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Protecting Your Assets

Corporate structures aren’t ironclad protection against liability claims

Business owners form various types of legal entities, in part, to protect themselves from personal liability. Business entities and their officers are treated as separate and distinct from one other. As a result, generally speaking, creditors can only look to the company for outstanding obligations, while the owners and officers of a company are shielded from liability.

There are situations, however, where claimants may hold a company’s owners, officers, directors, and shareholders personally accountable for debts. This is known as “piercing the corporate veil,” and means creditors can, under select circumstances, reach the bank accounts, homes, investments, and other assets of owners to satisfy corporate debt.

Corporate veil piercing and the personal liability of owners is one of the most litigated issues in corporate law. In recent years, it has become more prevalent in the produce industry as well, due to the trust provisions in the Perishable Agricultural Commodities Act (PACA).

“The big picture,” according to Mark A. Amendola, senior litigation counsel at Martyn & Associates in Cleveland, OH, “is that personal liability under the PACA trust is expanding, as more and more courts visit this issue.”

Jonathan Macey, a professor of corporate law at Yale Law School, and Joshua Mitts, a 2013 Yale law graduate, published an article in the Cornell Law Review in March 2014 about courts piercing the corporate veil. “The list of justifications for piercing the corporate veil is long, imprecise to the point of vagueness, and less than reassuring to investors and other participants in the corporate enterprise interested in knowing with certainty what the limitations are on the scope of shareholders’ personal liability for corporate acts.”

While courts have not yet provided a ‘bright-line rule’ (a clearly defined rule or standard made up of objective factors, leaving little or no room for interpretation) regarding the personal liability of corporate officers, there are instances when officers can be held liable for misconduct, according to attorney Fred Fenster, a partner at Greenberg Glusker Fields Claman & Machtinger LLP in Los Angeles. “Courts are far less likely to impose personal liability on a corporate officer when the harm is the result of negligence rather than intentional conduct.”

Negligence can range from major to minor infractions. But businesses, both large and small, can avoid complications and future scrutiny by having proper checks and balances and corporate formalities in place. Electing directors, holding annual meetings, keeping accurate records, creating and adopting company bylaws, and making sure officers and agents abide by these bylaws can help protect companies, their officers, and assets from liability.

The negligent owner of a firm operating subject to licensing under PACA must be particularly wary. Under PACA, produce buyers have a fiduciary responsibility to maintain proceeds derived from the sale of produce in trust for the benefit of suppliers. When trust assets are mismanaged, and trust beneficiaries (i.e., produce suppliers) are not paid, the business entity’s agents—that is, those with the responsibility for running the company—risk personal liability.