This article clarifies a new court ruling by the Louisiana First Circuit Court of Appeal that a corporate president has no duty to disclose his corporation’s financial problems to other companies contracting with the corporation.
Terrebonne Concrete, LLC v. CEC Enterprises, LLC, 2011-0072 (La. App. 1 Cir. 8/17/11), a recent case from the Louisiana First Circuit Court of Appeal, established that a corporate president has no duty to disclose his corporation’s financial problems to other companies contracting with the corporation.
Reversal of a Lower Court Ruling on the Personal Liability of a Corporate President
In Terrebonne Concrete, LLC v. CEC Enterprises, LLC, the First Circuit reviewed a lower court ruling holding the president and substantial shareholder of a construction corporation personally liable for $100,000 for fraud, based on allegations that the president should have informed the company that was contracting with his corporation that the corporation was in financial distress.
The First Circuit refused to hold the president personally liable because shareholders of corporations generally cannot be held personally liable for the liabilities of the corporation. Courts can only “pierce the corporate veil” to hold shareholders personally liable if they make the company their “alter ego” by disregarding corporate formalities or if they practice fraud or deceit on a third party.
The court found that the corporation was not the president’s “alter ego” because there was no evidence of any disregard of corporate formalities. The court also found that the president did not commit fraud. As a result, the court could not pierce the corporate veil to hold the president personally liable.
Corporate Officers Do Not Owe a Fiduciary Duty to Entities That Contract with their Corporation
The court focused on the fraud allegations. Because they were based on an omission, i.e. the president’s failure to disclose the corporation’s financial problems, the court recognized that the president had to have a fiduciary “duty” to disclose the information in order for the omission to constitute fraud. The court held that corporate officers and directors do not owe a fiduciary duty to people or entities that contract with their corporation, at least not in the context of a typical commercial construction contract.
The First Circuit noted that the trial court based its finding of liability largely on the fact that the president held himself out as “the person in charge” of the corporation. However, the First Circuit held that corporate officers and directors are not personally liable to third parties for acts done on behalf of the corporation unless there is some personal duty to the third party.
The Takeaway – The Ability to Pierce the Corporate Veil is Limited
This ruling reinforces the principle that corporations are separate and distinct from their shareholders. By recognizing that corporate officers and directors generally do not owe a duty to entities that contract with their corporation, the court limited the ability to pierce the corporate veil by showing fraud. This helps strengthen the protections against personal liability for officers and directors of corporations.