Failure to Disclose Principal Exposes Shareholders to Personal Liability

Failure to Disclose Principal Exposes Shareholders to Personal Liability

      It is practically axiomatic that the shareholders are not liable for the debts and obligations of the corporation. The “practically” is, however, crucial. The rule of limited liability as set forth in the various business corporation statutes is that, essentially, the shareholders are not liable for the debts and obligations of the corporation merely because they are shareholders. There are, however, a variety of other ways in which a shareholder may expose themselves to personal liability. In a recent case from Nebraska, the shareholders were held liable on what would have been a corporate debt because they never adequately disclosed that it was a corporation that was incurring the obligation.  Thomas Grady Photography, Inc. v. Amazing Vapor, Ltd., 918 N.W.2d 853 (Neb. 2018).

      Calderon and Anderson formed “Amazing Vapor, Ltd.” as a corporation in March, 2014. Thereafter, Anderson contacted Thomas Grady, a commercial photographer he had met several years previously, about photographing some of the electronic vapor products being sold by Amazing Vapor. The trial court accepted “that Anderson did not inform Grady of the corporate status of Amazing Vapor.” Ultimately, Grady would submit an invoice for $2,400.00, which went unsatisfied. After Grady declined a request to pay a reduced fee in consideration for future work, Grady brought suit against Calderon and Anderson as well as Amazing Vapor. While a default judgment was entered against the corporation and Calderon, Anderson represented himself, alleging that he was the minority owner of Amazing Vapor and that “Calderon closed the business, took the inventory and started his own business at an undisclosed location.”

      The trial court imposed personal liability against Anderson on a variety of theories including piercing the veil and the fact that Anderson had taken distributions during the time when the company was indebted to Grady. Under Nebraska law, as is the law under most states, a distribution may not be made if the company is not able to pay its debts as they come due in the usual course of business. Neb. Rev. Stat. § 21-252(c)(1). In addition, there was evidence presented that Anderson had referred to Calderon as his “partner.”

      The decision of the trial court was appealed to the District Court where it was affirmed, whereupon it was appealed again to the Nebraska Supreme Court.

      The Nebraska Supreme Court, while setting aside the determination based on piercing principles, affirmed the liability of the basis of agency and the failure to identify the corporation as the party entering into the agreement. The Nebraska Supreme Court wrote:

The cases provide that it is the agent’s duty to disclose his or her capacity as an agent of a corporation if the agent is to escape personal liability for contracts made, and in the absence of such disclosure, the agent bears the burden of proof of showing that the contract was made while acting in a corporate, not individual, capacity. See, Purbaugh v. Jurgensmeier, 240 Neb. 679, 483 N.W.2d 757 (1992); 3 C.J.S. Agency § 565 (2013). The uncontradicted testimony at trial was that neither Calderon nor Anderson disclosed Amazing Vapor’s incorporated status during discussions leading up to the agreements. In text messages, Anderson referred to Calderon as his “partner.” At Anderson’s request, Grady sent the March 27, 2014, invoice to Anderson’s personal or attorney email, not an address associated with Amazing Vapor. The invoice reads, “Art Buyer: Tom Anderson & Manny Calderon Client: Amazing Vapor,” indicating that Grady believed the buyers were Calderon and Anderson for their client, Amazing Vapor. After the invoice remained unpaid after several attempts to collect on the contract, Grady texted Anderson: “You are also part owner. It’s time for you to pay and take it up with [Calderon] on your own.... [Y]ou are responsible for hiring me ... and therefore you are responsible just as much as [Calderon].” The series of communications between Grady and Anderson leading up to and following the photography services supports the county court’s finding of a breach of two oral agreements for which Anderson was liable, and we find no plain error with regard to the district court’s affirmance thereof.

      Cases such as this pop up with far more familiarity than they should. The rule is simple; the agent has the responsibility to tell the person with whom the contract is being entered into who is the principal undertaking the obligation. Handing over a business card providing the full name of the business entity and the title of the agent may be all that is necessary in order to satisfy that obligation. Also, while not directly relevant to this case as the contracts were oral, agents should be sure that the signature blocks on documents clearly identify the party to the agreement as the business entity, and that the agent signature is in that capacity. For example, “Bob Smith, as president of ABC, Inc.” makes clear who is the principal and the capacity of the signatory.”