LEGAL TRENDS
Not-So-Limited Individual Liability for Members of LLCs
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The Houston Lawyer
By Nikki L. Morris
rganizing a business as a limited liability company comes with myriad advantages, including various tax benefits and the ability to protect individual assets of the members from liabilities of the company. A common misconception about LLCs is that individuals are completely shielded from liability. However, settling a split among Texas intermediate appellate courts, the Texas Supreme Court recently made it clear in Keyes v. Weller that an individual member of an LLC is not shielded from liability for his or her individual tortious conduct committed while acting as a corporate officer or agent.1 The contours of individual liability for LLC members have been the subject of various Texas statutes, numerous Texas appellate court decisions, and several Texas Supreme Court decisions. Historically, under the common law, corporate shareholders, officers, and directors have been shielded from liability for corporate obligations.2 To find an individual liable for corporate obligations, the law required a party to pierce the corporate veil by establishing either that the individual is the alter ego of the corporation or that the corporate entity was used as a sham to perpetuate a fraud.3 In Castleberry v. Branscum, the Texas Supreme Court interpreted the latter approach to require only proof of constructive fraud. The Texas Legislature responded to this opinion by amending the law to require a “stricter approach to disregarding the corporate structure.” 4 In its current form, the Texas Business Organizations Code states in relevant part: 36 September/October 2024
(a) A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate of such a holder, owner, or subscriber or of the corporation, may not be held liable to the corporation or its obligees with respect to: ... (2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory; [but] ... (b) Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.5 Several Texas courts of appeals and federal courts had previously concluded that this provision did not eliminate common-law claims based on individual tortious conduct. However, in 2017, Houston’s Fourteenth Court of Appeals held that this provision eliminated all individual liability, absent compliance with subsection (b).6 The Texas Supreme Court has now clarified the issue and stated definitively that “Section 21.223 does not limit an individual’s liability under the common law for tortious acts allegedly committed while acting as a corporate officer or agent, even when the individual is also a shareholder or member.” 7 The court reached this conclusion based on a de-
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tailed statutory analysis and explained that “[t]he statutory history and language confirm that the statute’s focus has always been, and continues to be, on the liability of shareholders for matters relating to corporate contractual obligations—not the liability of corporate agents for their own misconduct.” 8 Thus, absent further statutory amendment, individual members and officers of an LLC should be aware that if they engage in tortious conduct while acting as an officer or agent of the company, they may be subject to personal liability. Nikki L. Morris is a commercial litigator at BakerHostetler LLP. She also serves as the Articles editor for The Houston Lawyer. Endnotes
1. Keyes v. Weller, 692 S.W.3d 274 (Tex. 2024). 2. Id. at 278 (citing Willis v. Donnelly, 199 S.W.3d 262, 271 (Tex. 2006)). 3. Id. (citing Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986)). 4. Id. (quoting SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 455 (Tex. 2008)). 5. TEX. BUS. ORGS. CODE § 21.223. 6. TecLogistics, Inc. v. Dresser-Rand Grp., Inc., 527 S.W.3d 589, 591 (Tex. App.—Houston [14th Dist.] 2017, no pet.), abrogated by Keyes, 692 S.W.3d 274. 7. Keyes, 692 S.W.3d at 281 (emphasis added). 8. Id. at 282.
Presumed Innocent? Texas’ Rebuttable Presumption of Non-Defectiveness Gets Some MuchNeeded Clarification
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By Lane Morrison
n late June, the Supreme Court of Texas answered two critical questions in Texas’ products liability law: (1) when does a product manufacturer’s compliance with federal safety standards