Business people use LLCs when starting a new business venture so they can be shielded from personal liability for the venture’s obligations. Limited liability for members is a fundamental part of the states’ LLC laws. The Pennsylvania LLC Act, for example, states:
Except as provided in subsection (e), the members of a limited liability company shall not be liable, solely by reason of being a member, under an order of a court or in any other manner for a debt, obligation or liability of the company of any kind or for the acts of any member, manager, agent or employee of the company.
15 Pa. Cons. Stat. § 8922(a). (Subsection (e) is only applicable if the LLC’s certificate of organization provides that some or all of the members are personally liable for the debts or liabilities of the LLCs. That is almost never done.)
The members can of course give up their liability shield, either intentionally in a contract or sometimes by mistake. One part of a contract that can be a pitfall for LLC members is the signature block, the place at the end of the contract where the parties sign it. (I assume the contract is in writing.)
The standard way to indicate that an LLC (and none of its members) is a party to a contract is to use the LLC’s name and the title of the signing member (or manager if it is manager-managed). Unfortunately this detail is sometimes overlooked or mishandled.
In Hazer v. Zabala, 26 A.3d 1166, 2011 Pa. Super. LEXIS 2227 (Pa. Super. Ct. Aug. 11, 2011), Juan Zabala signed his name to a lease, and underneath printed “DBA/ZABALA BROKER, LLC.” Hazer, 26 A.3d at 1170. (The lease did not otherwise recite the name of the tenant.) The landlord sued Zabala when the rent was not paid, and Zabala defended on the ground that the LLC, not Zabala, was the party to the lease.
The court disagreed. It recognized “DBA” as an abbreviation for “doing business as,” and saw the acronym as an indication that Zabala Broker, LLC was simply another name for Juan Zabala. “‘DBA’ identifies an equivalency or single identity between the appellations.” Id. at 1170.
Zabala’s signature did not identify himself as an officer, member or agent of the LLC, and the court found that the corporate rule applied to LLCs: “Corporations necessarily act through agents and if one so acting is to escape personal liability for what he intends to be a corporate obligation, the limitation of his responsibility should be made to appear on the face of the instrument.” Id. (internal quotation marks and citations omitted). Zabala’s failure to use any title such as “member” or “managing member” doomed his appeal.
The court was also unswayed by the fact that rent checks from an account in the name of Zabala Broker, LLC were accepted by the landlord. The court affirmed the trial court’s finding that the landlord was justified in accepting the checks in the belief that they were simply paid on behalf of Mr. Zabala.
The court’s analysis focused on the notion that “DBA” is used to indicate an alternative name for an individual or entity. It usually is, and the court’s analysis would have made perfect sense if Juan Zabala had used “Zabala Broker” as a DBA. What is odd is that he included “LLC” in the DBA, i.e., “Zabala Broker, LLC.” That indicates that he was holding himself out as a limited liability company, which doesn’t make sense. An individual is not an entity. It would seem more logical to view the use of “DBA Zabala Broker, LLC” as an awkward attempt to indicate that he was signing on behalf of the LLC, in a representative capacity.
However, the court also pointed out in a footnote that Zabala Broker, LLC was not formed until December 15, 2008, two and a half months after the lease was signed. Id. Although the court didn’t discuss the fact that the LLC did not exist at the time of signing the lease, that nonexistence supports the court’s conclusion that Zabala had not clearly indicated that he was signing in a representative capacity.
Lawyers routinely and reflexively write contractual signature blocks using the entity’s name and the title of the signing individual. In most cases where an incorrect signature block is used the signer is inexperienced or rushed, without an attorney to review and catch the mistake. In the song The End of the Innocence, Don Henley sings “The lawyers dwell on small details.” But sometimes those small details can cause large problems, and that’s what happened in Hazer v. Zabala.