scenarios

173

VICARIOUS SUPERVISORY LIABILITY IN THE

LLP, LLC, AND CORPORATION: TIME TO DO

AWAY WITH THE LAST VESTIGE

OF THE GENERAL PARTNERSHIP

NICHOLAS C. MISENTI*

I. (INTRODUCTION

The doctrine of respondeat superior is not applicable to the

relationship between a supervisor and his subordinate

employees. The supervisor occupies an economic and legal

position quite different from that of the employer. It is not

the supervisor’s work that is being performed, nor does he

share in the profits which the employees’ conduct is

designed to produce. In the usual situation, furthermore, he,

like his subordinates, is a wage earner, and he is seldom able

to respond in damages to an appreciably greater extent than

they. For these reasons, the law has shifted financial

responsibility from the supervisor, who exercises immediate

control, to the employer, who exercises ultimate control and

for whose benefit the work is done.1

Exceptions to limited liability may be most closely

associated with the LLP. When the LLP was first created in

Texas, partners were not provided full limited liability.

(Instead, legislators partially retained vicarious liability from

the general partnership in the first version of the LLP.

Specifically, partners in an LLP remained vicariously liable

* J.D., CPA. ( 1 California Supreme Court Chief Justice Robert Traynor, explaining

why vicarious supervisory liability is inappropriate. Malloy v. Fong, 37

Cal. 2d 356, 378-9, 232 P.2d 241, 254-5 (Sup. Ct. 1951).

174

for the acts and omissions of non-partner employees and

agents, and for the general debts of the partnership.2

However, one exception to limited liability, in the

form of vicarious liability, predates the LLP: namely,

vicarious supervisory liability.3 This exception first

appeared in the corporation, in the 1960s when professionals

were first allowed to incorporate. Today, this exception

exists in many states in the corporation, LLC, and LLP.

(Vicarious supervisory liability generally applies only in

entities that provide professional services, although at least

one state, Connecticut, applies this exception to all LLPs.4

Recent literature has not examined the underpinnings

for this exception to limited liability. It has essentially gone

unnoticed and unchallenged.5 Why vicarious supervisory

liability exists at all is unclear. (Different theories can be

envisioned that could possibly support vicarious supervisory

liability. (The history of prohibitions on professionals

incorporating, and the history of the first LLP in Texas, offer

2 Elizabeth S. Miller, The Perils and Pitfalls of Practicing Law in A

Texas Limited Liability Partnership, 43 Tex. Tech L. Rev. 563, 564

(2011). Another way of looking at it is that the initial version of the

LLP in Texas only eliminated mutual agency, so that partners would

not be vicariously liable for the acts and omissions of the other

partners. 3 A typical version of the exception makes someone vicariously liable

for the acts and omissions of another person who they directly

supervise and control to the person who is being rendered professional

services. (See, e.g., 8 Del. C. 1953, §608. 4 CGS Sec. 34-327(d). (Strangely, in contrast to the LLP, CT applies

vicarious supervisory liability only to corporations and LLCs that

provide professional services. No explanation for this inconsistency can

be found. 5 The literature has focused solely on what is “direct supervision and

control” that could trigger vicarious liability, without questioning why

the exception exists. See, e.g., Susan Saab Fortney, Professional

Responsibility and Liability Issues Related to Limited Liability Law

Partnerships, 39 S. Tex. L. Rev. 399, 439–40 (1998).

175

some insights as to its origin. However, in the end, the

possible theories that could support vicarious supervisory

liability lack merit. There are also inconsistencies in

whether, or how, states apply vicarious supervisory liability,

and inconsistencies within the same state as to how the

exception applies to a corporation, LLC, or LLP. (The

general partnership can be seen as the basis for vicarious

supervisory liability. (However, in some states, vicarious

supervisory liability applies to classes of supervisors in a

corporation and LLC who would not have vicarious

supervisory liability in a general partnership. (There seems

to be no well-reasoned explanation for these inconsistencies,

but states which are leading the way, such a s Texas,

demonstrate that the time has come to do away with

vicarious supervisory liability.

II. COMMON VERSIONS OF VICARIOUS SUPERVISORY

LIABILITY

A. The Professional Corporation Models

States generally limit vicarious supervisory liability

to professional corporations. (However, exactly who in a

professional corporation is potentially subject to vicarious

supervisory liability varies by state. (Several different

models exist. (

1. The “Any Person” Model

A common version of vicarious liability in the

corporation makes any person (director, officer, shareholder,

agent, or employee) of the corporation personally liable for

the acts and omissions of any person under his or her direct

supervision and control. Liability extends to any persons

receiving professional services from the business and

176

harmed by the acts and omissions. (For example, Delaware,6

Connecticut,7 Florida,8 New York,9 New Jersey,10 Illinois,11

and Washington State12 follow this model. (

Delaware has a typical provision:

Any officer, employee, agent or

shareholder of a professional

corporation shall remain personally

and fully liable and accountable for

any negligent, wrongful acts, or

misconduct committed by such

person, or by any person under such

person’s direct supervision and

control, while rendering professional

services on behalf of the professional

corporation to the person for whom

such professional services were being

rendered.13

Connecticut has a slightly different provision that omits

shareholders from the mix:

. . . any officer, agent or employee of a

corporation … shall be personally liable and

accountable only for negligent or wrongful

acts or misconduct committed by him, or by

any person under his direct supervision and

control, while rendering professional services

6 8 Del. C. 1953, §608 7 CGS Sec. 33-182e. 8 Fl Stat. §621.07. 9 NY Business Corporation Law §1505 (McKinney). 10 NJ REV STAT SECTION 14A:17-8. 11 IL 805 ILCS 10/8. 12 Washington PC Statute §18.100. 070. 13 8 Del. C. 1953, §608.

177

on behalf of the corporation to the person for

whom such professional services were being

rendered . . ..14

The omission of shareholders from the Connecticut

statute is of no practical significance, since any shareholder

directly supervising and controlling employees would also

be an employee/agent of the corporation.

