Pepsi-Cola Bottling Co. v. Handy

Brief Fact Summary.

The Pepsi-Cola Bottling Company of Salisbury, Maryland (Plaintiff) had purchased land from Willow Creek Estates, LLC (Defendant) and claimed that Defendant did not shield its members from liability for fraud committed before the LLC was formed.

Synopsis of Rule of Law.

If a person makes material misrepresentations to persuade a buyer to purchase a parcel of land at a price that greatly exceeds fair market value, and then forms an LLC to purchase and hold the land, that person cannot later claim that his status as an LLC member protects him from liability to the buyer.

Facts.

Handy (Defendant), Ginsburg (Defendant) and McKinley (Defendant) had a contract of sale for a tract of undeveloped land they were interested in developing.  Before commencing development, they learned from an environmental study firm that the land had wetlands, which negatively affected the land’s value and development potential.  Therefore, they abandoned their plans to develop and decided to sell the property after they acquired it.  The Pepsi-Cola Bottling Company of Salisbury, Maryland (Plaintiff) expressed interest in purchasing the land.  Unaware that wetlands existed on the property, Plaintiff acquired an option to purchase the property from Handy (Defendant), who was acting on his and the other sellers’ behalf.  During the option period, Handy (Defendant) was deceptive in falsely responding to an environmental investigation questionnaire indicating that there were no wetlands on the land, and not disclosing that another environmental study firm had already performed a written preliminary wetlands determination in the prior month.  In addition, when he responded to the question whether any analytical tests or inspections had been performed on the property previously, Handy (Defendant) falsely indicated that “no analytical tests or inspections [had] been conducted on the groundwater, surface water, or soil of the Property.â€Â  Two weeks after Plaintiff acquired its option, Handy (Defendant), Ginsburg (Defendant) and McKinley (Defendant) formed Willow Creek Estates, LLC (Defendant) for the purpose of selling the property.  Willow Creek (Defendant) purchased the property for $174,000 and then sold the property to Plaintiff for $455,000.  The Defendants, Willow Creek’s (Defendant) members profited $281,000 on the sale.  After Plaintiff learned that the property contained wetlands, it brought an action for rescission and damages, claiming, inter alia, claims of fraud and unjust enrichment based on the facts that none of the defendants informed Plaintiff that the land contained wetlands and that the defendants knew that if Plaintiff had been informed about the wetlands, Plaintiff would not have paid as much for the property as it did.  The defendants moved to dismiss, arguing that even if the claims were legally sufficient, no relief could be granted because there could be no recovery against individual members of the LLC in this particular case, as they never individually held legal or equitable title to the land.

Issue.

If a person makes material misrepresentations to persuade a buyer to purchase a parcel of land at a price that greatly exceeds fair market value, and then forms an LLC to purchase and hold the land, can that person later claim that his status as an LLC member protects him from liability to the buyer?

Held.

(Jacobs, V. Chan.)  No.  If a person makes material misrepresentations to persuade a buyer to purchase a parcel of land at a price that greatly exceeds fair market value, and then forms an LLC to purchase and hold the land, that person cannot later claim that his status as an LLC member protects him from liability to the buyer.  The defendants claim protection under a state statute (DLLCA. §18-303(a)) that protects members and managers of an LLC against liability for any obligations of the LLC for the sole reason of being or acting as LLC members or managers.  However, because the facts alleged in the complaint show that the LLC was not formed (and the property was not acquired by the LLC) until after the alleged critical wrongful acts had been committed, then the defendants could not have been acting “solely as members of the LLC when they committed those acts.â€Â  The defendants, therefore, are not shielded from liability by this provision.  The defendants next claim they are also protected by another statutory provision (DLLCA S§18-607).  That section prohibits the stripping of corporate assets in order to render an LLC insolvent, and creates a corporate cause of action against LLC members who improperly receive a distribution of those assets.  The defendants argue that this is the only provision that allows a third party to recover from an LLC member without piercing the LLC’s corporate veil, and because the complaint did not allege a claim under this provision, the defendants cannot be held liable.  However, the defendants read this provision too broadly.  In their interpretation, the provision would shield them from all claims except those brought under the provision itself, but there is nothing in the provision that supports that interpretation.  Plus, as discussed previously, a third party may recover from an LLC member on claims that do not arise “solely by reason of being†an LLC member or manager.  Because all counts of the complaint are based on conduct that occurred prior to the forming of the LLC, and since the LLC statute offers no protection against liability to LLC members who are sued in capacities other than as members of an LLC, those claims are not barred.  Motion to dismiss is denied.

Discussion.

The court determined that all the claims were not barred, therefore, the court did not need to reach the defendants’ other argument that the only way personal liability could be imposed on them was by piercing the LLC’s corporate veil, so that the LLC’s acts and obligations are legally recognized as those of its constituent members because of the members’ great influence over the LLC and such a unity of interest and ownership that the individuality, or separateness, of the members and the LLC has ceased, and holding to the fiction of the separate existence of the LLC would, under the circumstances, sanction a fraud or promote injustice.