McDonald, had not been careful in distinguishing between his personal business affairs and finances, and those associated with the LLC.  By way of example, Mr. McDonald used his personal line of credit to fund the LLC, he made credit card purchases for the LLC using his personal credit cards, and entered into contracts without clearly designating that he was doing so on behalf of the LLC.

Noting Pennsylvania’s strong presumption against piercing the corporate veil the Court declined to apply this theory as well as the reverse piercing theory.   The Court next observed that the enterprise or single entity theory of liability had not yet been adopted by Pennsylvania courts, and posited that if it were to be adopted, it would likely be confined to isolated instances involving fraud or injustice — neither of which were presented.  Finally, while the Court was inclined to apply a quantum meruit theory, the Trustee failed to meet his burden of establishing the reasonable value of the benefit conferred.

Having rejected each of the theories proffered by the Trustee, the Court did find one theory upon which the McDonalds could be held personally liable.   Specifically, the Court noted that it has long been held under Pennsylvania law that “the use of an individual signature, without indication that it is being signed in a representative manner, imports personal liability.”  See, e.g., Watters v. DeMilio, 134 A. 2d 671, 674 (1957).  This principle has been codified by the Uniform Commercial Code at 12A P.S. §3-403(3).  Therefore, the Court held that on contracts that he signed for the benefit of the LLC, Mr. McDonald was personally liable for failing to clearly disclose his representative capacity.

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