2. The “Shareholder” Model

Oregon takes a narrower approach and makes only

shareholders vicariously liable for the acts and omissions of

any person under his or her direct supervision and control to

any persons receiving professional services:

In the rendering of specified professional

services on behalf of a domestic professional

corporation to a person receiving the service

or services, a shareholder of the corporation

is personally liable as if the shareholder were

rendering the service [ ] as an individual, only

for negligent or wrongful acts or omissions or

misconduct committed by the shareholder, or

by a person under the direct supervision and

control of the shareholder. 15

14 CGS Sec. 33-182e. 15 2017 ORS 58.185(3).

178

3. The “No Vicarious Supervisory Liability” Model

Some states, such as Texas, make no liability distinction

between professional and other corporations and thus do not

impose vicarious supervisory liability on any corporation.16

This model is consistent with the concept of a separate legal

entity. (

B. The LLC Vicarious Liability Models

States also take different approaches to vicarious

supervisory liability in the LLC. States apply the “Any

Person” or the “No Vicarious Supervisory Liability” models.

There is no discernable explanation as to why no states

appear to apply the “Shareholder” model to LLCs and

instead apply vicarious supervisory liability only to

Members. (

1. The “Any Person” Model

Connecticut, New York, and Illinois follow the “Any

Person” Model.17 The Illinois professional LLC statute has

a typical provision:

Any manager, member, agent, or employee

of a professional limited liability company

shall remain personally and fully liable and

accountable for any negligent or wrongful

acts or misconduct committed by him or her

or by any person under his or her direct

supervision and control while rendering

professional services on behalf of the

professional limited liability company.18

16 See, e.g., Tex. Bus. & Comm. Code Sec. 301.010. 17 CGS Sec. 34-251a(c), N.Y. P’ship Law § 26(c)i (McKinney), 805

ILCS 185/35. 18 805 ILCS 185/35.

179

This LLC model in Connecticut, New York, and Illinois is

at least consistent with the corporate models in these states,

but that also means it suffers from the same faults.19

2. The “No Vicarious Supervisory Liability” Model

Some states apply the “No Vicarious Liability”

Model to LLCs, even when they impose that vicarious

supervisory liability in the corporation. (Thus, while

Delaware imposes the “Any Person” model in the

corporation, it applies the "No Vicarious Supervisory

Liability model in the LLC.20 Similarly, Oregon applies the

narrower “Shareholder” model in the corporation, but it does

not impose vicarious liability at all in the LLC.21 The most

likely explanation for these inconsistencies seems to be that

the corporate statutes have not been updated since the

statutory creation of the LLC entities in those jurisdictions.

(On the other hand, the Illinois professional LLC statute that

applies the “Any Person” model of vicarious supervisory

liability in professional service LLCs is fairly new.22

C. The LLP Vicarious Liability Models

1. The “Any Person” Model

New York adopts the “Any Person” model for

LLPs.23 Thus, New York consistently applies this model

across all three types entities. (This due to the somewhat

unusual fact that one statutory provision applies to all

professional entities in New York. While New York has

more consistency than most states, why there would be

19 These faults are discussed below in subpart I.D, infra. 20 Del Stat. Title 6 § 18-303. 21 Or Stat. 63.165. 22 IL P.A. 99-227, eff. August 3, 2015. 23 N.Y. P’ship Law § 26(c)i (McKinney).

180

greater exposure to vicarious supervisory liability in a

corporation, LLC, and LLP than in a general partnership

remains unclear.

2. The “Shareholder” Model

In contrast, Connecticut imposes vicarious

supervisory liability only on partners in an LLP.24 This is

consistent with the “Shareholder” model some states use for

corporations and general partnerships. However, it is not

consistent with the “Any Person” model that Connecticut

applies to corporations and LLCs. Why Connecticut imposes

liability to corporations and LLCs yet uses a different

standard for LLPs defies explanation. (Still stranger is the

fact that Connecticut makes no distinction between

professional and other LLPs, and instead imposes vicarious

supervisory liability in all LLPs. (Connecticut provides that

limited liability in an LLP “shall not affect the liability of a

partner in a registered limited liability partnership for his

own negligence, wrongful acts or misconduct, or that of any

person under his direct supervision and control.”25 This

creates the anomaly that a person who will not provide

professional services can form a Connecticut corporation or

LLC, instead of an LLP, and thereby avoid vicarious

supervisory liability all together. (

3. The “No Vicarious Supervisory Liability” Model

Ironically, Texas, the birthplace of vicarious

supervisory liability,26 no longer applies vicarious

supervisory liability in the LLP. (Texas law provides that:

24 CGS Sec. 34-327(d). 25 Id. 26 For a discussion of the history of the Texas LLP statute, see Robert

W. Hamilton, Registered Limited Liability Partnerships: Present at the

Birth (Nearly), 66 U. Colo. L. Rev. 1065 (1995).

181

An owner, managerial official, employee, or

agent of a professional entity . . . is not

subject to the same liability imposed on the

professional entity under this section. 27

The application in Texas of a single statutory provision to all

professional entities is unusual. (New York also has a single

statutory provision that applies to all professional entities.

(However, unlike Texas, New York applies the “All

Persons” model to all professional entities.28

D. Flaws in the “Any Person” Model

The "Any Person" model reduces exposure to

vicarious liability for a shareholder/owner of a corporation,

as compared to a general partner in a general partnership,

because vicarious liability of a shareholder is limited to

vicarious supervisory liability. In a general partnership, the

general partners have unlimited vicarious liability because

they are in essence the business. (However, that vicarious

liability is limited to the general partners in a general

partnership. The "Any Person" model in the corporation

creates the anomaly that a nonowner (director, officer, agent,

or employee) would have less exposure to vicarious

supervisory liability in a general partnership than in a

corporation. (It is unclear that this is a result specifically

contemplated by the legislature, and instead is an illustration

of the often irrational nature of vicarious supervisory

liability.

