Suing Corporate Officers
By Michael A. Collora
Send Email to: mcollora@dwyercollora.com
This article first appeared in the December 4, 2000 edition of Massachusetts Lawyers Weekly.
In drafting a complaint against a corporation or other organized entity, you should give some thought to including individual higher ranking officials. Including a corporate officer as a defendant has the possible benefit of adding additional assets to pay a judgment if the corporation is undercapitalized; the addition of a party can also ease your evidentiary burden at trial and put pressure on the corporation to settle. However, if frivolous, it will draw a motion to dismiss with possible Rule 11 sanctions, and may increase the difficulties of resolving the dispute.
This article examines the basis upon which you could include an individual in a claim against the corporate entity. In doing so, you should be aware that there are jurisdictional issues to overcome if the officer lives outside the Commonwealth, a subject which is beyond the scope of this article. Keep in mind, however, that activities by the corporation alone will not implicate its officers. See Kleinerman v. Morse, 26 Mass. App. Ct. 819, 824 (1989) (noting that "jurisdiction over a corporation does not automatically secure jurisdiction over its officers") (citing Escude Cruz v. Ortho Pharmaceutical Corp., 619 F.2d 902, 906 (1st Cir. 1980)).
Contract Claims
Normally corporate officers are shielded from individual liability for actions taken on behalf of the corporation, on the theory that he or she is merely an agent for a disclosed principal. Doyle v. Hasbro, Inc., 884 F.Supp 35 (D. Mass. 1995).
Even claims that the officer lacked authority to enter into the contract have failed, as have claims that the employee interfered in a contract his employees had with others – "as long as the employee ‘acted for a purpose that was part of his employment responsibilities,’ the interference is privileged". EMC Corp. v. Clearpoint Research Corp., 1999 Mass. Super. LEXIS 111 (Mar. 3, 1999). In order to prevail, actual malice must be shown. See Speen v. Crown Clothing Corp., 102 F.3d 625 (1st Cir. 1996) (privilege afforded to officers does not excuse unlawful malice in connection with a corporate decision); Mutual Life Insur. Co. v. Chrysler Corp., 793 F.2d 1, 12 (1st Cir. 1986) (no liability for officer in contract breach case because no malice shown).
In this context, there are two situations involving misrepresentation which could allow you to pursue the officer. First, if a corporate officer misrepresented material facts about the contract, a claim under M.G.L. c. 93A, § 11 for unfair or deceptive acts can be pursued. See below. Secondly, if the corporation was undercapitalized at the time of the contract, the other party could include the owner/corporate officer in the lawsuit on that basis. See e.g., Worcester County Institution for Savings v. Rose, 1993 Mass. Super. LEXIS 112 (June 4, 1993) (corporate veil pierced because plaintiffs demonstrated that corporate officers operated as alter egos of each other, material to the instant transaction); Evans v. Multicon Constr. Corp., 30 Mass.App. Ct. 728, 733 (1991) (cites factors which permit disregard of corporate form).
On a variation of this theme, if the corporation transferred assets to its owner or corporate officer while the contract claim existed, use of M.G.L. c. 109A, the fraudulent transfer statute will justify including the transferee, which could, of course, include the corporate officer’s family, friends or a successor corporation. Nader v. Citron, 372 Mass. 96, 105 (1976) (holding transferee corporation liable under c. 109A for a conveyance made without fair consideration). Top
Tort Claims
A recent appellate court emphasized that "a corporate officer is personally liable for a tort committed by the corporation that employs him, if he personally participated … by … directing, controlling, approving or ratifying the act…." Townsends v. Beaupre, 47 Mass. App. Ct. 747, 751 (1999).
A corporate officer can be held liable for his or her participation in unfair and deceptive acts. A corporate officer who commits a tort is personally liable for his actions and cannot seek refuge in the claim he was acting for a corporation. See Instant Image Print Shop, Inc. v. Lavigne, Keating, Halstead, Inc., 1998 WL 201424 (Mass. App. Div. 1998); Bond Leather Co., Inc. v. L.T. Shoe Mfg., Inc., 764 F.2d 928, 938 (1st Cir. 1985).
Generally, if the officer has acted in good faith, albeit imprudently, he will not be subject to personal liability under Massachusetts law, absent clear and gross negligence in conduct. Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st Cir. 1996). For example, in a false representation case, the plaintiff must show that the corporate officer acted knowingly or recklessly. Townsends v. Beaupre, 47 Mass. App. Ct. at 753. See also Acushnet Federal Credit Union v. Roderick, 26 Mass. App. Ct. 604, 605 (1988) (purported deceiver must know or could have discovered the falsity).
However, under some provisions, corporate officers can be found liable without having participated in tortious acts, by having had authority to control such acts. See U.S. v. Building Inspectors of America, 894 F.Supp. 507 (D. Mass. 1995) (found such liability under the Federal Trade Commission Act).
Such acts as the failure by a business official to purchase insurance, pay taxes on behalf of employees, or provide a safe working environment have also been found to support tort claims against corporate officers. See Santiago Hodge v. Parke Davis & Co., 909 F.2d 628 (1st Cir. 1990) (officer might be held liable for failure to provide safe work environment).
93A Claims
A corporate officer may be held personally liable for participation in unfair and deceptive practices. There must, however, be evidence of fraud, deceit, coercion, or other unethical conduct – a mere breach by the corporation, even one that is directed by the officer, will not be sufficient. EMC Corp. v. Clearpoint Research Corp., 1999 WL 1327909 (Mass. Super 1999), citing to Community Builders, Inc. v. Indian Motorcycle Assoc., 44 Mass.App. Ct. 537, 560 (1998).
