While a 2010 Maryland case raised questions as to the extent of protections for LLC members, a more recent 2013 case provides some measure of reassurance that Maryland remains averse to holding members liable in the absence of fraud.
Maryland statutory law states, “no [LLC] member shall be personally liable for the obligations of the limited liability company, whether arising in contract, tort, or otherwise, solely by reason of being a member of the limited liability company.” However, protections provided to members of LLCs are not absolute.
Calling the protections afforded by limited liability companies into question, in 2010, Maryland’s highest court held that a member of a limited liability company “could” be personally liable for lead-paint injuries allegedly suffered by children who occupied the dwelling that the LLC owned. The court ruled that the Baltimore City Housing Code imposed a duty on those who “own, hold, or control” the title to a dwelling and that a member of an LLC could be found to have controlled the title to the dwelling. Additionally, the court ruled that a member of an LLC could be personally liable for torts committed in the name of the LLC if the member personally participated in those torts.
More recently, however, a 2013 Maryland Court of Special Appeals case emphasized Maryland’s reluctance to hold a member of an LLC liable for the LLC’s actions, stating that “Maryland is averse to disregarding the entity shield in a business situation in the absence of fraud.” The court stated that Maryland only imposes personal liability against a member of an LLC (or “pierces the corporate veil”, which applies to both corporations and LLCs) if an LLC is used as a shield to perpetrate fraud or to enforce a paramount equity. Of these two bases to pierce the corporate veil, only the first, perpetration of fraud, has been a basis for imposing personal liability.
While enforcing a paramount equity has never been a basis for piercing the corporate veil, such a basis may exist where: (1) a member has complete domination over finances, policy and business practice in transaction so that the LLC has no separate mind, will or existence of its own; (2) such control was used to commit fraud or wrong, to perpetrate the violation of a statutory or other legal duty or dishonest and unjust act; and (3) such control and breach of duty causes injury or unjust loss. The court may consider factors, such as: the company’s capitalization; the company’s solvency, and whether the company has observed corporate formalities.
While such circumstances may exist for piercing the corporate veil, the Court of Special Appeals stated in its recent case that “this Court and the Court of Appeals have made clear that the corporate veil will not be pierced to redress the breach of a contractual obligation in the absence of fraud when the party seeking to pierce the corporate shield has dealt with the corporation in the course of its business on corporate basis.”
In sum, Maryland provides a high level of protection for LLC members. However, members should keep in mind factors which could be used by an adversary to breach the corporate veil, such as fraud, undercapitalization, insolvency, compliance with statutory obligations and corporate formalities, and most importantly, clearly documented identification of the LLC as the party to any transaction.
For more information please contact Vincent Guida at 410-583-2400 or email@example.com.