Business owners are often wooed by the misconception that an LLC shields them from any personal liability to the LLC’s members. Although an LLC can protect a member from actionable claims, that protection is not absolute. In certain situations, a member of an LLC may be held personally liable to the other individual members of the LLC.
In North Carolina, an LLC member is typically barred from bringing an individual claim against another member for injuries to the LLC. However, like most rules, there are exceptions. In Barger v. McCoy Hillard & Parks, the Supreme Court of North Carolina articulated two exceptions to the general rule, applicable in LLC member disputes.
- First, an individual may be bring an action where a special duty exists between the LLC members. A special duty will exist when (a) a party’s wrongful actions induced an individual to become an LLC member, (b) a party performed individualized services directly to the LLC member, or (c) a party advised the member independently of the LLC.
- Second, where the LLC member suffered an injury that is separate and distinct from the injury sustained by the LLC itself, the member may bring an individual action. While the harm can arise from the same wrong to the LLC, the injury must be peculiar to the member. An injury is peculiar or personal if a legal basis exists to support allegations of an individual loss. The diminution or destruction of an investment is (generally) the injury suffered by the LLC itself and therefore, not actionable.
Once the member plaintiff has met the threshold set forth in Barger, a the member plaintiff will have standing to bring individual claims in lieu of, or in addition to, derivate claims on behalf of the LLC.
See my next posts for an overview of standing in derivative claims and a discussion of case law following Barger.