Limited Liability Company Officers and Members Must Remain Aware of Instances Permitting Individual Liability

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2019 Issue One

Limited Liability Company Officers and Members Must Remain Aware of Instances Permitting Individual Liability

By:  Hayden Baker

Generally, the members of a limited liability company (“LLC”) are not personally liable for the debts, obligations, or liabilities of the company in which they are members. In effect, this means that a member’s own personal assets are not on the hook for any of the obligations of the entity. For this very reason, many individuals elect to operate their business as an LLC. However, as sweet as that deal may sound, the members of an LLC must remain cognizant of their personal conduct. In February 2018, the Texas Supreme Court, in State v. Morello, provided one such instance where, regardless of whether the member of an LLC was acting in his capacity as an agent or member of that LLC, he could still be found individually and personally liable for a violation of the Texas Water Code.1

In Morello, the State of Texas brought a civil action under the Texas Water Code against both Bernard Morello and the entity in which he was the sole member, White Lion Holdings, LLC (“White Lion”). The factual scenario giving rise to the action was relatively straight forward. Many years earlier in 2004, Morello purchased a piece of property that had been subject to a “hazardous waste permit and a compliance plan” governed by the Texas Commission on Environmental Quality (“TCEQ”).2 Shortly after his purchase, Morello assigned all of his interest in the property, including any obligations under the TCEQ compliance plan, to White Lion. However, as detailed in the facts of the case, White Lion failed to perform its many obligations under the compliance plan. Accordingly, the state’s suit sought recourse for those violations of the compliance plan.

Logically, one would think that because White Lion was the owner of the property subject to the compliance plan, White Lion would have been answerable for any violation. Nevertheless, the state brought suit against White Lion and Morello in his individual capacity. The state’s theory, in principal part, rested under section 7.102 of the Texas Water Code, reading that any “person who causes, suffers, allows, or permits a violation of a statute … within the [TCEQ’s] jurisdiction … shall be assessed” civil penalties.3 Therefore, the state argued that Morello, as a “person,” caused White Lion’s violation of the compliance plan, a plan promulgated under a statute within the TCEQ’s jurisdiction.

After the trial court granted summary judgment in favor of the state and a reversal of that grant by the Austin Court of Appeals, the parties argued their case before the Texas Supreme Court. Unsurprisingly, Morello’s argument rested on the plain language of the Texas Business Organizations Code, that “a member … is not liable for a debt, obligation, or liability of a limited liability company.”4 However, the Court quickly disregarded Morello’s argument, stating that “the State’s position is not based on the Business Organizations Code; it is based on the Water Code.”5 As such, according to the Court, whether Morello could be found personally liable was to be analyzed by determining whether he was a “person who cause[d], suffer[ed], allow[ed] or permit[ted] a violation” of the compliance plan.6

In ultimately finding that Morello could be found personally liable under the Water Code, the Court furthered three primary arguments. First, the Court found no persuasive reason to exclude an individual from the term “person” contained within section 7.102. Second, that White Lion was the sole owner of the property and held sole responsibility for the compliance plan was immaterial to the Court. Accordingly, the Court held that by the language of section 7.102, any “person” who caused a violation could be found liable, not simply “the person holding the permit.”7 Last, finding that Morello’s actions were in his capacity as an agent and member of White Lion, the Court cited numerous inter-jurisdictional cases standing for the proposition that a corporate agent may not escape individual liability where that agent “personally participated in the wrongful conduct.”8 Therefore, in the opinion of the Court, where a statute applies to any “person,” an “individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.”9

The Morello case is significant in that it provides a particular example of where an officer or member of an LLC can be found personally answerable for his or her conduct, regardless of the capacity in which that conduct was performed in. While the protections of an LLC remain significant with respect to how it protects the personal assets of its members, individuals must remain aware of their personal conduct. Morello demonstrates one such instance where, pursuant to the applicable statutory language, an LLC’s member may have to answer for his or her own violative conduct rather than the conduct of the entity.

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  1. State v. Morello, 547 S.W.3d 881 (2018).
  2. Id. at 883.
  3. TEX. WATER CODE § 7.102.
  4. Morello, 547 S.W.3d at 885 (quoting TEX. BUS. ORGS. CODE § 101.114).
  5. Id.
  6. See Id. See TEX. Water Code § 7.102.
  7. Id. at 886.
  8. Id. at 888.
  9. Id.