Corporate Officers Beware: You May Be Held Personally Liable For Fraud1/29/2018 | By: Randy J. Heller, Esq. | GDB 2018 Winter Newsletter
The corporate form may shield an officer or director acting in his or her official capacity from personal liability in most settings, and it is usually hard to “pierce the corporate veil.” Nevertheless, if such an individual commits a “tort” (which includes many types of fraud and misrepresentation), a corporate officer may be held personally liable.
It is commonly believed that forming a corporation shields individuals from personal liability for acts or omissions they commit in their official capacity as officers or directors of the corporation. That is often true. But a recent case by a New York appellate court reminds us of an important exception to that rule.
In North Shore Architectural Stone, Inc. v. American Artisan Construction, Inc., a contractor (North Shore) sued a supplier (Artisan) in connection with a delivery of limestone to a project. The owner of the project contended that a recent delivery had missing pieces. At first, Artisan reported that the missing pieces had been stolen. As a result, North Shore agreed to pay Artisan for replacement pieces. But later it was alleged that Artisan had never supplied the missing pieces in the first place and had misrepresented what happened in order to obtain duplicate payment.
North Shore sued Artisan as well as its president for conversion and fraud. The president moved to dismiss the claims against him on the grounds that he was at all times acting in his capacity as an officer of Artisan and not in his individual capacity. The lower court dismissed the claims against the president, stating that there was no basis to “pierce the corporate veil.”
But the appellate court reinstated the claims. As it explained, since the complaint had alleged that the president “misrepresented the facts regarding the delivery of the original limestone, with the intent of inducing the plaintiff to rely on it,” he could be personally liable whether or not he acted in his official duties as president. One who commits a tort (which includes fraud and misrepresentation) can be held individually liable regardless of whether he acted on behalf of the corporation or whether the corporate veil is pierced.
The case serves as a reminder to corporate officers that, in certain circumstances, they may be held personally liable for their actions if they commit fraud or other tortious conduct. The case also raises questions as to what other types of representations routinely made by corporate officers, such as promises made concerning payment of subcontractors and vendors, use of minority business enterprises, or financial solvency, might possibly form the basis of a fraud claim that could subject an executive to individual liability.