As most people are aware, one of the benefits of doing business as a corporation or limited liability company is that, generally speaking, the owners of the company cannot be held personally liable for the company’s debts. The exception to that general rule is that a court may pierce the corporate veil and hold the company owners personally liable if the company owners are found to have improperly used the corporate form, or have used the corporate form to commit wrongful acts. Nonetheless, even a cursory of the caselaw indicates that plaintiffs do not often prevail when they are attempting to pierce the corporate veil.
The statement of the law with regard to piercing the corporate view is quite simple. In All Phase Builders, LLC v. New City Rests., 2011 Conn. Super. LEXIS 1793, *20-21, 2011 WL 3483368 (Conn. Super. Ct. July 12, 2011), the court ruled:
“In order to pierce the corporate veil, a plaintiff must plead and prove that the corporate shield can be pierced under either the instrumentality rule or the identity rule. The instrumentality rule requires… proof of three elements: (1) Control …; (2) that such control must have been used by the defendant to commit fraud or wrong …; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss . . . The identity rule has been stated as follows: If the plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.”
The problem for plaintiffs attempting to pierce the corporate veil arises when it comes to the level of wrongful conduct required to hold the company owners personally liable. The caselaw evidences that the protection of the corporate form warrants the acceptance of much bad behavior. However, the inability to pierce the corporate veil will no longer allow construction company owners to escape personal liability for their wrongful acts.
In Joseph Gen. Contr., Inc. v. Couto, 317 Conn. 565 (Conn. 2015), the parties contracted for the construction of a new home. During construction, the owner of the construction company misinformed the property owners that they would likely “lose their deposits if they did not pay for the construction upfront.” Id. at 571. In reliance upon that false statement, the property owners surrendered “their contractual right to reject the construction development in its entirety if it was not completed to their satisfaction.” Id. The subject work, however, was not completed and it was not completed in a workmanlike manner. Id. On appeal, the Supreme Court decided that the company owner could not be held personally liable under the contract but, in an issue of first impression, it decided that the company owner could be held liable for violating the Connecticut Unfair Trade Practices Act (“CUTPA”).
It is important to note that even the trial court in Joseph Gen. Contr., Inc. refused to pierce the corporate veil in order to hold the construction company owner personally liable but it did hold him liable under the theory of “joint action.” In rejecting that decision, however, the Supreme Court said that “such a theory ignores the reality that this court has recognized that the fact that an owner of a corporation acted on behalf of the corporation is no more than a reflection of the reality that all corporations act through individuals.” Id. at 578. However, the Supreme Court did not allow the construction company owner to escape liability under CUTPA.
In reaching its decision, the Supreme Court looked to CUTPA’s counterpart under federal law, the Federal Trade Commission Act. “In order to hold an individual liable, a plaintiff, after showing that an entity violated the federal act, must prove that the individual either participated directly in the entity’s deceptive or unfair acts or practices, or that he or she had the authority to control them.” Id. at 589. Furthermore, “[a]n individual’s status as controlling shareholder or officer in a closely held corporation creates a presumption of the ability to control.” Id. In light of the foregoing, the Supreme Court upheld the trial court’s decision to hold the construction company’s owner personally liable under CUTPA.
It is interesting to consider that the even the trial court refused to hold the company owner personally liable by piercing the corporate veil but applied a “joint action” theory that the Supreme Court rejected while still approving of the application of personal liability under the CUTPA. Again, this decision evidence a willingness to tolerate a certain amount of bad behavior out of respect for the corporate form but provides an alternative way to hold bad actors liable for their misdeeds.
Should you need advice with regard to holding a company owner personally liable, or if you are the owner of a single member limited liability company and you are concerned as to whether you have the protection you need, please give me a call at (860) 760-3317.