27 Tex. Bus. Org.'s Code Sec. 301.010(b). 28 N.Y. P’ship Law § 26(c)i (McKinney).

182

E. Flaws in the “Shareholder” Model

The “Shareholder” approach is consistent with the

general partnership model. (But it is not free of serious

faults. (Multiple theories could explain the imposition of

vicarious supervisory liability upon an owner of a separate

legal entity, such as a corporation. (One theory posits that,

but for vicarious liability, a shareholder could escape

personal lability for wrongdoing, such as negligently

supervising an employee. (However, this theory lacks merit

since personal liability for wrongdoing, including direct and

supervisory negligence, is a well-established exception to

limited liability in a corporations, LLCs, and LLPs.29

Another potential theory is that professionals owe a

“super duty” to patients and clients, such that they guarantee

the work of persons they directly supervise. (If that is the

case, then this model produces a peculiar outcome in that a

non-shareholder supervisors will escape vicarious liability.

(In short, there is no justification for vicarious supervisory

liability under the Shareholder Model.

III. THE ROOT OF VICARIOUS SUPERVISORY LIABILITY:

VICARIOUS LIABILITY IN THE GENERAL PARTNERSHIP

Before the 1960s, professionals were denied the right

to incorporate and were therefore relegated to operating in

general partnership or sole proprietorship entities.30 A

29 See, e.g., Jane Doe, et al. v. Chad Coe, et al., 2019 IL 123521 (May

23, 2019). (See also, Nicholas Misenti, Personal Liability for

Commission of a Tort: A Significant, and Often Overlooked, Exception

to Limited Liability in the LLC and Corporation October

2016 Southern Journal of Business & Ethics, Volume 8 (2016), p. 11. 30 Thill, Debra L., The Inherent Powers Doctrine and Regulation of the

Practice of Law: Will Minnesota Attorneys Practicing in Professional

Corporations or Limited Liability Companies be Denied the Benefit of

Statutory Liability Shields?, William Mitchell Law Review: Vol. 20:

183

general partnership is an undesirable entity in which to

operate a business. Vicarious liability is the hallmark of the

general partnership. (Each partner in a general partnership is

an agent of the partnership.31 Respondeat superior makes a

principal vicariously liable for all of the acts and omissions

of an agent that are committed while carrying out the

principal’s business.32 Partners in a general partnership have

joint and several liability for the partnership’s debts.33 The

result is that a partner in a general partnership is vicariously

liable for the acts and omissions of all partners and

employees of the partnership committed in the course of the

partnership’s business.34

State legislatures have expressed outright hostility to

the idea of professionals, in particular lawyers and

physicians, incorporating.35 Even when professionals have

been allowed to incorporate, this hostility has continued as

states adopted varying restrictions on limited liability. (The

majority of states adopted vicarious supervisory liability as

the exception.36 It is this vicarious supervisory liability that

Issue. 4, Article 7, 1143 (1994)).

Available at: http://open.mitchellhamline.edu/wmlr/vol20/iss4/7.

George A. Buchmann, Jr. and Ralph H. Bearden, Jr., The Professional

Service Corporation - A New Business Entity, University of Miami

Law Review XVI No. 1, p. 1, Fall 1961. 31 UPA Section 301(1). 32 Restatement (Second) of Agency § 219 (1958). 33 UPA Section 306(a). 34 Unif. Ltd. P'ship Act § 404(a) (2001). Lauris G.L. Rall, A General

Partner's Liability Under the Uniform Limited Partnership Act (2001),

37 Suffolk U. L. Rev. 913, 926 (2004). 35 Will Minnesota Attorneys Practicing in Professional Corporations or

Limited Liability Companies be Denied the Benefit of Statutory

Liability Shields?, William Mitchell Law Review: Vol. 20: Issue. 4,

Article 7, p. 1143, 1154-5, fn 68.Available at:

htp://open.mitchellhamline.edu/wmlr/vol20/iss4/7. 36 Thill, Debra L., The Inherent Powers Doctrine and Regulation of the

Practice of Law: Will Minnesota Attorneys Practicing in Professional

Corporations or Limited Liability Companies be Denied the Benefit of

184

exists today in the corporation, LLC, and LLP. (Thus, an

understanding the history of the prohibition on professionals

incorporating is important.

IV. (THE PROHIBITION AGAINST PROFESSIONALS

INCORPORATING AS THE ORIGIN

OF VICARIOUS SUPERVISORY LIABILITY

The lifting of the prohibition on professionals

incorporating in the 1960s marks the first appearance of

vicarious supervisory liability in the corporation. Therefore,

it is important to understand why this prohibition existed,

and why it was lifted. (In his 1958 article, H. Bradley Jones

examined the rationales underling the prohibition against

professionals incorporating.37 Jones summarized this

rationale as follows:38

1. A corporation itself cannot practice a profession because it cannot meet licensure requirements, such

as minimum education and testing requirements

(“corporate licensure rationale”);

2. A professional relationship is personal, and a corporation itself cannot engage in a personal

relationship (“personal relationship rationale”);

3. Incorporation by professionals would undermine a professional’s primary duty is to his client or patent

because a professional would be beholden to the

corporation (“primary duty rationale”);

Statutory Liability Shields?, William Mitchell Law Review: Vol. 20:

Issue. 4, Article 7, p. 1143, 1154, fn 68 (1994).

Available at: htp://open.mitchellhamline.edu/wmlr/vol20/iss4/7 37 H. Bradley Jones, The Professional Corporation, Fordham Law

Review, Volume 27, Issue 3, Article 3 (1958). (Bradley also proposed a

model professional corporations statute with characteristics that were

eventually adopted into law, including the requirement that all

shareholders be licensed in the same profession. (Id., at pp 360-3. 38 Id., at pp 354-5.

