FACTS In the afternoon of September 6, 1999, an explosion lev- eled the home of
ID: 434757 • Letter: F
Question
FACTS In the afternoon of September 6, 1999, an explosion lev- eled the home of Jerry Usovsky in Richland, Iowa, killing seven people who had gathered in the home to celebrate the Labor Day holiday. Six others were injured, some seriously. The likely cause of the explosion was stray propane gas. The survivors and execu- tors of the estates of those who died filed a lawsuit based on negli- gence, breach of warranty, and strict liability against a number of defendants, including Iowa Double Circle, L.C. (Double Circle) and Farmers Cooperative Association of Keota (Keota). Double Circle, is an Iowa limited liability company (LLC). It is a supplier of propane and delivered propane to Usovsky’s home prior to the explosion. Keota is one of two members in Double Circle. It owns a 95 percent interest in the company. The other member is Farmland Industries, Inc. (Farmland Industries), a regional cooperative. Keota is a farm cooperative that provides a variety of farm products and services to area farmers. It is a mem- ber of Farmland Industries and is managed by Dave Hopscheidt (Hopscheidt). The executive committee of Keota’s board of direc- tors serves as the board of directors of Double Circle, along with a representative of Farmland Industries. Keota provides managerial services to Double Circle, pursuant to a management agreement between Keota and Double Circle. Keota’s duties under the agree- ment include “human resource and safety management.” Hop- scheidt oversees the daily operations of both Keota and Double Circle. However, Keota and Double Circle operate as separate enti- ties and maintain separate finances. The plaintiffs alleged that Keota participated in the claimed wrongdoing through the management decisions it made in consumer safety matters. The trial court found that plaintiffs failed to produce any facts to show that Keota engaged in conduct separate from its duties as director or manager of Double Circle. Consequently, it concluded Keota was protected as a matter of law from personal liability for claims of wrongful conduct attributable to Double Circle and granted summary judgment for Keota. Plaintiffs appealed. DECISION Summary judgment is reversed and case remanded. OPINION The LLC is a hybrid business entity that is considered to have the attributes of a partnership for federal income tax pur- poses and the limited liability protections of a corporation. As such, it provides for the operational advantages of a partnership by allowing the owners, called members, to participate in the management of the business. Yet, the members and managers are
protected from liability in the same manner shareholders, officers, and directors of a corporation are protected.
The rules of personal liability under the Iowa Limited Liability Company Act (ILLCA) have been summarized as follows:
Sections ... of the Act generally provide that a member or manager of a limited liability company is not personally liable for acts or debts of the company solely by reason of being a member or man- ager, except in the following situations: (1) the ILLCA expressly provides for the person’s liability; (2) the articles of organization provide for the person’s liability; (3) the person has agreed in writ- ing to be personally liable; (4) the person participates in tortious conduct; or (5) a shareholder of a corporation would be personally liable in the same situation, except that the failure to hold meetings and related formalities shall not be considered.
While liability of members and managers is limited, the statute clearly imposes liability when they participate in tortious conduct. This approach is compatible with the longstanding approach to liability in corporate settings, in which case, under general agency principles, corporate officers and directors can be liable for their torts even when committed in their capacity as an officer. The
“participation in tortious conduct” standard would not impose tort liability on a manager for merely performing a general administra- tive duty. There must be some participation; liability is derived from individual activities. The ILLCA does not insulate a manager from liability for participation in tortious conduct merely because the conduct occurs within the scope and role as a manager. The statutory limit on liability created for members and managers of LLCs means members and managers are not liable for company torts “solely by reason of being a member or manager” of an LLC. Keota is not protected from liability if it participated in tortious conduct in performing its duties as manager of Double Circle.
INTERPRETATION Members and managers of an LLC are not liable for company torts solely by reason of being a member or manager of an LLC, but a member or manager of an LLC who takes part in the commission of a tort is liable even when the member or manager acts on behalf of the LLC.
CRITICAL THINKING QUESTIONs
1.What can members and managers of LLCs do to limit their personal liability for acting on behalf of the LLC? Explain.
2.Do you agree or disagree with the holdings/verdict?
Explanation / Answer
1. Members and managers need to be sure that they only perform acts which are authorised, requested, commanded, by the company and the act is entirely on behalf of the corporation and within the scope of its office of employment. Therefore, if due diligence is applied to prevent wrongdoing by an employee or representative and no negligence or tortious actions are involved they cannot be penalized, for acts performed in course of duty resulting in injury or loss to others. It is important that an individual ensure that the act performed is essentially ratified by an agreement with the organization or rules and procedures within the articles of the organization. Due diligence is important as no individual can perform unethical acts which result in personal benefit or benefit to the organization, and not be accountable for such acts by passing it off as performance of duty. Most laws, which are enforceable, are meant to provide protection and ensure that no individual suffers harm, due to negligence or deliberate intent of another. An individual should ensure they do not perform a tort by understanding what constitutes a tort. The aim of a tort case is to identify whether an injury has been caused by specific intent or negligence of the other party. The major factors to be focused on in every tort case to ensure fair judgement are duty involved, breach of Duty, causation of injury and existence of injury. They should exist and underline sufficient breach of duty on the part of the defendant which resulted in an injury to the plaintiff, for the tort case to be sufficiently strong.
2. I agree with the verdict as we cannot hold individuals representing a company in normal performance of duties responsible for acts which are not directly under their control and may have stemmed from several actions and procedures involving multiple individuals at various levels. Individuals need to be held liable on identification of negligent behaviour in an individual capacity resulting in loss or injury to others. Corporate criminal liability law is an important monitoring and controlling tool which is essential to maintain accountability within the business environment. A corporation can be made liable by application of numerous methods utilised by courts for analysis and subsequent prosecution upon identification of liability of the parent Corporation to ensure control, growth and prevalence of illegalities within economic environment.
Whether or not a corporation can be considered as an individual with a distinct identity capable of committing crimes and being held liable therefore, cannot be considered on a universal basis. Every Corporation is greatly impacted by the individuals who take decisions and act on its behalf as well as all the rules and procedures framed by these very individuals within the Ambit of which the Corporation operates. It is similar to holding a car which has killed a pedestrian criminally liable for the incident when in reality the person controlling and guiding the vehicle caused the incident. However, given the fact that corporations are large bodies not operated by single individuals it becomes essential to hold them criminally liable to maintain control over all individuals who represent the corporation and take decisions and make actions on behalf of the corporation. In the absence of such doctrine holding a corporation liable by imposition of fines or other stringent action, this would have been viewed as a means to commit crimes within the economic environment, without any fear of prosecution for the crime or any sense of accountability or responsibility in operations of such corporations. Therefore, it is essential that corporations be treated like a person and made prosecutable under criminal law for all actions committed in its name and under its authority. Provided the employee committing the offence should necessarily have the authority to do so and it must be in the course of performance of duties required by his employment of the organisation. that means it should be within the scope of work and not outside his established scope of work which would make the action unauthorised by the Corporation. The model Penal Code clearly states that any illegal act which requires for a corporation to be penalised it must necessarily be proved the act was "authorised, requested, commanded, performed or recklessly tolerated by the board of directors or a high managerial agent acting on behalf of the corporation within the scope of his office of employment". therefore, if due diligence is applied to prevent wrongdoing by the top Management an Organisation cannot be penalised.
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