Tuesday, February 6, 2018

LLCs Still Not Corporations, But What Are Managers?

A brand new Arizona case continues the trend of incorrectly discussing limited liability companies (LLCs) as limited liability corporations, but it does allow for an interesting look at how entities are sometimes treated (or not) in laws and regulations. Here’s the opening paragraph of the case:

Noah Sensibar appeals from the superior court's ruling affirming the Tucson City Court's finding that he had violated the Tucson City Code (TCC). He argues that the municipal ordinance in question is facially invalid because it conflicts with a state statute shielding members or agents of a limited liability corporation from personal liability. 

City of Tucson v. Noah Sensibar, No. 2 CA-CV 2017-0087, 2018 WL 703319 (Ariz. Ct. App. Feb. 5, 2018).

About three years ago, the City of Tucson alleged that Sensibar, as “the managing member and statutory agent of Blue Jay Real Estate LLC, an Arizona corporation, was responsible for building code violations.” Id. (emphasis added). Notwithstanding the incorrect characterization of the entity type, it looks like the court at least reasonable (though not clearly correct) to hold Sensibar individually liable.  Here’s why:

The Tuscon City Code states that “Any owner or responsible party who commits, causes, permits, facilitates or aids or abets any violation of any provision of this chapter . . . is responsible for a civil infraction and is subject to a civil sanction of not less than one hundred dollars ($100.00) nor more than two thousand five hundred dollars ($2,500.00).” Tucson Code Sec. 16-48(2) (Violations and penalties).

The Code Definitions in Sec. 16-3 provide the following:

Owner means, as applied to a building, structure, or land, any part owner, joint owner, tenant in common, joint tenant or tenant by the entirety of the whole or a part of such building, structure or land.

. . . .

Person means any natural person, firm, partnership, association, corporation, company or organization of any kind, but not the federal government, state, county, city or political subdivision of the state.

. . .  .

Responsible party means an occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land; and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.

As such, the Code seems to contemplate holding both entities and individuals liable. Still, Sensibar had an argument. The use of the term “manager” here causes some potential confusion because one can be a manager of an LLC, while the LLC might serve as the manager of the property. Thus, it could be that only the LLC should be liable.  Another plausible reading, though, is that “manager” meant the natural person doing the managing as is common in property situations.  Manager, like occupant, lessee, and lessor, is not defined in the Code, so it would seem the intended source of the definitions should be from a property perspective, not an entity perspective.

Similarly, the Code could mean a natural “person having control over a structure” can be liable.  If that’s the case, and the court seems to have gone down this road, the argument would be that Sensibar was being held liable directly for his role as manager or person in control of the property and not vicariously for violations of the LLC.  Given that occupants, lessors, and lessees, among others, can be held liable, it does appear that the Code could have intended to impose liability directly on multiple parties, including both individuals and entities. This would be sensible, in many contexts, though it would also be sensible to say explicitly, especially given that the term “person” clearly includes entities. 

A simple improvement might be to update the definition of “responsible party,” as follows:

Responsible party means an, whether as an individual or entity, any occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.

That would, at least, be consistent with the decision. Because if the court is holding Sensibar liable for merely being the manager of the LLC, and not as the manager of the property, the case is wrongly decided.  Too bad the notice of appeal was not timely filed – maybe we could have found out. 

UPDATE: Based on a good comment from Tom N., I did a little more research. As of an LLC filing in 2009, Noah Sensibar owned at least a 20% interest. (It may be 50% because there were two listed members, but it was at least 20%.) As such, this suggests that the LLC does not have funding to cover the fines or that express indemnification is lacking and the other member(s) won't agree to cover the costs from LLC funds. 

I will also note that a 2016 decision denying Sensibar's appeal stated, "The court also heard evidence that Sensibar, the managing partner of the LLC, was 'the person in charge' of the property."  City of Tucson v. Sensibar, No. 2 CA-CV 2016-0051, 2016 WL 5899737, at *1 (Ariz. Ct. App. Oct. 11, 2016). Seriously? He's an LLC manager.  That's all.  LLCs are not corporations OR partnerships. THEY ARE LLCS! 

http://lawprofessors.typepad.com/business_law/2018/02/llcs-still-not-corporations-but-what-are-managers-.html

Corporations, Joshua P. Fershee, LLCs, Management | Permalink

Comments

A number of States permit designation of a person as manager who holds no equity in an LLC. If Noah Sensibar, one may certainly hope that the equity possessed and the indemnification respectively sufficient. It seems to me, in this particular context, that somebody’s paying too much for purported limited liability.

Posted by: Tom N | Feb 6, 2018 2:02:04 PM

Indeed, Tom. Indeed.

Posted by: Joshua Fershee | Feb 6, 2018 2:09:48 PM

Free copy of the decision: https://www.appeals2.az.gov/Decisions/CV20170087Opinion.pdf

Posted by: Antifa Family Law | Feb 19, 2018 3:50:55 PM

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