185

4. A “middle-man” should not be inserted between a professional and his patent or client (“middle-man

rationale”);

5. The contract for professional services would be between the patient or client and the corporation, not

the professional, thus relieving the professional of

any duties to the patient or client (“contract

rationale”);

6. Even if all shareholders were licensed processionals, transfer of their shares to unlicensed individuals

could occur (“unlicensed professionals rationale”);

7. A corporation itself cannot be suspended from professional practice because it cannot be licensed to

practice a profession in the first place (“professional

discipline rationale”); and

8. Incorporation by professionals is unethical because a corporate limited liability shield would prevent

professionals from being sued for negligence, and in

particular, for medical malpractice (“personal

liability shield rationale”).

An examination of these rationales shows that they are, at

best, questionable and many may fairly be described as

specious.

A. (The Corporate Licensure Rationale

The corporate licensure rationale is but a truism. (It

is true that an inanimate entity cannot meet educational,

testing, and experience requirements to obtain a professional

license, but that is not relevant. As early as 1938,

commentators argued that the purpose of professional

licensing statutes was being misconstrued and that there was

no reason a corporation would need to be licensed to practice

186

a profession.39 Licensing statutes are designed to protect the

public by ensuring that the individuals actually practicing the

profession are competent; licensing individuals fulfills this

purpose. While allowing laymen shareholders to direct

professionals in a corporation could present an issue, that

issue is easily resolved, and the purpose of licensing statutes

fulfilled, simply by requiring that all shareholders be

licensed in the same profession.40

B. (The Personal Relationship Rationale

The personal relationship rationale is another

example of a truism. It is true that an inanimate entity cannot

engage in a personal relationship. (However, it is also true

that professionals within the corporation, and not the

corporation itself, actually provide the services to patients

and clients, and in this process they can, and do, establish

personal relationships with patients and clients, thus making

the personal relationship rationale irrelevant. (It also

appears that the personal relationship rationale is a different

expression of some of the other rationales, including the

corporate licensure and middle-man rationales, and may

have been designed to provide a further underpinning for the

penultimate rationale, the personal liability shield rationale.

C. (The Primary Duty Rationale

The primary duty rationale posits that a professional

with an employer would be beholden to the employer, and

put the employer’s interests, including maximizing profits,

ahead of the interests of the client or patient. This rationale

appears to be based on the mistaken belief that duties of the

39 Note, Right of Corporation to Practice Medicine, 48 Yale L.J. 346,

348 (1938). 40 Id, at p. 348.

187

professional to a corporation necessarily would supplant the

duties of the professional to the patient or client.41 This

rationale also fails to recognize that a professional who has

not incorporated has the same objective of making money,

and may put his financial interests ahead of the patient’s or

client’s interest. The introduction of the corporation does not

change that argument. The issue, that laymen shareholders

with no understanding of the profession and only a profit

motive could direct professionals to put the corporation’s

interests before the patient’s or client’s interests, also

presents itself here.42 Again, this issue is easily resolved

simply by requiring that all shareholders be licensed in the

same profession.

D. (The Middle-Man Rationale

The middle-man rationale may be the weakest

rationale of all. (Simply put, it is hard to explain how an

inanimate entity could physically impose itself between a

professional and a patient or client. A corporation could not

be in the room interfering with the professional’s

relationship with a patient or client. (Nor could a corporation

affirmatively act to undermine the professional’s

relationship with a patient or client. (In short, this rationale

is not born out in the real world. (The middle-man argument

is most closely related to the contract rationale.

41 See, e.g., In re Co-operative Law Co., 198 N.Y. 479 (1910), where

the New York Appellate Court invalidated a corporation that was

established to practice law. The court offered the typical rationale,

including the idea that if lawyers were allowed to incorporate, they

“would be subject to the directions of the corporation, and not to the

directions of the client”, and “the attorney would be responsible to the

corporation only.” Id., at 483-4. 42 In re Co-operative Law Co., supra, at 483.

188

E. (The Contract Rationale

If a corporation is used to provide professional

services, the contract rationale theorizes that the contract for

professional services would be between the patient or client

and the corporation, but not the professional. (While it is also

true that the corporation would be inserted between the

patient or client and the professional, the professional’s

duties to a patient or client do not arise only from the

contract. (Stated differently, even if the contract were

between the patient or client and the corporation, the

professional would still owe duties to the patient or client.43

The lack of contractual duties does not extinguish duties,

such as those that arise under tort law. (Tort duties arise and

exist independently of contract duties.

The economic loss doctrine needs to be considered

here. (This doctrine provides that, where a contract exists

between a plaintiff and defendant, and damages are solely

economic in nature, a tort action is barred, and the only

remedy is for breach of contract.44 This would seem, at first

glance, to provide a basis for the contract rationale.

However, there are two relevant exceptions to the economic

loss doctrine which are universally applied: a tort action is

allowed where the professional services are involved, or

where personal injuries occurred.45 In short, the contract

rationale lacks merit.

43 In In re Co-operative Law Co, the New York Appellate Court opined

that if a contract for legal services existed between a corporation and

the client, “There would be neither contract nor privity between him

and the client, and he would not owe even the duty of counsel to the

actual litigant.” In re Co-operative Law Co., supra, at 483. 44 For a discussion of the economic loss doctrine, see Nicholas Misenti,

Personal Liability for Commission of a Tort: A Significant, and Often

Overlooked, Exception to Limited Liability in the LLC and

Corporation, Southern Journal of Business & Ethics , Volume 8

(2016), p. 11, 27. 45 Id., at 29.

189

F. (The Unlicensed Professionals Rationale

The unlicensed professionals rationale is easily

addressed by requiring shareholders to members of the same

profession, and prohibiting transfers to laymen, which is

what H. Bradley Jones suggested in 1958,46 and what

ultimately became law when professionals were allowed to

incorporate.47

G. (The Professional Discipline Rationale

The professional discipline rationale is similarly

without merit. It is true that a corporation itself is not

licensed for professional practice because it cannot meet the

education, experience, and testing requirements of a

profession. Therefore, a corporation itself cannot be

suspended from professional practice. However, the

individual shareholders, who are actually engaged in the

professional practice, are licensed and subject to discipline,

resulting in the adequate protection for the public.

