Corporations and other limited liability forms provide significant protections to the shareholders, officers, and directors of those organizations by limiting potential personal exposure for corporate debts to the assets invested in the organization. But sometimes those limitations don’t hold. All corporate lawyers and litigators are aware of the concept of “piercing the corporate veil” to hold officers, directors, and shareholders personally liable for the debts of a corporation—this may be the most litigated issue in corporate law.[1] But some corporate lawyers and litigators are not aware that the officers and directors of a corporation or other limited liability organization can be held personally liable for some torts without any need to pierce the corporate veil. Though not a new doctrine in California law, this avenue of personal liability is often overlooked. This lack of awareness can benefit defendants who are not named personally when they might otherwise have been, and can burden successful plaintiffs, who might otherwise have recovered from solvent individuals.

So what is this liability? Quite simply, shareholders, directors and officers may be held liable in California (and in other states) for their own tortious acts or omissions, even if undertaken in an authorized, official capacity for the benefit of the organization. “A corporate officer or director is, in general, personally liable for all torts which he authorizes or directs or in which he participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf.”[2] Indeed, “[t]he legal fiction of the corporation as an independent entity was never intended to insulate officers and directors from liability for their own tortious conduct.”[3] This personal liability makes logical sense—one who personally commits a tort should not be able to escape personal liability for the injury one causes simply because the actions were undertaken for the benefit of another. The organization’s liability is, after all, vicarious in nature, while the individual tortfeasor’s liability is direct.

The theory underlying the personal liability of officers and directors traces its roots to the much older law of agency, rather than to the law of corporations, per se. Thus, there is no need in such a situation to pierce the corporate veil, because the officer’s or director’s liability is independent of any of the various reasons or requirements for piercing the corporate veil.[4] Directors and officers of a corporation acting in their official capacity are considered agents of the corporation.[5] But, just like any other agent, an officer, director, or shareholder “is liable for his own acts, regardless of whether the principal is liable or amenable to judicial action.”[6] Of course, for the officer, director, or shareholder to be liable to a third-party plaintiff, the tort must involve a breach of a duty owed to the injured plaintiff, not solely the breach of a duty owed by the tortfeasor to the corporation alone.[7] But courts have found a wide range of duties can be owed by a director, officer, or shareholder—acting as a corporate agent—to third-parties.

Traditionally, the law of agency provided for personal liability of an agent acting for a principal only when the agent’s act or omission caused physical injury.[8] Thus, personal liability would lie for a director of a homeowner’s association who personally voted to order a tenant to remove security lighting installed, despite knowledge of complaints of poor lighting and a history of home invasions when the tenant was attacked on the same day she removed the lighting.[9]

Now, however, personal liability may lie without any physical injury. Courts have indicated that they would allow plaintiffs to bring these types of claims against corporate officers, directors and shareholders personally for strict liability, intentional, and negligent torts occurring within the scope of their official duties, including, for example: trademark infringement,[10] misappropriation of trade secrets,[11] copyright infringement,[12] unfair competition and antitrust,[13] and fraudulent misrepresentation.[14]

The law has liberalized in other ways, too. Under traditional agency principles, the law required some tortious act or omission on the part of the individual agent in order to hold the agent personally liable for torts committed within the scope of the individual’s agency. But in 1986, the California Supreme Court opened the door to a broader scope of potential liability: “To maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed or participated in the allegedly tortious conduct; or that although they [sic] specifically knew or reasonably should have known that some hazardous condition or activity under their [sic] control could injure plaintiff, they [sic] negligently failed to take or order appropriate action to avoid the harm.”[15] Though in that case only those directors who were personally involved could be held personally liable, the Court’s words had broader implications.

Later courts have taken the position that officers, directors and shareholders need not even directly participate in the tort—they may be found liable even if they only demonstrate an awareness and approval of the tortious conduct. “A corporate director or officer’s participation in tortious conduct may be shown not solely by direct action but also by knowing consent to or approval of unlawful acts.”[16] Indeed, some courts have taken it a step further, holding that the individual defendant need not have even been actually aware of the tortious conduct, if he or she had reason to be aware of it or should have been aware of it and did nothing to stop it.[17] At first blush, it might appear that the law has reversed the roles of the officer and the organization, such that an individual now risks potential vicarious liability for the torts for which the organization is directly liable.[18] But closer inspection reveals that it is still the individual’s own negligence or intentional action—in other words, the individual’s responsibility to recognize and stop tortious conduct—that gives rise to the her personal liability.[19]

Although not strictly limited to small organizations, the smaller the organization the more likely it is that an officer, director, or shareholder will be personally involved in the decision-making or actions that might lead to tort liability. In short, officers, directors, and shareholders of organizations should be aware that they may be held jointly liable with their organizations if they conduct business unlawfully or unreasonably, and plaintiffs should strongly consider whether to bring these claims.

The authors are litigation associates in the Los Angeles office of Irell & Manella LLP. Mr. Simler was awarded a J.D. by the University of Pennsylvania Law School in 2010. He can be reached at Bsimler@irell.com. Ms. Wilson was awarded a J.D. by Yale Law School in 2007. She can be reached at AWilson@irell.com. The views expressed herein are those of the authors, and not necessarily those of Irell & Manella.

---