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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.”

BRIGHT LINES AND LIABILITY
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.

PACA, PRODUCE, AND CORPOR­ATE VEILS
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.

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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.”

BRIGHT LINES AND LIABILITY
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.

PACA, PRODUCE, AND CORPOR­ATE VEILS
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.

Marion Quesenbery, an attorney based in Berkeley, CA states “there are five [general] exceptions for when an owner of a corporation can be held personally liable, if he or she: (1) personally and directly injures someone; (2) personally guarantees a bank loan or other debt; (3) fails to deposit taxes withheld from employees’ wages; (4) does something intentionally fraudulent or illegal that causes harm to the company or someone else; and (5) treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity.

For produce companies, the difference is that personal liability may attach to a person who is in a position to control PACA trust assets. This, Quesenbery notes, is based on a leading court decision on the issue, Sunkist v. Fisher, 104 F. 3rd 280 (9th Cir. 1996). The court held that “An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for the tortious act. A PACA trust, in effect, imposes liability on the trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier.”

Quesenbery adds, “Buyers of perishable agricultural commodities are required to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.” Additionally, she notes, “Any act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of 7 USC § 499b(4).”

Amendola agrees and cites two notable legal decisions, Weis-Buy Services v. Paglia, 411 F. 3d 415, 420-21 (3d Cir. 2005) and Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348-50 (S.D.N.Y. 1993), stating, “An individual who is in a position to control the assets of the PACA trust and fails to preserve them may be held personally liable to the trust beneficiaries for breach of fiduciary duty.”

In a Drake Journal of Agricultural Law article from 1997 that is still considered the gold standard for interpreting PACA and personal liability, Bartholomew M. Botta, a partner at Rynn & Janowsky, LLP in Newport Beach, CA, discusses how the 1930 PACA law was amended in 1984 to create a non-segregated floating trust. “By amending PACA, Congress broadened the protections afforded produce sellers and created a powerful new tool for suppliers of fresh produce.”

Further, Botta notes that under the PACA trust “when a seller, dealer, or supplier ships produce to a buyer, a statutory trust is created on acceptance of the commodities. The statutory trust is impressed on all inventory of food or other products derived from perishable agricultural commodities, as well as any receivables or proceeds from the sale of such commodities or products, until the seller is fully paid.”

In Okun v. Zimmerman, the U.S. District Court for the Southern District of New York wrote: “PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. This legal framework is to be distinguished from the piercing the veil doctrine, where the corporate form is disregarded because the individual has either committed a fraud, or because the corporation is a ‘shell’ being used by the individual shareholders to advance their own purely personal rather than corporate ends.”

CONCLUSION
“The single most persuasive factor in determining whether to impose individual liability in spite of the protection of the corporate structure is when fiduciary duties are not carried out by a business or corporation, but instead by those individuals responsible for the operation of the corporation,” wrote Botta.

The increasing number of cases addressing the issue of individual liability for corporate debts under PACA show a judicial trend to broaden the protections afforded to unpaid produce suppliers. Although Botta wrote these remarks back in 1997, Amendola confirms his predictions.

Botta’s conclusion, despite being nearly two decades old, still holds: “Because the case law interpreting the 1984 PACA trust amendments continues to grow and evolve, predicting just how far courts will go to protect the public interest and to remedy the burden on commerce caused by such credit arrangements is difficult. One thing is certain, by continuing to supplement PACA, originally enacted in 1930, with such weapons as personal liability for corporate debt and non-dischargeability in bankruptcy, the balance of power in recent years has clearly shifted in favor of produce suppliers and sellers.”

Commenting on the current state of the law on personal liability for breach of the PACA trust and predicting where we may be headed, Botta states: “Personal liability and non-dischargeability for PACA trust debts are firmly set as the law. These legal principles and the appellate court decisions are not going away. However, what has been seen more in recent years is litigation over what facts and circumstances are necessary to avoid personal liability.”

“In other words, many cases are addressing attempts by individuals to poke holes in the reach and power of the PACA trust. Although some limited success has been seen in these attempts to weaken the law on personal liability under PACA (particularly when the individual in question is a mere figurehead having no management authority whatsoever), it is unlikely these developments constitute a reversal of the trend—but time will tell,” Botta concludes.

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