BFV Perspectives, Georgia Business Disputes, | Aug 12, 2013

AAA Spells Trouble For LLC Members

A recent decision by the Court of Appeals in American Arbitration Association v. Bowen addresses an interesting issue regarding the personal liability of LLC members for arbitration fees. One of the most significant factors that dissuades parties from initiating an arbitration are the significant fees involved.  In Bowen, the members of an LLC embroiled in a business dispute were found personally liable for at least a portion of the arbitration fees. 

Gene Bowen and Karen McGinn were members of eCential Group, LLC (“eCential”).  This LLC was a franchisee of iSold It, a retail chain designed to assist customers with selling their products on eBay.  Due to a dispute with iSold It, eCential and its members submitted their claims against iSold It to binding arbitration with the American Arbitration Assocation (“AAA”).  After an arbitrator was selected, AAA asked eCential to pay a deposit before the arbitrator performed work on the matter.  However, eCential filed a hardship claim to reduce or delay the payment of this fee.  Before any ruling on the hardship request was made, AAA requested that eCential and its members pay additional fees.  Because the fees were not paid, the arbitration was discontinued.  AAA then sent eCential and the members a bill for $12,712.50 plus interest of $3,666.00.  After receiving no payment, AAA filed suit against the members. 

In their defense to the lawsuit, the members argued that they were not personally liable to AAA because the arbitration fees were incurred by their LLC.  The trial court agreed with the members, finding that the invoice was insufficient to establish their personal liability for eCential’s expenses, and it dismissed the action. 

The Court of Appeals reversed, finding that eCential was not the only party to the arbitration; rather, the members were parties to the arbitration in their individual capacities.  Because the members asserted their own personal claims in the arbitration, they were personally liable for any fees associated with the arbitration of these claims.  Thus, in this instance, the members could not simply rely on their LLC to shield them from personal liability.  The Court of Appeals looked to their personal involvement in the arbitration.

This decision is a good reminder that, while the formation of an LLC can insulate its member-owners from liability relating solely to the company, it will not protect them from liability for their individual conduct and/or obligations.  It also highlights another significant issue to consider in evaluating the prospect of arbitration and how the claims should be framed.  Which party or entity is going to be responsible for the fees should be sorted out before engaging in such an action. 

BFV Perspectives, Georgia Business Disputes, | Aug 12, 2013