November 2, 2011
Limited Liability as the Default
I recently covered a case on LLC formation in my Business Associations course: Water, Waste, & Land v. Lanham, 955 P.2d 997 (Colo. 1998). (The case is in this casebook, from Klein, Ramseyer, and Bainbridge.) In that case, an engineering firm performed work for an LLC, but was able to successfully hold one of the LLC’s owners individually liable for the debts. Here are the basics:
Water, Waste & Land performed work for a P.I.I., LLC (owned by Clark and Lanham). Clark failed to fill out and sign the contract between Water, Waste & Land and instead orally authorized the work. During the negotiation process, Clark gave Water, Waste & Land a business card that said only “P.I.I.”, and not “LLC.” The address on the card was a home address for Lanham. The Colorado Supreme Court determined that Clark was an agent for Lanham and held the LLC and Lanham (personally) for the bill.
The Colorado LLC act at the time required that any LLC clearly state that the company is an LLC or otherwise indicate it is a limited liability entity. The new statute retains this requirement. Colorado Statute 7-90-601. Entity name, provides:
(c) The entity name of a limited liability company shall contain the term or abbreviation "limited liability company", "ltd. liability company", "limited liability co.", "ltd. liability co.", "limited", "l.l.c.", "llc", or "ltd."
Under the law, then and now, the court got this right. Still, I can't help but think that a company in the same spot as Water, Waste & Land would be getting a bit of a windfall if this occurred today. If someone gives me a business card that says, “P.I.I.,” I know I’m dealing with an entity. I expect that most sane people would have a limited liability entity in this circumstance. Even if I'm not sure if I am dealing with an LLC, LLP, or corporation, if I want a personal guarantee, I should ask for it. Otherwise, I proceed at my own peril. (To be clear, this is different, in my view, without the business card, though this rule still applies.)
I’m not going so far as to say we should eliminate the notice requirement for limited liability entities. Still, I do think we would all be well served to assume we are dealing with limited liability entities and seek guarantees from individuals if that’s what we want. If we change our own default, we will likely be a lot happier with the outcome (or at least know we got the deal we bargained for).
November 2, 2011 | Permalink