S.C. Supreme Court Rules on Protecting Negligent Contractors

Construction Defect

S.C. builders can’t be shielded by LLC status

The South Carolina Supreme Court ruled on April 4, 2012 in 16 Jade Street v. R. Design Co., LLC, et al.  ruled that a member of a limited liability company, or LLC, can be held personally liability for torts committed while acting on behalf of the company’s business.

The basic facts in the case

16 Jade Street, LLC was the property owner that entered into a contract with general contractor, R. Design Construction Co., LLC for the construction of a four-unit condo project. RDC was owned by its members, Carl Aten and his wife. Aten held a residential home builders license. Aten subbed out part of the work to Catterson & Sons Construction, a corporation, for framing and block installation. Michael Catterson was the sole shareholder of Catterson & Sons. Catterson himself did not perform any construction, but served as a liaison between his foreman and his own workers. Problems arose with the quality of work by Catterson and following a payment dispute, Catterson withdrew from the job. Aten did repair the defects quickly and RDC eventually left the project. A new general contractor was hired to finish the project. Jade Street subsequently sued RDC, Aten individually, Catterson & Sons, and Catterson individually for breach of contract, negligence, and breach of implied warranties.

Aten argued that he was personally shielded for his ordinary negligence as an LLC member by the provisions of the Uniform Limited Liability Company Act as enacted in South Carolina. The Supreme Court was not swayed by this argument even though it admitted that the statute appeared to provide such protection. The court cited the following arguments:

  •  “… a majority of states to examine similar statutory language have concluded that a member is always liable for his own torts and cannot rely on his status as a member of an LLC as a shield.”
  • “Additionally, many scholars opine that LLC statutes do not insulate a member from tort liability primarily due to the common law concept that one is always liable for his torts.”
  • “… the liability shield erected (for LLCs) is one against vicarious liability for non-tortfeasor members, such as Aten’s wife in this case.”
  • “… the right to sue one’s tortfeasor is a long-standing right in our legal system, and we will only find it abrogated by statute through ‘clear legislative intent’.”
  • “… this also has been the rule with respect to shareholders and officers of corporations, an organizational structure from which LLCs borrow heavily. See S.C. Code Ann. 33-6-220(b) ‘A shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liability by reason of his own acts or conduct’.”

Here are the practical implications of the court’s holding for each individual:

  • Aten is not shielded for his own personal negligence by the LLC status of his company.
  • Aten’s wife is shielded by the LLC status of her company since she was not personally negligent.
  • Catterson is shielded by the incorporation status of his company since he was not personally negligent.

In my opinion

This ruling has caused an outcry from the South Carolina building community. However, this has been the case law for many years as regards incorporation by builders. This is how I have always explained things to my clients:

  • Incorporation or LLC status only protects an individual executive superintendent shareholder or member against the negligence of his or her employees (passive negligence).
  • Incorporation or LLC status does not protect an individual executive superintendent shareholder or member against their own active negligence.

As a result, builders will need to look to their General Liability policy for protection against lawsuits that involve their own active negligence. As for construction defect claims, Exclusion CG2294 can be a big problem for builders.

See our other articles for strategies to deal with this exclusion:

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