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LLC can’t recover damages for breach of sales contract

1222neih_8_DeMouraA limited liability company whose owners failed to disclose that they were acting as the LLC’s agents in negotiating the sale of a purebred dog could not recover damages for breach of contract, the Massachusetts District Court’s Appellate Division has ruled in reversing a $60,000 verdict.

The LLC contended that the buyers of the dog were sophisticated business people who should have known that they were contracting with a commercial entity rather than with individuals.

But the Appellate Division disagreed. In addition to deciding that the LLC could not recover under the contract, the court concluded that the company’s owners had exposed themselves to potential personal liability for the soured deal by failing to observe the disclosure requirements for conducting business on behalf of an LLC.

“[T]he onus was not on the [buyers] to determine with whom they were dealing; rather, the [LLC’s owners] bore the burden, if they were to avoid personal liability, to disclose fully the identity of the principal on whose behalf they were acting,” Judge Sabita Singh wrote on behalf of the unanimous court.

The six-page decision is Keane, et al. v. Waggoner, et al.

Cautionary tale

Kenneth J. DeMoura represented the defendant buyers in the case, Heather and Christopher Keane, on appeal. The Boston lawyer said the case illustrates why officers, directors, and LLC managers and members who think they are protected by a corporate umbrella need to act carefully when conducting business in order to avoid the risk of personal liability.

“The Appellate Division’s opinion reinforces the general rule that individuals have a duty, in fact a burden, to disclose their representative capacity and cannot rely on the other party to the transaction to figure it out for themselves,” said DeMoura, a lawyer at DeMoura Smith.

Attorneys need to advise their business clients not to be “lulled into a false sense of security” by the mere existence of a legal entity such as an LLC, he said, recommending that lawyers remind clients to take affirmative steps to disclose the corporate existence and their representative capacity.

Sean M. Beagan represented plaintiff Vom Daxi Haus, LLC. The Medford attorney did not respond to a request for comment prior to deadline.

But Springfield business and corporate law attorney Scott W. Foster said clients need to understand that the disclosure requirements have real consequences, even though they may consider them mere formalities.

“Even though the formalities for an LLC are less onerous than they are for a corporation, you still need to make sure that the public knows they are dealing with an entity and not with an individual,” said Foster, who practices at Bulkley, Richardson & Gelinas.

Keane provides a clear example to LLC owners of what not to do, Foster said, noting that the contract at issue named an individual owner as the seller without any indication of representative capacity.

“The whole purpose of [the business’s owners] setting up the LLC has been blown by their failure to follow the formalities,” Foster said. “The decision should be a warning to all small business owners that are operating with an LLC to revisit what they have on the top of their contracts, on their websites, or even on their business cards.”

Travis J. Jacobs, a business and corporate law attorney in Boston, said Keane also shows the need for an attorney to be involved in some capacity when a new business is started, regardless of its size.

All too often, Jacobs said, he sees entrepreneurs who just want the legal papers registering their business organization filed without the added value of critical legal advice.

“You have these online websites that will complete your paperwork and file it for a cheap amount, but they give you no counsel on how you need to run your entity and what you need to do in order to protect yourself from personal liability,” he said.

And that can be a big mistake, Jacobs said.

“Business owners really need to ask themselves whether an ounce of prevention is worth a pound of cure,” he said. “For just a few hundred dollars up front for an hour of a lawyer’s time, you can get an outline of what you need to do to protect yourself. That few hundred dollars up front can help you avoid thousands of dollars in litigation fees and judgments.”

Unhappy dog buyers

The Keanes purchased a miniature long-haired dachshund bred by Vom Daxi Haus, LLC. The Wisconsin company is owned by Jacqulyn and Mark Waggoner.

Alleging that they had been deceived as to the dog’s pedigree, the Keanes subsequently sued the Waggoners in small claims court in Massachusetts. Their complaint included a consumer protection claim under G.L.c. 93A, as well as claims of breach of contract and fraud.

The Waggoners removed the case to Cambridge District Court, where Jacqulyn Waggoner filed a counterclaim against Heather Keane for defamation, alleging the buyer had ruined her reputation by spreading lies about their business dealings.

In addition, the plaintiff LLC sued Heather Keane for breach of contract, alleging the buyer had failed to honor the company’s breeding rights in the dog as reserved under the terms of the sales agreement.

Judge Michele B. Hogan dismissed the claims against the Waggoners on the ground that they were immunized from personal liability since they operated within the framework of an LLC.

At trial, the Keanes moved for a directed verdict on the plaintiff LLC’s claim, arguing that there was insufficient evidence that the company was a party to the contract. The Keanes pointed to the fact that the contract listed the seller as Jacqulyn Waggoner, without any indication of representative capacity, and that they otherwise had no knowledge that she was acting as an agent for the LLC.

Hogan denied the Keanes’ motion and a jury returned a verdict in favor of Vom Daxi Haus, LLC, on its breach of contract claim.

Burden of disclosure

The Appellate Division decided that the plaintiffs’ breach of contract claim should not have gone to the jury because there was insufficient evidence that Vom Daxi Haus, LLC, was a party to the contract.

Singh said it is “well established” that individuals acting on behalf of a corporate entity have the burden to disclose their representative capacity in order to avoid personal liability.

“There was no evidence presented at trial that the Waggoners at any point put the Keanes on notice that they were acting on behalf of a corporate entity, rather than as individuals who did business under a trade name,” Singh wrote.

She pointed to the fact that the sales contract listed Jacqulyn Waggoner as the seller. In addition, Singh noted that, while the contract included references to “Jacqulyn Waggoner Family of Vom Daxi Haus,” “Vom Daxi Haus,” and “Vom Daxi Haus Lildoxis,” it made no reference to Vom Daxi Haus, LLC. In addition, the company’s website, which was referenced in the contract and the parties’ negotiations, also made no mention of Vom Daxi Haus, LLC.

The plaintiffs argued that the LLC could be considered a party to the contract because the Keanes were experienced business people who easily could have determined for themselves that the entity was registered as an LLC in Wisconsin.

Singh flatly rejected that line of argument, saying “it does not matter that the Keanes, through research, may have had the means to discover the information.”

The Appellate Division revived the Keanes’ fraud claims against the Waggoners for a reason similar to the reason why it overturned the judgment in favor of Vom Daxi Haus, LLC.

Singh found that the Keanes’ affidavit indicating that they had no knowledge of the corporate entity and that the Waggoners had not disclosed the existence of it was sufficient to defeat the Waggoners’ motion to dismiss.

“The existence of the corporate entity, in and of itself, did not shield the Waggoners from personal liability, particularly where there was no evidence presented that the corporate entity had entered into the contract in question,” Singh concluded.

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