H. (The Personal Liability Shield Rationale

This leaves the penultimate argument against

professionals incorporating, and by implication for vicarious

supervisory liability: the mistaken belief that limited

liability shields professionals from liability for their own

wrongdoing. (While this fear has engendered the

development of vicarious supervisory liability, it is

unfounded. (It is well established that personal liability

46 H. Bradley Jones, The Professional Corporation, Fordham Law

Review, Volume 27, Issue 3, Article 3 (1958) at pp 360-3. 47 See, e.g., CGS Sec. 33-182c.

190

applies when an owner of a corporation, LLC, or LLP

commits a tort, the limited liability shield notwithstanding.48

V. (FEDERAL INCOME TAX LAW AS THE SOLE BASIS FOR

CHANGE

The assumption that professionals were finally

allowed to incorporate due to a reevaluation of these

rationales, while logical, is incorrect. (In fact, the prohibition

on professionals incorporating was lifted solely due to

lobbying by professionals who wanted to obtain the federal

tax benefits that were afforded at that time only to

corporations and not to individuals.49 There has never been

a reconsideration of the faulty underpinnings of the

prohibition. (This helps explain why vicarious supervisory

liability was carried over to the corporation, and then to the

LLC and LLP.

A. Lobbying by Professionals for Tax Equality

It is not an exaggeration to say professionals and

legislatures were fixated on the tax benefits that only

corporations provided and that professionals practicing in

the general partnership form were missing. (During the post-

World War II era, individual tax rates were significantly

higher than corporate tax rates, and employee benefits,

including qualified pensions, profit-sharing plans, and

annuity plans were available only to corporations.50 These

48 See, e.g., Nicholas Misenti, Personal Liability for Commission of a

Tort: A Significant, and Often Overlooked, Exception to Limited

Liability in the LLC and Corporation October 2016 Southern Journal of

Business & Ethics , Volume 8 (2016), p. 11. 49 4 A.L.R.3d 383 (Originally published in 1965). 50 Charles W. Hall et. al., Professional Incorporation in Texas-A

Current Look, 48 Tex. L. Rev. 84, 88 (1969); 4 A.L.R.3d 383

(Originally published in 1965).

191

distinctions led professionals, including doctors and

lawyers, who were banned from incorporating, to form

common law associations, which they argued should be

classified as corporations for federal tax purposes.

In the first case of this era to consider the issue,

United States v. Kintner, the court ruled in favor of a group

of physicians who had formed a common law association to

practice medicine in Montana, holding that the association

was classified as a corporation for federal tax purposes, even

though Montana law barred physicians from forming

corporations to practice medicine.51 The court relied on

precedent from an earlier era, including Morrissey v.

Commissioner.52 However, the court also was persuaded by

treasury department regulations, which at the time relied on

state law to classify common law associations as

corporations for federal tax purposes.53

In response to Kitner, the Treasury Department was

quick to enact revised regulations that denied common law

associations corporate tax status based on a finding that any

one of the characteristics of a corporation54 was missing.55

For example, the new regulations provided that a restriction

on transfer that gave existing members the first right to buy

a member’s interest before it could be sold to a qualified

outsider meant that corporate characteristic of the ability to

freely transfer an interest was missing.56 The revised

regulations also categorically provided that professional

associations lacked continuity of life, essentially closing the

51 216 F.24 418 (9th Cir. 1954). 52 296 U.S. 344 (1935). 53 Treas. Reg. § 301.7701-1(c), T.D. 6503, 1960-2 Cum. Bull. 409. 54 The four characteristics being limited liability, continuity of interest,

centralized management, and the ability to freely transfer an ownership

interest. 55 Treas. Reg. §§ 301.7701-1-2, T.D. 5697, 1965-1 Cum. Bull. 558. 56 Treas. Reg. § 301.7701-2(h)(5)(ii), T.D. 5697, 1965-1 Cum.

Bull. 553.

192

door on any possibility that a professional association could

be classified as a corporation for federal tax purposes.57

States were quick to seize on the fact that the post-

Kitner treasury regulations relied significantly on local law

to classify professional associations.58 By 1969, 47 states

had statutes that allowed professionals to form professional

corporations or associations.59 Professionals were also quick

to challenge the revised regulations, and courts were quick

to invalidate the revised regulations on the grounds that the

regulations were discriminatory and inconsistent with

related tax statutes .60

This fairly rapid evolution in the law was based

entirely on the idea that professionals were being

discriminated against based on federal income tax benefits

that were afforded only to corporations. (Nowhere to be

found in this evolution is even a suggestion that

professionals were being singled out and discriminated

against because they were denied any form of limited

liability. This failure meant that antiquated and questionable

rationales against professionals incorporating would

continue even after states changed their laws to allow

professionals to incorporate. (This omission ultimately led

to vicarious supervisory liability being carried over to the

corporation, and then to the LLC and LLP.

57 Treas. Reg. § 301.7701-2(h)(2), T.D. 5697, 1965-1 Cum. Bull. 553. 58 Charles W. Hall et. al., Professional Incorporation in Texas-A

Current Look, 48 Tex. L. Rev. 84, 92 (1969). 59 Id. (at 92–93 (1969). 60 See United States v. Empey, 406 F.2d 157 (10th Cir. 1969); O’Neill

v. United States, 410 F.2d 888 (6th Cir. 1969); Kurzner v. United

States, 413 F.2d 97 (5th Cir. 1969).

