Wednesday, February 05, 2003

Limited Liability and Its Discontents, Part 1

Last week, I gave a brief presentation at the Advanced Limited Liability Entity Institute which I entitled "Limited Liability and Its Discontents." The presentation discussed PLR 200235023 which sets forth the Internal Revenue Service's position with respect to the limited liability shield of LLCs in a variety of factual settings.

I will discuss PLR 200235023 in a subsequent posting later this week. However, the IRS is not the only potential attacker of the ramparts of limited liability. I suspect that this is a topic that I will come back to with some regularity. Happily, I can begin the series with a case in which liability limitations were respected.

On January 22, a unanimous Supreme Court upheld the dismissal of a claim for a violation of the Fair Housing Act against the principal of a corporation engaged in the real estate business. There was no question but that a violation of the Act had occurred--an interracial married couple had been hindered in their attempt to purchase a home for racially discriminatory reasons. In addition to bringing an action against the agent, who was directly responsible for the acts complained of, and the corporation for which he worked, the plaintiffs brought a claim against Meyer. Meyer was the president and sole shareholder of the corporate defendant. Furthermore, he was the licensed "officer/broker" of that corporation under a California law that requires corporations, in order to engage in acts for which a real estate license is required, to designate one of its officers to act as the licensed broker. However, there was no allegation that Meyer participated in, authorized, directed, or in any way countenanced the wrongful actions of the agent.

The district court had dismissed the claims against Meyer, construing them as claims to impose vicarious liability, which it concluded was not imposed on corporate officers by the Fair Housing Act. The Ninth Circuit reversed, holding that Meyer could be held liable because he had the authority to control the acts of the corporation's sales agent and, even if he neither participated in nor authorized the discrimination in question, that control or authority to control was sufficient to impose liability upon him.

The Supreme Court reversed the appeals court and upheld the dismissal. The Court construed the question before it as whether "owners and officers of corporations . . .are automatically and absolutely liable for an employee's or agent's violation of the [Fair Housing] Act . . .even if they did not direct or authorize, and were otherwise not involved in, the unlawful discriminatory acts."

The logic of the opinion is as follows: Statutes are written against the background of the common law and common law principles ought to be applied in interpreting a statute’s meaning unless it is clear that the legislature intended a specifically contrary result. Traditionally, wrongful acts of agents acting in the course of their agency will cause liability to be imposed upon their principals. However, when an agent is employed by a corporation, the agent's principal is the corporation, not the corporation's owner or the agent's supervisor. Thus, "the 'right to control' is insufficient by itself, under traditional agency principles, to establish a principal/agent or employer/employee relationship."

In a sense, it's heartwarming to see a court apply traditional principles. (Although it would have been nicer if that same court was consistent in its application of traditional principles. I seem to recall a case in November of 2000 in which they shot tradition to hell.) But the Court was equally clear that these traditional principles could be overridden by legislative action. Thus, limited liability remains at risk of future attacks by its discontents.

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