February 11, 2016 Articles

The Responsible Corporate Officer Killed the LLC

A look at the RCO doctrine through the case law of Connecticut and other states that have adopted similar legal theories.

By John R. Bashaw and Mary Mintel Miller – February 11, 2016

Traditionally, the limited liability company (LLC) form of business structure provides liability protection to the members and manager of the LLC for the actions of the company. In the 1940s, the U.S. Supreme Court determined that for certain violations of laws that protect the public welfare, a “responsible corporate officer” (RCO) could be held individually liable for the actions of a corporation. This RCO doctrine applies even if the officer was unaware of the offending action or did not partake in it. Liability arose simply as a result of the officer’s position in the corporation and ability to control policies or procedures that may have prevented the offense. At first, the RCO doctrine was applied sparingly to offenses that resulted in minor penalties. Many state courts have expanded the RCO doctrine to civil environmental violations committed by corporations and LLCs. Further, the monetary penalties sought for environmental violations have increased substantially. The result is that almost any violation of an environmental law by any closely held LLC or corporation may result in substantial personal liability for the individual members, managers, officers, directors, or shareholders solely as a result of the practical reality that such individuals have day-to-day control of the operations of the LLC or corporation. The same environmental violations performed by a larger corporation rarely result in RCO liability because of the inability to establish that the officers, directors, or shareholders of large corporations had such control. In short, when small closely held entities are structuring a deal that involves contaminated property or a business that handles hazardous waste, you also have to consider the protection of personal assets so as to better protect against liability as an RCO.

This article looks at the RCO doctrine through the case law of the state of Connecticut, where the authors have defended RCO actions. While this article focuses on Connecticut, a limited review of case law in other states suggests that some states have adopted similar legal theories. A complete review of each state’s specific RCO common law is beyond the scope of this article, but the fundamental bases of the RCO doctrine are similar in other states. To avoid repetition, the authors refer mostly to the LLC form of company ownership, but the RCO doctrine applies with equal vigor to small closely held corporations.

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