193

B. (Hostility Toward Providing Limited Liability for

Professionals: The First Professional Corporations

Many states were reluctant to provide limited

liability to professionals when they were allowed

incorporate.61 States adopted different restrictions on

limited liability. Four states (Colorado, Oregon, Wisconsin,

and Wyoming) went so far as to continue to apply unlimited

personal liability to professional corporations.62 For

example, North Carolina provided that a shareholder in a

professional corporation was liable as if it were a general

partnership. Nelson v. Patrick involved a malpractice case

arising from radiology services by one physician, Patrick,

in a North Carolina professional services corporation. A

second physician, Flournoy, was held vicariously liable for

Patrick’s negligence. (The court held that “defendant

Flournoy could be held jointly and severally liable for any

negligence of his partner, defendant Patrick, which occurred

during the course of the corporation’s business, and he could

be made a party to the action.”63 Nelson v. Patrick clearly

61 Thill, Debra L. (1994) The Inherent Powers Doctrine and Regulation

of the Practice of Law: Will Minnesota Attorneys Practicing in

Professional Corporations or Limited Liability Companies be Denied

the Benefit of Statutory Liability Shields?, William Mitchell Law

Review: Vol. 20: Issue. 4, Article 7, p. 1143, 1153, fn 66.

Available at:

https://open.mitchellhamline.edu/cgi/viewcontent.cgi?article=2204&co

ntext=wmlr 62 Thill, Debra L. (1994) The Inherent Powers Doctrine and Regulation

of the Practice of Law: Will Minnesota Attorneys Practicing in

Professional Corporations or Limited Liability Companies be Denied

the Benefit of Statutory Liability Shields?, William Mitchell Law

Review: Vol. 20: Issue. 4, Article 7, p. 1143, 1153, fn 66.

Available at:

https://open.mitchellhamline.edu/cgi/viewcontent.cgi?article=2204&co

ntext=wmlr 63 Nelson v. Patrick, 73 N.C. App. 1, 8–9, 326 S.E.2d 45, 50 (1985).

194

illustrates that the general partnership is the basis for

vicarious supervisory liability.64

Many states adopted vicarious supervisory liability

as the exception to limited liability when professionals were

allowed to incorporate.65 This vicarious supervisory liability

is what is seen today in corporations, LLCs, and LLPs.

C. (Continued Hostility Toward Providing Limited Liability

for Professionals After Professionals Were Allowed to

Incorporate

Hostility by professional organizations and courts to

the idea that professionals, in particular lawyers and

physicians, would have any version of limited liability

continued after professionals were allowed to incorporate,

even in states that provided for limited liability by statute.

(For example, the ABA Model Code of Professional

64 N.C. Gen. Stat. Section 55B-9 now provides that:

“A shareholder, a director, or an officer of a professional corporation is

not individually liable, directly or indirectly, including by

indemnification, contribution, assessment, or otherwise, for the debts,

obligations, and liabilities of, or chargeable to, the professional

corporation that arise from errors, omissions, negligence, malpractice,

incompetence, or malfeasance committed by another shareholder,

director, or officer or by a representative of the professional

corporation; provided, however, nothing in this Chapter shall affect the

liability of a shareholder, director, or officer of a professional

corporation for his or her own errors, omissions, negligence,

malpractice, incompetence, or malfeasance committed in the rendering

of professional services.”

This clearly eliminates all vicarious liability. Why other states have not

updated their statutes in a similar fashion is unclear. 65 Thill, Debra L., The Inherent Powers Doctrine and Regulation of the

Practice of Law: Will Minnesota Attorneys Practicing in Professional

Corporations or Limited Liability Companies be Denied the Benefit of

Statutory Liability Shields?, William Mitchell Law Review: Vol. 20:

Issue. 4, Article 7, p. 1143, 1154, fn 68 (1994).

Available at: htp://open.mitchellhamline.edu/wmlr/vol20/iss4/7

195

Responsibility provided that an attorney could “limit his

liability for malpractice of his associates in the corporation,

but only to the extent permitted by law.”66 However, an

earlier draft of this provision provided the following:

A lawyer should not seek to limit his liability

to his client for malpractice, whether by

contract, limitation of corporate liability, or

otherwise. Thus the liability of lawyers who

are stockholders in a professional legal

corporation should be the same as it would be

if they were practicing as partners (emphasis

added).67

This, again, is an example of how the general

partnership is the basis for today’s vicarious supervisory

liability in the corporation, LLC, and LLP. (

Some state supreme courts, from the 1970s to as late

as the early 1990s, refused to allow for limited liability for

attorneys practicing in professional corporations, even

where statutory limited liability existed. Here, state supreme

courts generally invoked their authority as the ultimate

regulator of attorneys to override legislatures.68

In First Bank & Trust Co. v. Zagoria, the issue was

whether an attorney/shareholder of a professional

corporation in Georgia become personally liable for

dishonored checks issued by the corporation when that

66 EC 6-6 (1980). 67 See American Bar Foundation, Annotated Code of Professional

Responsibility 273 textual and historical notes (1979). 68 See, eg., First Bank & Tr. Co. v. Zagoria, 250 Ga. 844, 845, 302

S.E.2d 674, 675 (1983), overruled by Henderson v. HSI Fin. Servs.,

Inc., 266 Ga. 844, 471 S.E.2d 885 (1996), In re Bar Ass’n of Hawaii,

516 P.2d 1267,1268, South High Development, Ltd. v. Weiner Lippe &

Cromley Co., 445 N.E.2d 1106, 1107 (Ohio 1983), Beane v. Paulsen,

26 Cal. Rptr.2d 486 (Ct. App. 1993).

196

attorney/shareholder was not personally involved in

managing the checking account.69 The Georgia Supreme

Court held that the attorney/shareholder was vicariously

liable for the actions of his fellow attorney/shareholder who

managed the checking account. (The court noted “[t]he fact

that a corporation is a legal entity separate and apart from its

shareholders is so well recognized that it needs no

elaboration.”70 However, the Court continued:

We hold that when a lawyer holds himself out

as a member of a law firm, the lawyer will be

liable not only for his own professional

misdeeds but also for those of the other

members of his firm. We make no distinction

between partnerships and professional

corporations in this respect. We cannot allow

a corporate veil to hang from the cornices of

professional corporations which engage in

the law practice.71

The Court explained its holding this way:

We do not view this case as one in which we

need to interpret the statute providing for the

creation and operation of professional

corporations. We rather view this case as one

which calls for the exercise of this court’s

authority to regulate the practice of law.72

69 First Bank & Tr. Co. v. Zagoria, 250 Ga. 844, 845, 302 S.E.2d 674,

675 (1983), overruled by Henderson v. HSI Fin. Servs., Inc., 266 Ga.

