Typically, officers and employees of corporations or limited liability companies are not personally liable for acts taken in a corporate capacity. However, there are important exceptions. As discussed in a previous post, when a corporate entity fails to follow corporate formalities and its shareholders mingle personal and corporate funds, the shareholders may be personally liable under the concept known as “piercing the corporate veil.” There is an additional exception to the protections against individual liability – an officer or employee can be sued individually where the corporation is accused of a tort in which the shareholder/officer/employee personally participated. Tort liability applies regardless of whether the corporate veil is pierced. The distinction is crucial for plaintiffs who may be considering a lawsuit against a company.
A tort is a specific kind of “violation” of the law. It is most often distinguished from a contractual breach. For example, if a corporate officer writes a letter terminating a contract to which the corporation is a party, and the termination was invalid or improper, the corporation may be sued for breach of contract. Even though the officer was personally involved in the actions leading to the alleged breach, he cannot be held individually or personally liable for it.
A tort is different. Common business torts include fraudulent misrepresentation, conversion (theft), breach of fiduciary duty, and invasion of privacy and others. Even if a lawsuit primarily concerns a breach of contract, there may be alternative causes of action based in tort which are viable. For instance, in the recent New York case of North Shore Architectural Stone, Inc. v. American Art is in Construction, Inc., the Appellate Division Second Department found that the corporate officer of a limestone company knowingly lied about the delivery of a product to a party to induce the plaintiff to pay for the product before it had been delivered. This goes beyond a simple breach of contract for failing to deliver a product on time. The Court held in that case that the defendant personally participated in making the misrepresentation on behalf of the corporation and therefore could not avoid liability simply because he was doing this in his capacity as a corporate officer.
This case illustrates the importance for plaintiffs to consider whether they may have a viable basis to bring an action not only against the corporation, but also the corporation’s officers or employees who participated in the conduct which caused the injury. This is beneficial to plaintiffs for two reasons: (1) all of the defendants may be more willing to settle the action in a favorable way if they are concerned about potential personal liability and (2) if a judgment is obtained against the individual, it provides an additional source of assets against which a plaintiff can attempt to collect. The judgment can be executed against the personal funds of the individual and not just of the corporation, which may be defunct or have no assets.
If you have a potential lawsuit against a corporation, it is important to have an attorney analyze your case to determine whether you have a viable tort cause of action against an individual who is an officer or employee of the corporation.
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