Agent Fails to Dislcose Principal Exists, Avoids Liability
Was the limited liability company statute supposed to eliminate basic principles of agency law? That seemsto be the import of a decision by the Appellate Division of Superior Court in Castro v. Giacchi, Docket No. A-6220-12T2 (N.J. Super. App. Div. December 5, 2014)(Opinion Below) that reversed a judgment against an individual who failed to disclose that he was acting on behalf of a limited liability company.
Perhaps just as important as our first question: does it really matter? Here the answer is pretty easy. Absolutely. Understanding agency law – that is the law that governs when one person acts on behalf of another – is critical to understanding how business entities function. The reason is that even though a business entity is a legal person, but it can an only act through its agents. The business entity is distinct from its principals.
Contractor’s Handshake Deal with Sub
The decision arose out of a contruction contract. Castro was subcontracted to do carpentry work on a new home under construction in Southhamptom by Defendants. It was a handshake deal. Plaintiff contended that he never knew Giacchi was acting on behalf of anyone other than himself, but he received two progress payments John & Sons ANG, LLC. The final bill was sent to ANG.
Ordinarily, an agent who fails to disclose he is entering into a contract on behalf of a principal is individually liable on the contract, unless the other party knows or had reason to know the agent was acting on behalf of a principal.
* * *
But N.J.S.A. 42:2B-23 shielded a member or agent of a limited liability company from all of its debts. The statute did not limit the circumstances under which a member or agent was immune from liability, including those where a member or agent of a limited liability company entered into a contract without disclosing the identity of its principal. Being clear and unambiguous, our sole function is to enforce the statute according to its terms.
Contractor Alleges Individual Liability
When the bill went upaid and plaintiff sued, Giacchi contended that that the contract was with another entity, 23234 Kellis Pond West LLC, of which he was a member. The trial court rejected the argument and entered judgment against Giacchi and AMG.
The appeals court reversed, finding that N.J.S.A. 42:2B-23 of the now-repealed limited liability company act barred the claim. The statute provides that
Except as otherwise provided by this act, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company; and no member, manager, employee or agent of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company, or for any debt, obligation or liability of any other member, manager, employee or agent of the limited liability company, by reason of being a member, or acting as a manager, employee or agent of the limited liability company.
Giacchi argued that the plaintiff’s claim fell short of “piercing the veil” of the limited liability company, a remedy that has been traditionally recognized in limited circumstances in which it is unfair to give the principals of a business entity the normal immunity from individual liability.
The evidence also indicated that Giacchi may have failed to tell the plaintiff that he was not acting on behalf of himself but on behalf of another limited liability company when the contract was formed. Ordinarily if someone fails to disclose that he or she is acting on behalf of a principal in making a contract, he or she will liable along with the undisclosed principal, a legal principle that the court held was vitiated by the language of the statute.