844, 471 S.E.2d 885 (1996). 70 Id. 71 Id., at 250 Ga. 846. 72 Id., at 250 Ga. 844, 845.

197

Cases that rejected limited liability were not limited

to attorneys. Some courts also refused to apply limited

liability protection to physicians.73 In Boyd v. Badenhausen,

a physician in a professional corporation was held

vicariously liable “for the derelictions of persons employed

by a corporation to carry out for him the clerical details that

are necessary to the successful performance of his duty to

render skillful care and attention to whomever he accepts as

a patient.”74 The court applied what can be described as a

loose interpretation of the Kentucky professional

corporation statute, holding that the statute “provides in

substance that the corporate existence shall not affect the

relationship between the professional member and his client

or patient (emphasis added).”75 Based on that interpretation,

the court held that vicarious liability applied.

What is clear from an examination of cases from this

era is that there was a hostility to the very idea that

professionals should have limited liability. Courts seemed to

grapple with the idea that professional corporations should

be, in essence, general partnerships, but with the tax benefits

that were afforded only to corporations. This reluctance to

accept change helps explain why vicarious liability still

73 See, e.g., Boyd v. Badenhausen, 556 S.W.2d 896, 898 (Ky. 1977),

Nelson v. Patrick, 326 S.E.2d 45 (N.C. Ct. App. 1985). 74 The Kentucky professional corporation statute today contains a

similar statement, but now the statute clearly renounces vicarious

liability. It provides that provides “that no shareholder, director, officer

or employee of a professional service corporation shall be personally

liable for the negligence, wrongful acts, or actionable misconduct of

any other shareholder, director, officer, agent or employee nor shall

such shareholder, director, officer or employee be personally liable for

the contractual obligations of the corporation." KRS § 274.055(2). This

is evidence that some state legislatures have evolved on these issues.

Too many states have not, however. 75 Boyd v. Badenhausen, 556 S.W.2d 896, 898 (Ky. 1977).

198

exists in many states today, in the form of vicarious

supervisory liability.

VI. THE FIRST LLP IN TEXAS AND THE RELUCTANCE TO

PROVIDE A FULL LIMITED LIABILITY TO PROFESSIONALS

While the history of professional’s ability to

incorporate provides insights on the origin of vicarious

supervisory liability, the history of the first LLP in Texas

provides some insight into why vicarious supervisory

liability still exists today. (Robert Hamilton, a Texas State

Legislator at the time, stated that “[t]he idea of limiting

liability within partnerships generally was received with

great skepticism.”76 Hamilton elaborated:

Representative Steven Wolens, a Democrat

from Dallas (and a lawyer with Baron &

Budd, a litigation firm that conducted

business as a professional corporation)

viewed any change in the long-accepted

characteristics of a general partnership to be

a radical and undesirable proposal. Two other

legislators argued to lawyer witnesses, ‘You

want your cake and yet you want to eat it

too.’77

Thus, in the first version of the Texas LLP, partners

remained vicariously liable for the acts and omissions of

non-partner employees and agents, and for the general debts

of the partnership.78 It is clear that the mistaken notion that

76 Robert W. Hamilton, Registered Limited Liability Partnerships:

Present at the Birth (Nearly), 66 U. Colo. L. Rev. 1065, 1073 (1995). 77 Id., at 1073. 78 Elizabeth S. Miller, The Perils and Pitfalls of Practicing Law in A

Texas Limited Liability Partnership, 43 Tex. Tech L. Rev. 563, 564

(2011). Another way of looking at it is that the initial version of the

199

limited liability would shield a professional from liability

for his or her own acts and omissions played a part in the

development of vicarious supervisory liability. However, the

historic record makes clear that there was hostility to the

very idea that professionals should have limited liability.

The 1997 amendments to the Texas LLP statute

provided full shield version limited liability, with one

exception: the amendments retained vicarious supervisory

liability.79 This can be understood as a reluctance by the

Texas legislature to completely embrace limited liability for

professionals.80 Of the corporation, LLC, and LLP, the LLP

is the newest form. Thus, the history of the LLP completes

the connection to vicarious supervisory liability from the

corporation to the modern day and helps explain why this

exception to limited liability persists.

VII. (WHY VICARIOUS SUPERVISORY LIABILITY IS

UNNECESSARY

Someone who commits a tort such as negligence is

personally liable for that tort. The limited liability shield

provided by a corporation, LLC, or LLP does not change that

outcome. This principle is so well established that it has been

LLP in Texas only eliminated mutual agency, so that partners would

not be vicariously liable for the acts and omissions of the other

partners. 79 See Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 113, 1997 Tex.

Gen. Laws 1516, 1594-95 (amending § 3.08 of the Texas Revised

Partnership Act (Article 6132b-3.08, Vernon's Texas Civil Statutes).

(See also

Elizabeth S. Miller, The Perils and Pitfalls of Practicing Law in A

Texas Limited Liability Partnership, 43 Tex. Tech L. Rev. 563, 586

(2011). 80 Elizabeth S. Miller, The Perils and Pitfalls of Practicing Law in A

Texas Limited Liability Partnership, 43 Tex. Tech L. Rev. 563, 586

(2011).

200

called black letter law by one court.81 That the person may

have a principal who also is vicariously liable for that same

tort under respondeat superior also is irrelevant to that

outcome. 82

Negligent supervision is, simply put, negligence. (A

person who negligently supervises is directly liable for his

own omission, just as he would be liable for any other act or

omission constituting negligence. (Thus, vicarious super-

visory liability is unnecessary to liability for wrongdoing.

