Your Unlimited Liability: Beyond Piercing the Corporate Veil

Stuart Pachman The action the Attorney General recently brought against not only Lehman Brothers Holding Inc., but also its executives and directors, serves to remind us that the cloak of limited liability does not always shield the individuals through whom a corporation or limited liability company acts. By conducting their businesses as corporations or LLCs, shareholders and members erect a metaphorical wall, subject to the doctrine of veil piercing, which protects their personal fortunes from liability for the torts and contracts of the enterprise. The potential for personal liability of directors, officers, managers and employees (each hereafter a “Corporate Agent”) is, however, distinct and separate from that of the shareholders or the members and is not limited to veil piercing. Donsco, Inc. v. Casper Corp., 587 F.2d 602, 606 (3rd Cir. 1978). In Milgram v. Comfort Direct, Inc., (unreported), Docket No. A-0360-07T2 (App. Div. 2008), the court said:

A judge is not required to pierce the corporate veil in order to enter judgment against a corporate officer where, as here, that officer personally engages in unlawful activity under [the Consumer Fraud Act].

Consequently, even when shareholders or members have adequately capitalized the enterprise, have respected its separate existence, have not used it as a personal pocketbook, have dotted the i’s and crossed the t’s of statutory requirements and formalities — in short, when the piercing concept is not applicable — the shield of limited liability may nonetheless be denied to the human agents through whom the corporation or LLC act.

First, there are various federal and state statutes which expressly deny limited liability to particular Corporate Agents for particular acts or omissions made in connection with the enterprise. Perhaps the best known is IRC Section 6672, which imposes personal liability on the “responsible person” who has willfully failed to pay over taxes withheld from an employee’s wages. Similar provisions are found in state taxing statutes.

New Jersey’s Consumer Fraud Act is applicable both to the enterprise, and, where liability is established, to the Corporate Agent who personally participates in the violation of the statute. Root Jewelers v. JDR Contracting, 233 N.J. Super. 125 (App. Div. 1989), upheld a default judgment taken against officers of a New Jersey corporation under a Virginia statute that provided for personal liability of officers on contracts performed in Virginia by a foreign corporation doing business in Virginia without a Certificate of Authority.

In cases involving securities laws, courts have rigorously imposed personal liability. A new director was held liable for breaching Indiana’s securities laws, not because he affirmative inflated stock prices or misrepresented revenues, but because he failed to make inquiries and received no explicit assurances by management or counsel that the transaction he approved conformed with applicable laws.

For other examples of statutes where Congress and state legislatures have expressly (or impliedly) limited liability, see Pachman, “Title 14A Corporations” (Gann Law Books 2009 Ed.), Chapter 6, comment 18a:

The personal risk of Corporate Agents extends beyond statutorily imposed liability.

Intentional Torts
There is no limited liability for intentional physical torts. The frustrated Corporate Agent who assaults the obstructive person on the other side of the bargaining table is personally responsible for the physical attack.

Further, the Corporate Agent who commits fraud, misrepresentation, or some other nonphysical tort is not shielded because he or she utilized the instrumentality of a corporation, even if the agent acted to benefit the corporation rather than the agent personally. The rule of law is stated in Hirsch v. Philly, 4 N.J. 408, 416 (1950):

. . . the officers of a corporation are personally liable to one whose money or property has been misappropriated or converted by them to the uses of the corporation, although they derived no personal benefit therefrom and acted merely as agents of the corporation. The underlying reason for this rule is that an officer should not be permitted to escape the consequences of his individual wrongdoing by saying that he acted on behalf of a corporation in which he was interested[.]

Negligence
If either the corporate president driving a corporate car to a business meeting or a corporate employee making a delivery in the corporation’s truck collides with another vehicle, the corporation may be responsible on the concept of respondeat superior, but the driver is also liable for his or her own negligence. Thus, in Duffy v. Bates, 91 N.J.L. 243 (E & A 1918), when the president/general manager mistakenly pulled the brake rope causing injury to an employee, he was held personally liable.

Personal liability may follow from omissions as well as acts. For example in, Francis v. United Jersey Bank, 87 N.J. 15 (1981), the court imposed liability on a director for failing to prevent other directors from taking trust funds from the corporation. A 2008 bankruptcy court decision reviewed allegations as to the oversight duties of corporate officers.

Where a direct line between Corporate Agent and victim does not exist, courts have developed the “participation” theory. Although a corporation’s directors or officers generally do not incur personal liability for a corporation’s torts merely because of their official positions, if the director or officer directs the tortious act to be done, or participates or cooperates in the tort, he or she is personally liable to third persons injured even though liability may also attach to the corporation. For example, where it was shown that the general manager was in charge of, and had directed, a marine slip’s construction, he was held personally liable for its collapse. In another decision, a claim was permitted to proceed against the corporate officer who allegedly “directed his company to refuse to deal with” plaintiff.

In these cases the court must decide whether the Corporate Agent was in a “sufficiently direct or close” relationship with the industrial operation “that it may be fairly said that [he or she] did participate or cooperate” in the activity that resulted in plaintiff’s injury. Thus where there was no evidence that a corporate president “gave any particular direction” or “in any way supervised, participated, or cooperated in” the acts leading to the physical injury, and because the plaintiff failed to show that the president knew or should have known of the danger and failed to warn the victim, he was not held liable. On the other hand, a claim against the officers of the corporation in a Pennsylvania case was permitted to proceed because the homeowner-plaintiffs alleged that the officers had ordered the housing development to be built at a site knowing that its location created an unreasonable risk of a drainage problem.

Contracts
The Corporate Agent who wrongfully induces a vendor to sell goods to his insolvent corporation is personally liable to that vendor. The more difficult case is when a corporation’s contract is performed negligently by the corporation’s employees.

In Saltiel v. GSI Consultants, Inc., 170 N.J. 297 (2002), the plaintiff sought to hold personally liable the corporate employees who allegedly negligently prepared turf grass specifications for a soccer field. Because those employees were proximately involved in preparing the specifications, the Appellate Division held for plaintiff on the participation theory. The Supreme Court in attempting to harmonize the various, sometimes conflicting precedents, reversed, refusing to extend the participation theory to a contract case involving only economic damages. The Court noted that there was no showing that plaintiff had an expectation that the individual defendants would be personally liable under the contract. It repeatedly referred to the need for the plaintiff to “establish an independent duty of care” on the part of the Corporate Agent, citing a Connecticut decision where the corporate officer had held himself out to be a skilled builder. The decision suggests that the result might have been different if the allegedly defective design had caused physical injury.

The distinction between physical injury and economic loss was also made in a case involving a house not built to satisfaction. The court, lamenting the fact that the “boundary line between tort and contract actions is not capable of clear demarcation,” declined to find the principal personally liable on common-law principles because the damage was of a nature more normally associated with a contract action. (On remand the trial court was directed to determine if the corporation’s principal met the test for liability under the Consumer Fraud Act because inferior material had been substituted for that prescribed by the contract.)

The point at which a Corporate Agent may be held personally liable on a corporation’s (or LLC’s) service contracts, where no physical injury is involved, is not altogether clear. Courts have ruled that a real estate appraiser for a corporation in one case, and an employee managing an investment account for a bank in another, were subject to personal liability. Cases such as these may be thought of as involving services that approach, but are not necessarily encompassed within, the personal liability for malpractice imposed under The Professional Service Corporation Act.

The applicable statutes and decisions make clear that notwithstanding the limited liability feature of corporations and LLCs, individuals acting on behalf of the enterprise are exposed to personal risk and must act with due care.