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You might think that the Maryland statute was perfectly clear:

Except as otherwise provided by this title, no member shall be personally liable for the obligations of the limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company.

The only exceptions mentioned in the applicable title pertain to rendering professional services. Therefore, if a limited liability company (an “LLC”) owns property, and someone is injured on that property, allegedly because of a condition on the property, maybe the LLC has liability. But not a member of an LLC. The statute says clearly that a member, that is, an owner, is not personally liable for LLC obligations “whether arising in …tort or otherwise….” No personal liability- right? Just like a stockholder of a corporation is not liable for the obligations of the corporation.

Wrong. Or at least, maybe wrong. The Maryland Court of Appeals, like many courts around the country, apparently does not approve of what the LLC statute says and has come up with a way around it. In Allen v. Dackman, 991 A.2d 1216 (2010), the Court of Appeals of Maryland held that an individual member of an LLC could be held personally liable, that is, the limited liability shield could be pierced, under the Baltimore City Housing Code. The reason given: The individual who owned the LLC could control it, and, thereby, control the property where the tort occurred. The Court also held that the trier of fact should be provided the opportunity to see whether the member was personally involved in the alleged tort. In reaching this tortured decision the court overruled the Circuit Court and Court of Special Appeals.

There is an old legal maxim that some people consider a cliché. But it is true here. “Hard cases make bad law.” The plaintiffs in Allen alleged that as minor children they suffered lead paint poisoning during the period they resided on the property. For most of this period, the defendants did not even own the property. And during the one year period the defendants did own the property, they instituted litigation to have the plaintiffs, who were occupying the property illegally, removed. It is probable that the only defendant with deep pockets was the individual member of the LLC. The only way for the plaintiffs to have access to whatever assets the individual member had was to pierce the limited liability veil, which the court permitted them to do. In doing so, the court jeopardized the viability of the Maryland limited liability law.

On October 13, 2011, I wrote a blog concerning the competition between Maryland and Delaware as jurisdictions for organizing a business. One of the principal reasons so many companies are organized under Delaware law is the consistency of sensible decisions by the Delaware courts. The language of the Delaware statute providing limited liability to members of a limited liability company is almost identical to the language of the Maryland statute. And yet there is no Delaware case comparable to Allen, nor is there likely to be one.

There are, of course, other jurisdictions where the courts have demonstrated unhappiness with the limited liability provided by the state legislature to members of an LLC. Thus, notwithstanding the clear language of these statutes, there is always the possibility that the veil will be pierced. Historically, at least in the corporate context, the prevention of fraud has always been a legitimate reason to pierce the corporate veil. Certain other factors have been considered as well to determine whether a corporation’s veil, and perhaps now an LLC’s veil, should be pierced: failure to be properly designated as an LLC or corporation in contracts; failure to maintain separate books and records from the owners; and inadequate capitalization. Other than to prevent fraud, none of these factors should be relevant. But, as the Allen case demonstrates, you never know how a court will react.

Meanwhile, in view of the Allen case, those who organize LLCs under the Maryland statute do so at their peril.