LLC Members and Shareholders
Can Become Personally Liable for Company Transactions
By Marian L. Faupel, Esq.
In a somewhat shocking decision from the Michigan Court of Appeals issued on January 10, 2006, the Court held that a member of a limited liability company can become personally liable for the debt of his company if the company fails to return property to a potential investor upon demand. In Sytsema et al v Triple Partners, LLC and Michael Bowen, a couple had invested $100,000 in an LLC but did not receive anything for their investment. Meanwhile, the LLC's attorney deposited that money into the company's account with other company funds and then paid $50,000 to a company creditor.
Eventually, the investors asked for their money back, and Michael Bowen, a member of the LLC with ample power to return the money, did not return it. The investors sued both the LLC and Mr. Bowen, and the court entered judgment against Mr. Bowen personally on the theory that he had "converted" their money, i.e., had refused to return it on demand.
This recent case makes it clear that if a corporation or LLC "converts" a person's money or property, then the agents and officers of the company may become personally liable if they do not offer restitution, even if they do not personally benefit from the transaction.
More and more people are relying on the form of their business-i.e., a limited liability company or a corporation-to insulate them from the claims of creditors. If they comply with good business practices, they will generally be entitled to protection from creditors. If they retain power over company decisions and wrongfully deny valid claims such as those in the Sytsema case, they may be held liable for the acts of their agents or those of the LLC, even if they were not directly involved.
The Sytsema case dealt directly with "conversion," not general liabilities of the company, and that may make a difference. Conversion is defined as "any distinct act of dominion wrongfully exerted over another's personal property in denial or inconsistent with his rights therein." To sue for conversion, a person plaintiff must claim that the money or property was obtained without the owner's consent and that the other person had an obligation to return that money on demand. This situation exists where a company requires a deposit that should be returned and isn't, for example, or where a customer pays for something that is not delivered. The solution, of course, is to establish good written policies regarding deposits and refunds and to use employees or agents who will make reasonable business decisions. Finally, the owner of the LLC or corporation should remain aware of actions taken by those persons.
