Avoid Personal Liability by Following Proper Procedures

By Megan Marie Early-Soppa and Robert D. Moseley

Smith Moore Leatherwood LLP

Of course we love our clients and want to get to know each and every one of you, but we can all agree you do not want to get too personal when it comes to maintaining your corporate liability shield.

We frequently get inquiries from owners and managers of bus and trucking companies asking, “How can I protect my personal assets if something happens involving the business?”

In the transportation industry, in light of recent jury verdicts, there is a high level of risk no matter the size of the company. An accident could erase an owner’s equity in a blink.

It is important for all business owners to follow the proper procedures to ensure their business is set up to protect themselves, shareholders and officers from personal liability for the company’s debts and liabilities.

For the courts to impose personal liability on an owner of a bus or trucking company there must be (1) personal actions of the officer or (2) the courts must “pierce the corporate veil.”

In other words, the court ignores the protections afforded by the status of the corporation and holds the shareholders or another affiliated corporation liable.

As to the first possibility, officers and managers make decisions every day that could impose personal liability on them for those actions. For example, a safety director approves a driver hire or a dispatcher assigns a load to a driver when he should have known the driver did not have the credentials for the shipment.

However, plaintiffs’ attorneys rarely take this approach.

Doing so would create issues concerning coverage under a standard motor carrier policy, and plaintiffs’ attorneys don’t normally like to get bogged down in pursuing personal assets where the collection efforts would be akin to a land war in Eastern Europe in the winter.

However, the veil-piercing issues arise on a regular basis, especially when insurance limits may be insufficient.

So, how does a court determine whether or not to “pierce the veil?” Before we get there, one thing that comes up is, “When can the plaintiff raise the issue?”

The majority rule is that a plaintiff can’t conduct discovery on veil-piercing issues until the plaintiff has a judgment that is unsatisfied. This makes sense because the point would be moot if the plaintiff doesn’t ultimately recover more than the available coverage.

Once the issue is relevant, a court will typically consider the following when determining whether to pierce the corporate veil:

  • Was the corporation involved in fraudulent behavior? Was there any wrongdoing or injustice? The court will look to see if the owners/shareholders acted recklessly or committed fraud with regards to the running of the business.
  • Did the companies fail to maintain separate identities? Stated another way, did the parent company use a subsidiary company as merely an alter ego, maintaining control of the subsidiary, providing the financing, etc.?
  • Did the company or the owners/shareholders fail to maintain separate identities? The court will look to see if the owners/shareholders formed a company but continued to fund the business out of personal checking accounts or commingled business funds with personal funds.
  • Was the company adequately capitalized? The court will look to determine if the company’s level of assets available to the creditor is fair.
  • Did the company follow corporate formalities? The court will look to see if corporate formalities were properly followed. In instances where they find that they were not followed, courts have found that the legal-liability protection typically afforded to owners/shareholders was waived, and thus the personal assets of the owners/shareholders can be reached by the claimant.

It is important to note that while the courts typically look at all the factors above, the weight placed on these factors will vary by the facts of the case.

It is of the utmost importance for any business owner to ensure the business is properly structured to afford the proper protections.

In The Custom Companies v. Azera, LLC and Mammadov, 2015 WL 4467020 (N.D. Illinois July 21, 2015), the court found that the trucking company owner did not properly file his corporate paperwork to be considered a proper LLC in the state of Georgia or Texas.

He forfeited his corporate existence in Texas by failing to pay his annual registration fees, and was never reinstated. He also never successfully reorganized the corporate existence in Georgia.

One year had passed since he forfeited his corporate existence and entered into a contract with the plaintiff. The court found that he was afforded no protection, and he was personally liable for the damages.

This is a great example of how not simply following corporate formalities and staying on top of business filings can lead to disaster for a business owner.

One must remember that the Federal Motor Carrier Safety Administration does not do any sort of investigation as to whether your corporate status is correct.

If you say ABC Motorcoach Inc. is your company, FMCSA will issue authority as a motor carrier, even if you have not established ABC Motorcoach Inc. as a corporation with the state. These processes are completely separate and they need to match.

Taking the proper steps to protect yourself from personal liability could make the difference between the effective creation of a corporate structure versus the daunting effects of personal liability.

From the creation of the business to everyday business decisions, owners, officers and shareholders should be mindful of the separate corporate structure and acting in a manner that maintains that distinctiveness.

This also applies to affiliate entities. The corporate walls between the companies must be maintained with “shared services agreements” and other similar devices to allocate resources and expenses.

A Chinese proverb is credited with the following: “The best time to plant a tree was 20 years ago. The second best time is now.”

The same goes for putting your corporate house in order.

Megan Marie Early-Soppa and Robert D. Moseley are attorneys with Smith Moore Leatherwood LLP, a law firm with offices in Atlanta, Ga.; Charleston and Greenville, S.C.; and Charlotte, Greensboro, Raleigh and Wilmington, N.C.


Share this post