Shield or No Shield?

The case of North Strabane Township v. Majestic Hills LLC et al., 2024 WL5148461 (Pa. Cmwlth. 12/18/2024), has a very important lesson for individuals who are members of an LLC and believe that they are shielded from personal liability for acts of the LLC.

Two limited liability companies, Majestic Hills LLC and JND Properties LLC began a construction project for single-family homes. Majestic is wholly-owned by JND, which in turn is wholly-owned and controlled by Joseph and Shari DeNardo.  The development had a history of violating state and local regulations – including landslides and failure to control stormwater runoff.  The Pennsylvania Department of Environmental Protection [“DEP”] became involved and issued several notices of violation and compliance orders. The Township incurred heavy losses repairing sewer lines, stabilizing the hillside at the development and compensating condemnees for loss of property due to the landslides. The Township filed a lawsuit and a request for a preliminary injunction against Majestic Hills, JND and the DeNardos. Before the hearing, the parties entered into a Consent Order whereby Majestic Hills and JND were to take certain remedial action. The DeNardos were not parties to the Consent Order and were dismissed from the action.

Majestic Hills and JND failed to comply with the Consent Order, and both DEP and the Township filed a motion for injunctive relief and a motion for contempt of the Consent Order.    At the hearing on the contempt motion, the DeNardos admitted that neither LLC had sufficient assets to make the necessary repairs, which were estimated to be in excess of one million dollars.  Before the judge ruled on the motion, Majestic Hills and JND filed for bankruptcy. The lower court found the LLCs and the DeNardos in civil contempt of the Consent Order. The lower court found that the DeNardos knowingly, willfully and with wrongful intent violated the Consent Order even though they were not parties to the order. The lower court awarded the Township $275,000.00, and imposed daily fines until the DeNardos completed the remediation in the Consent Order. The DeNardos appealed the lower court’s order to the Commonwealth Court.

The DeNardos argued that they cannot be held in contempt because they were not parties to the Consent Order and were dismissed from the action. Further, the DeNardos argued that the lower court improperly pierced the corporate veil by holding the DeNardos responsible for JND’s financial inability to comply with the Consent Order. The Commonwealth Court did not buy these arguments. The Commonwealth Court noted that a corporation acts only through its officers, agents, representatives and employees. Pennsylvania law establishes broad liability for those who knowingly violate court orders, even if those persons are not parties to the action. In short, corporate officers or members of an LLC can be held in contempt for the corporation’s noncompliance of a court order. The Court clarified that this is not a case of piercing the corporate veil; rather, a corporate officer can be held liable in tort for his own wrongful conduct on behalf of the corporation even though the corporation is not a sham and there is no basis to pierce the corporate veil. In addition, the two LLCs filing for bankruptcy did not insulate the DeNardos from personal civil contempt. To avoid contempt, the DeNardos had to first exhaust all available means to comply with the court order and then, failing that, had to show that compliance was impossible, and that the impossibility was not the fault of the DeNardos. In this case, the DeNardos agreed to be dismissed from the case knowing that their two LLCs did not have adequate funds to comply with the Consent Order. Secondly, the DeNardos ignored their companies’ legal obligations, made no attempt to liquidate the assets of JND, and eventually sought bankruptcy protection in an effort to unburden JND.                

This opinion reinforces a very important lesson for owners of a corporation or members of a limited liability company. While these entities can shield owners and members from personal liability for acts of the entity, the shielding of liability is not absolute. If an owner or member acts with wrongful intent to avoid legal obligations of the entity, then the owner or member can be held personally liable for the entity’s legal obligations.