The Law Office of Patrick C. Burpee, LLC - consumer rights
The Law Office of Patrick C. Burpee, LLC - consumer rights

Holding Officers, Directors and Shareholders Personally Liable for Corporate Debt

Holding Officers, Directors and Shareholders Personally Liable for Corporate Debt

By Attorney Patrick C. Burpee

Clients often ask, "Why can't we sue and recover from the officers, directors executives or shareholders personally for the financial obligations of the defendant corporation?" Routinely, I explain that corporations are often formed for this exact reason. In general, the separate identity of a corporation from its stockholders, officers or directors must normally be honored under the laws governing corporations. The law is such that when the shareholders of a corporation, who can also be the corporation's officers and directors, routinely keep the business affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation's separate entity shall be recognized, and no personal liability will be imposed.

However, in order to enforce a duty owing, it is permissible for courts in Washington to disregard the separate entity of the corporation and impose liability upon the corporation's stockholders, officers and directors in their individual capacities. When this is done, the court in effect extends the scope of the duty initially owed by the corporation to the individuals dealing on the corporation's behalf. This phenomenon is called "piercing the corporate veil" and is based on the doctrine of "alter ego."

In Washington, the likelihood that a court will disregard a corporation's legal personality in a particular case is much greater if the corporation is closely-held rather than if it is publicly-held. However, whether the corporate entity will ultimately be disregarded will depend largely on the facts of each case, and typically, the court will not look to pierce a corporate veil unless the corporate form is employed to evade an obligation, circumvent a statute, perpetrate a fraud or crime, or gain an unjust advantage.

Factors that the court may consider in order to find and impose personal liability include, but are not limited to, the following: non-observance of corporate formalities, insufficient capitalization for purposes of corporate undertakings, pervasive control with a fraudulent consequence, use of the same address for a business and the personal residence of an officer, director or shareholder, siphoning of corporate funds by the dominant shareholder, and the absence of corporate records.

In summary, although the corporate structure may often prevent personally liability of officers, directors and shareholders, in certain cases plaintiffs may be able to obtain personal liability in order to prevent fraud or manifest injustice.

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