Corporations are legal entities which are designed to limit or shield the liability of its directors, officers, and shareholders who wield its executive power. Limited liability companies (“LLCs”) and limited partnerships (“LPs”) are intended to afford similar protection. However, those individuals who find themselves wielding executive power in a corporation should be mindful that they may be held personally liable if they commit a tort or fraud while acting on behalf of the corporation.
While most corporate officers are aware of the “veil-piercing doctrine,” much fewer know about Pennsylvania’s “participation theory” of liability. Pennsylvania’s Superior Court has summarized the distinction between the “veil-piercing doctrine” and the “participation theory” of liability as follows:
“Where the court pierces the corporate veil, the owner is liable because the corporation is not a bona fide independent entity; therefore, its acts are truly his. Under the participation theory, the court imposes liability on the individual as an actor rather than as an owner. Such liability is not predicated on a finding that the corporation is a sham and a mere alter ego of the individual corporate officer. Instead, liability attaches where the record establishes the individual’s participation in the tortious activity.”[1]
Pursuant to the Pennsylvania Superior Court, “Pennsylvania law recognizes the participation theory as a basis of liability. The general, if not universal, rule is that an officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor; but that an officer of a corporation who takes no part in the commission of the tort committed by the corporation is not personally liable to third persons for such a tort, nor for the acts of other agents, officers or employees of the corporation in committing it, unless he specifically directed the particular act to be done or participated, or cooperated therein.”[2]
The following instances were found by Pennsylvania courts to constitute personal participation by an officer:
- Plaintiffs purchased homes in a development. Water drainage problems in the development caused personal injuries and property damage to plaintiffs. The complaint generally alleged that the Defendant’s corporate officers allowed the construction and sale to proceed despite their specific knowledge that the development’s terrain would cause drainage problems. The Supreme Court held that the complaint adequately stated a claim for individual liability under the participation theory.[3]
- The lessor gave the Defendant dealer permission to sell equipment on the condition that the dealer would pay lessor $80,000. The dealer never paid. Because the lessor allowed the dealer to sell its equipment on the condition that, upon the sale, the dealer would pay it $80,000, the dealer’s failure to transmit the money to the lessor constituted a wrongful conversion. The Court held that because the Defendant’s officer participated in the conversion, he faced personal liability under the participation theory.[4]
By contrast, in Shay v. Flight C Helicopter Services,[5] the Plaintiff’s husband was killed in a helicopter crash caused by negligent maintenance performed by a corporate employee. The plaintiff sued the president individually under the “participation theory.” The Superior Court determined that the only tortious conduct was the improper installation of a part. Although the President’s day-to-day duties generally included supervising mechanics, there was no evidence that he was actively involved in the particular maintenance work at issue. The general power to supervise or prevent the improper installation, without knowledge that it had occurred, was insufficient participation.
If you are a corporate officer and would like to discuss your potential personal liability in a particular matter or if you would like to institute a lawsuit against a corporation and its individual officers and/or directors, please contact us in the United States: Jason Rabinovich (jrabinovich@mslegal.com) at (215) 569-8901.
Corporations are legal entities which are designed to limit or shield the liability of its directors, officers, and shareholders who wield its executive power. Limited liability companies (“LLCs”) and limited partnerships (“LPs”) are intended to afford similar protection. However, those individuals who find themselves wielding executive power in a corporation should be mindful that they may be held personally liable if they commit a tort or fraud while acting on behalf of the corporation.
While most corporate officers are aware of the “veil-piercing doctrine,” much fewer know about Pennsylvania’s “participation theory” of liability. Pennsylvania’s Superior Court has summarized the distinction between the “veil-piercing doctrine” and the “participation theory” of liability as follows:
“Where the court pierces the corporate veil, the owner is liable because the corporation is not a bona fide independent entity; therefore, its acts are truly his. Under the participation theory, the court imposes liability on the individual as an actor rather than as an owner. Such liability is not predicated on a finding that the corporation is a sham and a mere alter ego of the individual corporate officer. Instead, liability attaches where the record establishes the individual’s participation in the tortious activity.”[1]
Pursuant to the Pennsylvania Superior Court, “Pennsylvania law recognizes the participation theory as a basis of liability. The general, if not universal, rule is that an officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor; but that an officer of a corporation who takes no part in the commission of the tort committed by the corporation is not personally liable to third persons for such a tort, nor for the acts of other agents, officers or employees of the corporation in committing it, unless he specifically directed the particular act to be done or participated, or cooperated therein.”[2]
The following instances were found by Pennsylvania courts to constitute personal participation by an officer:
- Plaintiffs purchased homes in a development. Water drainage problems in the development caused personal injuries and property damage to plaintiffs. The complaint generally alleged that the Defendant’s corporate officers allowed the construction and sale to proceed despite their specific knowledge that the development’s terrain would cause drainage problems. The Supreme Court held that the complaint adequately stated a claim for individual liability under the participation theory.[3]
- The lessor gave the Defendant dealer permission to sell equipment on the condition that the dealer would pay lessor $80,000. The dealer never paid. Because the lessor allowed the dealer to sell its equipment on the condition that, upon the sale, the dealer would pay it $80,000, the dealer’s failure to transmit the money to the lessor constituted a wrongful conversion. The Court held that because the Defendant’s officer participated in the conversion, he faced personal liability under the participation theory.[4]
By contrast, in Shay v. Flight C Helicopter Services,[5] the Plaintiff’s husband was killed in a helicopter crash caused by negligent maintenance performed by a corporate employee. The plaintiff sued the president individually under the “participation theory.” The Superior Court determined that the only tortious conduct was the improper installation of a part. Although the President’s day-to-day duties generally included supervising mechanics, there was no evidence that he was actively involved in the particular maintenance work at issue. The general power to supervise or prevent the improper installation, without knowledge that it had occurred, was insufficient participation.
If you are a corporate officer and would like to discuss your potential personal liability in a particular matter or if you would like to institute a lawsuit against a corporation and its individual officers and/or directors, please contact us in the United States: Jason Rabinovich (jrabinovich@mslegal.com) at (215) 569-8901.