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Corporate Officer Liability

Fairfax Personal Injury Lawyer Addresses Corporate Officer Liability

Brien Roche

Corporate officer liability may be a basis for casting a bigger net.  By casting a bigger net I mean trying to better protect an injured plaintiff from the misdeeds of others.  An entity, whether it be a corporation, an LLC or a partnership, can only act through its officers and agents. Those employees or agents may be officers, directors, managers or members. They may be held to account personally for the actions of that business just as the business may be held to account for the conduct of the agents.

By holding those persons liable you cast a wider net. Also you give the business more motive to settle with you.

Corporate Officer Liability-Business Judgment Rule

There exists what is called the “business judgment rule”.  The rule is based on presumed conduct. That is, it is presumed that in the course of running the business, the directors of a corporation, have acted after they have gathered the required info and acted in good faith.  It is further presumed that they acted in the honest belief that the action taken was the best for the business. This rule is to protect directors from being held liable for matters that are part of the normal routine.  Any attempt to hold the directors to account must prove they acted with actual knowledge of the wrong.

Does the Rule Go Beyond Directors?

Should the rule also be applied to corporate officers?  Officers are people who hold jobs such as President, Vice President, Secretary and Treasurer. These jobs are sometimes just titles without any meat. If the business does that then these people may be exposed. The directors are the members of the board of directors. Call, or contact us for a free consult.

Corporate Officer Liability-CEO Gone Wild

In general the rule does not apply to officers.  In other words, it does not reduce the chances of the officer being forced to account.  For instance in the case of FDIC v. Perry, a bank’s CEO permitted and bought more than $10 billion in risky, residential loans. These bad loans caused the bank to lose $600 million.  The bank finally closed.

The FDIC sued the former CEO.  FDIC alleged that the CEO had breached duties he owed to the bank. FDIC further alleged that the CEO acted in a substandard fashion.  This substandard conduct consisted of the making and purchase of risky loans for sale.  The CEO moved to dismiss the lawsuit.  The Motion to Dismiss relied upon the business judgment rule.  The court denied the motion.  The court agreed with the FDIC that the rule does not apply to officers.  In so ruling, the court noted that no cases in that state had applied the rule to officers.  Another federal court applying U.S. law in FDIC v. Florescue reached the same result.

Courts on their own are not likely to extend the rule to officers.  It is limited to directors.

Corporate Officer Liability-Virginia

In Virginia there is no statute that extends the business judgment rule to officers. An exception is with a benefit corporation.

Duty Owed

In terms of trying to prove the officer should be held to account the first hurdle is to prove a duty. The question is what duty does the officer have? She has a duty to the corporation. But what is the duty to a third party who is injured. Nailing down that duty is the key to proving officer liability. For instance, a VP of a trucking company orders that truck service be done every 40,000 miles as opposed to every 20,000. He does this solely for cost saving reasons. The VP knows this will detract from truck safety. If a fatal crash results from that policy does the victim have a basis for suing the VP? I would say “Yes”.

As such where a corporate officer is a direct actor, then the officer has liability.  If the officer is the driver of a truck and the truck is involved in a collision then the officer may be sued along with the entity.

Also where the corporate officer participates in or cooperates in the commission of the tort, then the officer is liable.  American Game and Company Service v. Knighton, 178 Ga. App. 745 (1986)

Policies Created

Likewise the corporate officer may be liable for policies that he is responsible for creating and implementing.  Camacho v. Plumley, 620 A.2d 242 (D.C. App. 1993).  There must be some act or omission by the officer which leads to the reasonable inference that he had a share in the wrongful act of the entity.  Vuitch v. Furr, 482 Atlantic 2nd 811, 820 (D.C. App. 1984)

In the criminal sphere there are a number of instances of where corporate officers may be criminally liable for violations of certain federal statutes.  United States v. Park, 421 U.S. 658 (1975); U.S. v. Dotterweich, 320 U.S. 277 (1943)

Criteria

The general criteria however for imposing personal liability upon an officer are:

  • The corporation must owe a duty to the third person.
  • The corporation may delegate that duty to the officer.
  • The officer breaches that duty.
  • The officer has an independent duty to the third party.
  • The conduct of the officer must be measured by intentional conduct, negligent conduct or negligent omission.
  • Absent direct involvement in the wrongful conduct, the officer must have known of the dangerous activity and promoted it.

