Director and Officer Liability in the Corporation
Corporations shield their directors and officers from liability for corporate actions, unless a director or officer personally directed or participated in tortious conduct. See, e.g., Frances T. v. Village Green Owners Ass’n. (1986) 42 Cal.3d 490, 503-504. The term tortious conduct refers to a subset of law violations called torts, which include negligence, fraud, conversion, and defamation, among others. Unless the director or officer “authorizes, directs, or in some meaningful sense actively participates in the wrongful conduct,” he is not legally liable for its commission. 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.
However, if a director or officer did direct or participate in the tortious conduct, he is jointly liable together with the corporation, and may be named as a defendant in a lawsuit to recover damages suffered as a result of the conduct. Frances T., 42 Cal.3d at 504. For example, directors who vote for a corporate action that is a tort are personally liable for that tort, although the wrongful conduct actually is committed in the name of the corporation. See, e.g., Tillman v. Wheaton-Haven Recreation Ass’n, Inc. (4th Cir. 1975) 517 F.2d 1141, 1144.
Further, a director or officer may face personal liability for debts of a corporation in certain limited situations. When directors or officers have treated a corporation as their “alter ego”, rather than as a separate corporate entity, and allowed a corporation to be upheld such that directors and officers would avoid personal liability for the corporation’s debts would be a fraud and unjust. In this case, courts will “pierce the corporate veil” to hold directors or officers personally liable for the debts. Automotriz Del Golfo De California S.A. de C.V. v. Resnick et al. (1957) 47 Cal.2d 792. California courts consider a number of factors to determine if the corporation is an “alter ego.” See Associated Vendors, Inc. v. Oakland Meat Co., Inc. (1962) 210 Cal.App.2d 825. Piercing the corporate veil occurs most often in small, closely held corporations.
Finally, directors and officers are personally liable for their own wrongful acts and debts. Just holding a director or officer position does not give them any special protection for actions they commit separate and apart from the corporation.
If you could use some legal advice about corporate, director, officer, or shareholder liability, seek a knowledgeable and 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 help you and your business. To schedule a consultation, e-mail San Diego Corporate Law or call Mr. Leonard at (858) 483-9200.