Posted on Nov 17, 2014 by Audra M. Byrd
Organizing a limited liability company (LLC) often requires more than simply preparing and filing articles of organization. Like any other corporate entity, an LLC frequently has to prepare itself to conduct business even before the LLC is formally organized. Enter the promoters - individuals who act on behalf of an LLC prior to its formal organization and conduct necessary pre-organization work, which generally includes entering into various contracts. Until recently, South Carolina courts had not directly addressed the issue of whether an LLC may be held liable for the actions of a promoter taken prior to the organization of the LLC.
In Hansen v. Fields Co., LLC, Op. No. 27436 (filed August 20, 2014), the South Carolina Supreme Court considered the issue. The circumstances giving rise to the Hansen suit are complicated but, briefly stated, Clifford Hansen, the plaintiff, met an individual named Robert Fields, and through Fields, Hansen engaged a corporation to assist him in procuring capital for the purchase of a water bottling company. Subsequently, the corporation terminated its engagement and advised Hansen that it reserved the right to purchase the bottling company. Effectively, Hansen was cut out of the deal, and a later-formed LLC purchased the bottling company. Hansen filed suit against the LLC that purchased the bottling company as well as other entities in which Fields held an interest. Hansen alleged causes of action sounding in contract and tort. Notably, the parties agreed that there was no contract between the LLC and Hansen and that the LLC had not acted tortiously towards Hansen. The sole theory Hansen presented at trial was that the LLC was liable for the acts of its promoters (Fields and his related entities). At the close of the case, the LLC moved for a directed verdict, the trial court denied the motion, and the jury returned a verdict in favor of Hansen for over $1 million.
The Hansen Court conducted a two-part analysis of Hansen’s claims:
1. The Court considered if and when an LLC can be held liable for its promoter’s pre-formation contracts.
The Court adopted the prevailing rule and held that an LLC is not liable on promoter’s contracts made for the benefit of the LLC unless the LLC assumes the obligation by its own act after organization. The Court clarified that while initially an LLC is not liable for preformation contracts, an LLC can expose itself to contractual liability either by express or implicit ratification of the contract. An LLC implicitly ratifies a promoter’s contract when the LLC accepts the benefits of the contract with full knowledge of the terms of the contract. Since there was no evidence that the LLC expressly ratified any contract with Hansen or that the LLC benefited from or accepted any benefits of the contracts Hansen entered into with other entities, the Court found that the trial court erred in not directing a verdict in favor of the LLC on Hansen’s contractual claims.
2. The Court considered Hansen’s tort claims against the LLC.
Noting the rule adopted by every other jurisdiction that had considered the issue, the Hansen Court held that an LLC is not liable for torts committed by its promoter prior to the LLC’s organization. The Court cited three policy considerations in support of its decision: (1) the lack of an agency relationship between a promoter and a non-existent LLC; (2) the ability of the injured party to seek recourse from the promoter directly who remains liable for any torts committed; and (3) the potential stymieing effect on investment if a contrary rule were adopted.
With its decision, the Hansen Court kept South Carolina in line with the majority of states across the country and confirmed the “limited” nature of liability enjoyed by LLCs.