June 18, 2014

Oregon Limited Liability Protection Goes Only So Far


A court of appeals case that came down earlier this year has raised eyebrows in Oregon's business community.

In Cortez v Nacco Materials, a worker, employed by a limited liability company (the LLC), sued the LLC's member manager, among other defendants, for work related injuries that were covered by the LLC's workers' compensation insurance. The trial court dismissed the claims against the LLC's member manager, finding that the member manager shared the immunity from such claims that is afforded the LLC by Oregon's workers' compensation statutes. On appeal that finding was reversed. The LLC's member manager did not share the LLC's statutory immunity, and the negligence claims were sent back for trial.

This result has surprised and alarmed some Oregon employers who believed that their owners and managers were protected from such liability by the statutory provisions governing business entities, such as limited liability companies, in conjunction with workers' compensation laws. Based upon a very specific reading of the statute, the appeals court ruled that the workers' compensation law does not extend immunity protection to member managers of limited liability companies.

Limited Liability Companies

A limited liability company is one of a number of types of business entities that are authorized by law to form and conduct business in the state. Company ownership interests are distributed to one or more members, who share responsibility for company management unless the organizational documents delegate these responsibilities to designated managers. When properly formed and registered, the limited liability company allows the entity to operate distinctly from its members who may not be held responsible for the debts and liabilities of the company solely for being a member or acting as a manager of the company.

In this case, the LLC was held and managed by a single member. After receiving statutory benefits from the LLC's workers' compensation insurance, the employee filed suit against others, including the LLC's member manager, alleging that their negligent or wrongful conduct had caused or contributed to his injuries. The member manager challenged the suit, claiming that its liability was fully satisfied by the workers' compensation benefits paid.

Workers' Compensation Insurance

Workers' compensation insurance provides employee benefits for work related injury or illness without regard to who is at fault. Under workers' compensation statutes, the insurance benefit is the only liability for which the employer is responsible on account of such injury or illness. The benefits are mutual. The employee receives assured prompt compensation if he or she is hurt on the job; the employer gets immunity from all other claims.

Workers' compensation laws do not prohibit workers from seeking additional or alternative compensation from others who might be at fault for their injuries. The statute specifically extends the employer's immunity to its agents, employees, and corporate officers and directors engaged in furtherance of the employee's work. The statute does not identify limited liability company members or managers.

In Cortez, the employee did not sue the LLC, which had employer's immunity as a result of the workers' compensation benefit. The employee did sue the LLC's single member, alleging the member's negligent acts and omissions as manager of the LLC.

The Results in Cortez

Agreeing that the limited liability company entity shields the company's member from liability arising solely out of its owner or manager status, the appeals court noted that it does not protect the member from liability arising out of its own negligent acts or omissions. Thus, unless the LLC's immunity extended to its member manager, the injured employee could succeed in the claim against the member. Relying upon the statutory language, and a review of the legislative history of the statute, the appeals court determined that the workers' compensation law does not extend the employer's immunity to the LLC's member manager. The employee's claim was allowed to go forward.

The opinion in Cortez v Nacco Materials applies only to limited liability companies and their members. The question as to whether this is the best result will probably have to await a higher appeal or, more likely, a legislative act. Recently, the defendant LLC member filed a petition for review by the Oregon Supreme Court. The court has not yet announced whether it will accept the appeal. Whether and to what extent the court will consider the matter on review, as well whether the court will reject, modify, or affirm the appellate decision are open questions. Even with a favorable court decision in hand, LLC-employers may need to go to the legislature for complete relief.

In the meantime, employers can benefit from the lesson handed down in this case. Regardless of the business entity, maintain clear distinctions between ownership and management activities to preserve the legal protections afforded to corporate shareholders and LLC members.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

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