Piercing the Corporate Veil

Piercing the corporate veil is another way to get to the officers, directors and/or shareholders.  The court generally is reluctant to disregard the corporate shield.  The whole idea of the corporation is to insulate the investors and operators from liability. However the court may pierce the veil in certain cases.  There is no one requirement.  There are a host of factors to consider:

    Alter Ego

  • Have the operators perpetrated a fraud, either on insiders or third parties?
  • Is the culprit operating as the alter ego of the entity?  In particular is that person treating the entity as a personal checkbook?
  • Does the operator of the entity deal with third party investors or creditors on behalf of the entity as if they were really dealing with him individually?  That is, do these third parties believe that they will be paid by the corporation. Or are they operating on the premise that the individual is going to pay them?
  • Was the business properly capitalized? That is were there enough funds put in at the outset to keep it going or was it just bled?

    Corporate Respect

  • Has there been compliance with the corporate formalities in terms of organization, meetings, issuance of shares, and annual reporting?
  • Have there been any payment of dividends as might be expected by a stock corporation?
  • Is the entity in fact solvent i.e., able to pay its bills when they come due?
  • Are the officers and directors in fact acting as officers and directors or are they acting simply as employees or stooges for the person who is really in charge?
  • Are corporate and financial records maintained.

For more information on personal injury claims, see the other pages on this site.  Also see the pages on Wikipedia for information on the business judgment rule. Call, or contact us for a free consult.

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Corporate Officer Liability

Fairfax Personal Injury Lawyer Addresses Corporate Officer Liability

Brien Roche

Corporate officer liability may be a basis for casting a bigger net.  By casting a bigger net I mean trying to better protect an injured plaintiff from the misdeeds of others.  An entity, whether it be a corporation, an LLC or a partnership, can only act through its officers and agents. Those employees or agents may be officers, directors, managers or members. They may be held to account personally for the actions of that business just as the business may be held to account for the conduct of the agents.

By holding those persons liable you cast a wider net. Also you give the business more motive to settle with you.

Corporate Officer Liability-Business Judgment Rule

There exists what is called the “business judgment rule”.  The rule is based on presumed conduct. That is, it is presumed that in the course of running the business, the directors of a corporation, have acted after they have gathered the required info and acted in good faith.  It is further presumed that they acted in the honest belief that the action taken was the best for the business. This rule is to protect directors from being held liable for matters that are part of the normal routine.  Any attempt to hold the directors to account must prove they acted with actual knowledge of the wrong.

Does the Rule Go Beyond Directors?

Should the rule also be applied to corporate officers?  Officers are people who hold jobs such as President, Vice President, Secretary and Treasurer. These jobs are sometimes just titles without any meat. If the business does that then these people may be exposed. The directors are the members of the board of directors. Call, or contact us for a free consult.

Corporate Officer Liability-CEO Gone Wild

In general the rule does not apply to officers.  In other words, it does not reduce the chances of the officer being forced to account.  For instance in the case of FDIC v. Perry, a bank’s CEO permitted and bought more than $10 billion in risky, residential loans. These bad loans caused the bank to lose $600 million.  The bank finally closed.

