When Businesses Owners Face Personal Liability for Corporate Actions
Directors and officers of a corporation who participate in or personally direct tortious conduct can be found personally liable, rather than being shielded from liability by the corporation. To be personally liable, the director or officer must “authorize, direct, or in some meaningful sense actively participate in the wrongful conduct”. Teledyne Industries, Inc. v. Eon Corporation (S.D.N.Y. 1975) 401 F.Supp. 729, 736-737 (applying Cal. law), affd. (2d Cir. 1976) 546 F.2d 495.
A notable court case that explains why directors and officers face personal liability for torts they themselves committed is Frances T. v. Village Green Owners Ass’n. (1986) 42 Cal.3d 490. The plaintiff in the case was sexually assaulted outside her condo in an inadequately lit area. She sued members of the condo association’s board of directors personally, alleging that they knew past crimes had been committed and were linked to lack of lighting but that they failed to take action and refused to install additional lighting, even requiring the plaintiff to remove lights she installed herself.
The court found that the plaintiff had alleged sufficient information to link the directors’ requirement that the plaintiff remove lights from the condo to the increased risk of the crime occurring. Also, the plaintiff sufficiently alleged that the directors breached their duty of care by failing to address the inadequate lighting. The individual directors had taken specific actions that increased the risk of the plaintiff being assaulted, so the plaintiff could seek to hold them personally liable for their conduct.
Another court case explaining director liability is Michaelis v. Benavides (1998) 61 Cal.App.4th 681. There, a president and director of a cement company made all of the construction decisions in pouring a client’s patio and driveway cement. When the client sued the director for negligence in pouring the cement, the court found that the director personally participated in the process, down to deciding “to use cheaper materials and construction methods which allegedly resulted in the patio’s and driveway’s structural inadequacies.” Id. at p. 686. His involvement resulted in his personal liability for the negligence.
In sum, personal involvement and decision-making by a director or officer that results in commission of a tort does subject the director or officer to personal liability. However, if the director is more “hands-off”, liability is much more unlikely.
If you need advice on liability relating to corporate actions, protect yourself and your business by seeking out an experienced business attorney. Michael Leonard, Esq., of San Diego Corporate Law, named a “Rising Star” for 2017 by SuperLawyers, has the experience and the insight to resolve director liability issues or prevent them before they arise. To schedule a consultation, e-mail San Diego Corporate Law or call Mr. Leonard at (858) 483-9200.