This provision has been applied quite broadly. For example, where officers took a role in the negotiations leading up to the making of a contract, but did not sign the contract, the court found that they were still liable under 93A. Standard Register Co. v. Bolton-Emerson, Inc., 649 N.E. 2d 791 (Mass. App. Ct. 1995). Top
Securities Fraud Claims
Federal claims asserting individual liability against corporate officers are often brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Section 10(b) and Rule 10b-5 are used to join individuals to make a material misstatement or commit a manipulative act. Section 20-a allows a plaintiff greater latitude in that it can be used to join individuals who "control" those who directly perpetrated the fraudulent act allowing a plaintiff to pursue corporate officers who were not directly involved in the securities violation. See Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) (court found that Section 20(a) does allow for derivative liability of persons who control others found to be primarily liable under the Exchange Act.) However, the fraud as against the officers must be specific as to each; generalized allegations will not survive. Id.
A recent case against Fidelity Investments, the Fidelity Magellan Fund, parent FMR corporation and Magellan Fund manager Jeffery Vinik, alleging Section 20-a, Section 10(b), Rule 10b-5, common law deceit and market manipulation, negligent, misrepresentation and 93A claims survived a motion to dismiss and later settled for $10,000,000. See In Re: Fidelity/Micron Sec. Litig.,964 F.Supp. 539, 543 (D. Mass. 1997) (quoting In Re Kendall Square Research Corporation Sec. Litig., 868 F.Supp. 26, 28 (D. Mass. 1994); Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). It was unclear whether Vinik contributed to the settlement; he was not, however, successful on a motion to dismiss the Sections 20-a and 10(b) counts against him.
Recently, federal district courts in this Circuit have sent numerous cases against corporations and individually named defendants to the jury. See Gelfer v. Pegasystems, Inc., 2000 U.S. Dist. LEXIS 834 (D. Mass.); Chalverus v. Pegasystems, 59 F.Supp. 2d 226 (D. Mass. 1999); Rivera v. Clark Melvin Securities Corp., 59 F.Supp. 2d 280 (D.P.R. 1999).
Liability also may exist for officers and directors under the Massachusetts Securities Act. See M.G.L. c. 110A, et. seq. The full scope of § 410(b) of that chapter, which establishes liability for persons "in control" including officers has yet to be fully explored. It has rarely been cited. See e.g., American Microlet Inc. v. Secretary of State, 1995 WL 809575 (Sup. Ct.) (mentions control in passing). See also Adams v. Hyannis Harborview, Inc., 838 F.Supp. 676 (D. Mass. 1993). Top
Employment
There are both federal (Title VII – codified at 42 U.S.C. § 2000e) and state (M.G.L. c. 151B, §§ 1-10) statutes permitting victims of discrimination to sue their employers. The law with respect to suing individual supervisors is less clear. Most federal courts have denied individual liability. See e.g., Sheridan v. E.I. Dupont de Nemours & Co., 100 F.3d 1077 (3rd Cir. 1996). While the Massachusetts appellate courts have yet to rule and despite the analogy of c. 151B to title VII, there are lower court rulings permitting recovery. Admittedly section 4(5) of 151B makes it unlawful "for any person … to aid, abet, entice, compel or coerce the doing of any of the acts forbidden under this chapter", thus expanding liability to indirect participants. For example, the court in Winsmann v. Choate Health Management, Inc., denied a motion to dismiss where in considering whether a supervisor could be held personally liable as the agent of the employer – held that "[i]t is clear, from a plain reading of [Chapter 151B], that its terms apply not only to employers acting through their principals and agents, but also to any person who aids and abets discriminatory conduct." 8 Mass. L. Rptr. 480 (May 29, 1998). Plaintiffs’ allegations that the defendant-supervisor knew of the defendant’s diagnosed impairment and subsequently terminated him, was deemed sufficient to state a claim against the individual supervisor of aiding and abetting handicap discrimination. See also Ruffino v. State Street Bank, 908 F.Supp. 1019 (D.Mass. 1995) (holding c. 151B permitted retaliation claims against individuals); Chapin v. University of Massachusetts at Lowell, 977 F.Supp. 72 (D. Mass. 1997).
In some instances, the supervisor’s actions could be construed as the tort of intentional confliction of emotional distress. For example, The Ruffino court, citing O’Connell v. Chasdi, 400 Mass. 686 (1987), noted that employees can be liable for international torts outside the scope of their employment.
Under Massachusetts law, a supervisor or manager enjoys a qualified privilege from liability when performing actions within the scope of his or her normal employment duties, see Boothby v. Texon, Inc., 414 Mass. 468, 487 (1993). This privilege does not shield an employee whose actions are intentional and improper in motive, or means. For example, where the actions of a supervisor are at issue, the plaintiff must first allege, then prove that the supervisor interfered with the employee’s advantageous employment relationship "malevolently, i.e., for a spiteful, malignant purpose, unrelated to the legitimate corporate interest," Wright v. Shriners Hospital, 412 Mass. 469, 476 (1992). That is, the supervisor’s actions must rise to the level of "actual malice." Colin v. Boothby, 414 Mass. 478, 487 n.58 (1993).
Conclusion
An imaginative plaintiff’s lawyer dealing with an insolvent corporation, or fraudulent acts by management, should consider naming the corporate officers if there is some factual and legal basis for doing so. This article suggests some bases and no doubt others can be uncovered.