The FDIC sued the former CEO.  FDIC alleged that the CEO had breached duties he owed to the bank. FDIC further alleged that the CEO acted in a substandard fashion.  This substandard conduct consisted of the making and purchase of risky loans for sale.  The CEO moved to dismiss the lawsuit.  The Motion to Dismiss relied upon the business judgment rule.  The court denied the motion.  The court agreed with the FDIC that the rule does not apply to officers.  In so ruling, the court noted that no cases in that state had applied the rule to officers.  Another federal court applying U.S. law in FDIC v. Florescue reached the same result.

Courts on their own are not likely to extend the rule to officers.  It is limited to directors.

Corporate Officer Liability-Virginia

In Virginia there is no statute that extends the business judgment rule to officers. An exception is with a benefit corporation.

Duty Owed

In terms of trying to prove the officer should be held to account the first hurdle is to prove a duty. The question is what duty does the officer have? She has a duty to the corporation. But what is the duty to a third party who is injured. Nailing down that duty is the key to proving officer liability. For instance, a VP of a trucking company orders that truck service be done every 40,000 miles as opposed to every 20,000. He does this solely for cost saving reasons. The VP knows this will detract from truck safety. If a fatal crash results from that policy does the victim have a basis for suing the VP? I would say “Yes”.

As such where a corporate officer is a direct actor, then the officer has liability.  If the officer is the driver of a truck and the truck is involved in a collision then the officer may be sued along with the entity.

Also where the corporate officer participates in or cooperates in the commission of the tort, then the officer is liable.  American Game and Company Service v. Knighton, 178 Ga. App. 745 (1986)

Policies Created

Likewise the corporate officer may be liable for policies that he is responsible for creating and implementing.  Camacho v. Plumley, 620 A.2d 242 (D.C. App. 1993).  There must be some act or omission by the officer which leads to the reasonable inference that he had a share in the wrongful act of the entity.  Vuitch v. Furr, 482 Atlantic 2nd 811, 820 (D.C. App. 1984)

In the criminal sphere there are a number of instances of where corporate officers may be criminally liable for violations of certain federal statutes.  United States v. Park, 421 U.S. 658 (1975); U.S. v. Dotterweich, 320 U.S. 277 (1943)

Criteria

The general criteria however for imposing personal liability upon an officer are:

  • The corporation must owe a duty to the third person.
  • The corporation may delegate that duty to the officer.
  • The officer breaches that duty.
  • The officer has an independent duty to the third party.
  • The conduct of the officer must be measured by intentional conduct, negligent conduct or negligent omission.
  • Absent direct involvement in the wrongful conduct, the officer must have known of the dangerous activity and promoted it.

Piercing the Corporate Veil

Piercing the corporate veil is another way to get to the officers, directors and/or shareholders.  The court generally is reluctant to disregard the corporate shield.  The whole idea of the corporation is to insulate the investors and operators from liability. However the court may pierce the veil in certain cases.  There is no one requirement.  There are a host of factors to consider:

    Alter Ego

  • Have the operators perpetrated a fraud, either on insiders or third parties?
  • Is the culprit operating as the alter ego of the entity?  In particular is that person treating the entity as a personal checkbook?
  • Does the operator of the entity deal with third party investors or creditors on behalf of the entity as if they were really dealing with him individually?  That is, do these third parties believe that they will be paid by the corporation. Or are they operating on the premise that the individual is going to pay them?
  • Was the business properly capitalized? That is were there enough funds put in at the outset to keep it going or was it just bled?

    Corporate Respect

  • Has there been compliance with the corporate formalities in terms of organization, meetings, issuance of shares, and annual reporting?
  • Have there been any payment of dividends as might be expected by a stock corporation?
  • Is the entity in fact solvent i.e., able to pay its bills when they come due?
  • Are the officers and directors in fact acting as officers and directors or are they acting simply as employees or stooges for the person who is really in charge?
  • Are corporate and financial records maintained.

For more information on personal injury claims, see the other pages on this site.  Also see the pages on Wikipedia for information on the business judgment rule. Call, or contact us for a free consult.

Contact Us For A Free Consultation

Contact Us For A Free Consultation