Indemnification and Limitations on Liabilities of Members and Managers of Limited Liability Companies under Oregon Law

When a legal claim is brought against the manager, member, employee or agent of a limited liability company one of their first questions is who will pay for their defense and any damages ultimately assessed against them for the claim.  They will generally look to the company itself to fund their defense and to pay any damages or settlement amounts to the claimant.  That is, they will want the company to indemnify them against the claim.  However, under Oregon law the company may not be able to provide such indemnity either because neither the company’s articles of organization nor its operating agreement specifically permit it or because the particular claim is one of those claims for which the company is statutorily prohibited from providing such indemnity.

Oregon law (ORS 63.160) states that an LLC’s articles of organization or its operating agreement:

“. . . may provide for indemnification of any person for acts or omissions as a member, manager, employee or agent and may eliminate or limit the liability of a member, manager,employee or agent to the limited liability company or its members for damages from such acts or omissions. . .  .”

It is important to note though that no provision eliminating or limiting personal liability or providing for indemnification of a member of a member-managed LLC or a manager of a manager-managed LLC will be valid, “. . . for any act or omission occurring prior to the date when such provision became effective, . .  .”  ORS 63.160 (emphasis added)

Consequently, it is often critically important to make certain that either the articles of organization or the operating agreement specifically address the issues of indemnity for members, managers, and agents as well as the rights, if any, such members, managers and agents will have to indemnification in the event of any claim, preferably before the act or omission which is the basis of a claim.

Finally, it is important to note that an LLC subject to Oregon law cannot eliminate or limit the liability of its members and managers as to specific claims regardless of any provision in the operating agreement or articles of organization.  Those claims are: (1) breach of the duty of loyalty to the company or to its members; (2) intentional misconduct or violation of law not in good faith; (3) any unlawful distributions in violation of ORS 63.235; and, (4) any transaction from which a member or manager obtains an improper personal benefit.

©11/05/2010 Lawrence B. Hunt of Hunt & Associates, PC

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