Sunday, September 26, 2010

Personal Jurisdiction of Corporate Officers Under Alter-Ego Theory

The corporate form is a beautiful thing. It allows businesses to raise capital and take risks that without the shield of limited liability, would normal subject individuals to horrific losses if things took a turn for the worse.  Alter-ego theory allows plaintiffs to pierce the shield of limited liability when corporate officers abuse corporate privileges to perpetrate frauds.

The case described below is an illustration of how individual officers of corporations are typically not subject to the jurisdiction of courts simply because the corporation they work for has been sued. Without the requirements necessary to meet the alter-ego theory doctrine, employees and officers of corporations should feel safe that their actions conducted in the normal course of business operations will not subject them to individual liability (most of the time) in a court of law.

In, Keene Building Products Co., v. Stuc-O-Flex Int'l, Inc., No. 1:10 CV 1511 (N.D.OH, September 23rd, 2010).  Plaintiff, Keene, manufacturer of sound and moisture control products, sold products to Defendant, Stuc-O-Flex for five years, who in turn sold and distributed their products to customers in the State of Ohio and elsewhere.  Keene alleged in its complaint that Stuc-O-Flex and its owners owed them over $220,000 for breach of contract, unjust enrichment, fraudulent inducement to contract and misrepresentation, interference with contracts and business relationship, and defamation.  Stuc-O-Flex counter claimed that Keene had violated a exclusivity agreement with Stuc-O-Flex by selling the products of competitors.

Individual corporate officers of Stuc-O-Flex filed a motion to dismiss because of lack of personal jurisdiction.  Typically, corporate officers are not necessarily subject to personal jurisdiction just because the corporation they work for is.  For a court to exercise personal jurisdiction over an individual or corporation that would not ordinarily be subject to it, the plaintiff must show that the individual is an alter ego of a corporation that is subject to personal jurisdiction in that court.  This is because under alter ego theory, the corporation and the individual are the same entity, as the person merely uses the corporation as a fraudulent means to abuse corporate protections and escape personal liability.

Some of the things necessary to show that an individual should be subject to personal jurisdiction under alter ego theory are: (1) the corporation is grossly under capatilezed; (2) corporate formalities (board meetings, minutes, etc.) are not followed; (3) the corporation incurs debt when it is already insolvent; (4) shareholder hold themselves out to be personally liable for debt when they are not; (5) funds and other property of the corporation are diverted for personal use by an individual; (6) there is an absence of corporate records; and (7) the corporation is merely a facade for the operations of the dominant shareholders.

The court found that Keene failed to show that the individuals named in the suit were subject to personal jurisdiction under alter ego theory.  Keene argued that when personal jurisdiction was proper because when he sold product to Stuc-O, he named the individual defendants, as well as the corporation as having title to the goods as he shipped them and the defendants were involved with sales and marketing activities on behalf of their corporation.  These allegations were found to be very insufficient to meet the alter ego theory requirements.