(Jane Doe v. Chad Coe et al. provides a good example of

liability for negligent supervision.83 The plaintiff, a 15 year

old minor at the time, was allegedly sexually molested by a

31 year old youth pastor (Coe), at the First Congregational

Church of Dundee (FCCD). The lawsuit included allegations

of negligent hiring, negligent retention and negligent

supervision of the youth pastor against both FCCD and

James, the church’s pastor and the youth pastor’s direct

supervisor.

The court identified three elements to state a claim

for negligent supervision: “(1) the defendant had a duty to

supervise the harming party, (2) the defendant negligently

supervised the harming party, and (3) such negligence

proximately caused the plaintiff’s injuries.”84 These are the

elements in a simple negligence case. Thus, negligent

supervision is already actionable. (Professionals in a

corporation, LLC, or LLP cannot escape liability for

81 Kilduff v. Adams, Inc., 593 A.2d 478, 488 (Conn. 1991). 82 See Nicholas Misenti, Personal Liability for Commission of a Tort: A

Significant, and Often Overlooked, Exception to Limited Liability in the

LLC and Corporation October 2016 Southern Journal of Business &

Ethics , Volume 8 (2016), p. 11. 83 Doe by Doe by Doe v. Coe, 2018 IL App (2d) 170435, ¶ 90, 103

N.E.3d 436, 456, appeal allowed sub nom. Doe v. Coe, 108 N.E.3d 885

(Ill. 2018), and aff’d in part, rev’d in part and remanded sub nom. Doe

v. Coe, 2019 IL 123521, ¶ 90, 135 N.E.3d 1. 84 Id., at IL App (2d) 170435, at ¶ 103, 103 N.E.3d at 456.

201

improper supervision of other employees. (Vicarious

supervisory liability is not necessary to achieve this

outcome.

VIII. (CHANGE IS POSSIBLE

Change, though it may be slow, can take place. In

1996, the Georgia Supreme Court reversed its more than a

decade old decision in First Bank & Tr. Co. v. Zagoria,85

which had held that limited liability did not apply to

attorneys, despite statutory limited liability shields.86 The

Kentucky professional corporation statute has also been

amended to affirmatively disavow vicarious liability,

effectively overruling Boyd v. Badenhausen,87 which had

held that a physician in a professional corporation was

vicariously liable for the negligence of clerical staff.88

The Texas LLP may be the best example of how

change can occur. (In the original Texas LLP statute,

partners remained vicariously liable for the acts and

omissions of non-partner employees and agents, and for the

general debts of the partnership.89 A 1997 amendment

provided more of a full shield version of limited liability, but

retained vicarious supervisory liability.90 A subsequent

amendment to the Texas LLP statute did away with vicarious

supervisory liability and provided for “full shield” limited

85 First Bank & Tr. Co. v. Zagoria, 250 Ga. 844, 845, 302 S.E.2d 674,

675 (1983), overruled by Henderson v. HSI Fin. Servs., Inc., 266 Ga.

844, 471 S.E.2d 885 (1996). 86 Henderson v. HSI Fin. Servs., Inc., 266 Ga. 844, 471 S.E.2d 885

(1996). 87 Boyd v. Badenhausen, 556 S.W.2d 896, 898 (Ky. 1977). 88 See the current version of KRS § 274.055(2). 89 See, Act of May 25, 1991, 72d Leg., R.S., ch. 901, § 84, 1991 Tex.

Gen Laws 3161, 3234 (amending § 15 of the Texas Uniform

Partnership Act. (See also, Elizabeth S. Miller, The Perils and Pitfalls

of Practicing Law in A Texas Limited Liability Partnership, 43 Tex.

Tech L. Rev. 563, 564 (2011). 90 Id., at 566.

202

liability.91 Thus, the Texas LLP evolved from an extreme

version of vicarious liability to a narrower version of

vicarious liability that retained vicarious supervisory

liability, to the current version, which is a No Vicarious

Liability model. Why other states, including Delaware,92

Connecticut,93 Florida,94 New York,95 New Jersey,96

Illinois,97 and Washington State,98 have not modernized their

statutes in a similar fashion is unclear. The basis for these

older, unamended statutes is not sound.

IX. CONCLUSION

Vicarious supervisory liability is still applied today to

professional corporations, LLCs and LLPs in some states.

One state, Connecticut, inexplicably applies vicarious

supervisory liability to all LLPs. (Vicarious supervisory

liability may apply to “All Persons” or to “All Shareholders”

models. (In some states, how the exception applies will

depend on whether someone is operating a corporation,

LLC, or LLP. (The existence of these inconsistencies cannot

be explained. There are flaws in the theories that could

support either of these models. Further, in some states,

vicarious supervisory liability applies to classes of

supervisors in a corporation and LLC who would not have

vicarious supervisory liability in a general partnership.

(These inconstancies illustrate the irrational and haphazard

nature of vicarious supervisory liability.

91 See Tex. Bus. Org.'s Code Sec. 301.010(b). 92 8 Del. C. 1953, §608. 93 CGS Sec. 33-182e. 94 Fl Stat. §621.07. 95 NY Business Corporation Law §1505 (McKinney). 96 NJ REV STAT SECTION 14A:17-8. 97 IL 805 ILCS 10/8. 98 Washington PC Statute §18.100. 070.

203

The general partnership, and the unlimited vicarious

liability it imposes on partners, forms the basis for today’s

vicarious liability. The hostility toward allowing

professionals any version of limited liability led to vicarious

supervisory liability once professionals were finally allowed

to incorporate in the 1960s. (The justifications preventing

professionals from incorporating lack merit. In particular,

the notion that limited liability shields would insulate

professionals from liability from their wrongdoing is

mistaken. Because professionals mounted intense lobbying

efforts to be allowed to incorporate solely because of the

beneficial tax treatment afforded at the time only to

corporations, there was never a serious examination or

abandonment of those faulty rationales. This unfortunate

failure to grapple with the statutory underpinnings allowed

vicarious supervisory liability to be carried forward to the

LLC and then the LLP. (Although some states have

modernized their statutes, many have not. It is time for all

states to eliminate this last vestige of the general partnership

in the corporation, LLC, and LLP.

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