FORT LAUDERDALE BUSINESS LITIGATION: ALTER EGO LIABILITY FOR CORPORATION’S BREACH OF CONTRACT

Where a plaintiff considers a lawsuit against a corporation for breach of contract, an important strategic consideration is whether the victorious plaintiff will be able to collect the judgment against the corporate defendant. In other words, will the corporation will have the financial means to pay the what is owed to the plaintiff? In Florida and other states, the corporate form promotes investment and commerce by generally shielding shareholders and officers from liability for the company’s debts. However, there is a separate body of law of alter ego liability, also referred to as piercing the corporate veil, which under certain circumstances allows a court to hold a corporate officer or shareholder liable for a corporate obligation. Peter Mavrick is a Fort Lauderdale business litigation attorney, and represents clients in business litigation in Miami, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration. The Supreme Court of Florida’s decision in Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla. 1984), is frequently cited precedent on the issue of alter ego liability/piercing the corporate veil. Dania Jai-Alai addressed whether, “[U]nder the evidentiary facts presented to the trial court, was the court correct in taking the issue from the jury and directing a verdict against Dania?” In deciding there was error in the lower court, the Supreme Court of Florida explained that:

In granting a motion for directed verdict, the Court must determine that there is no evidence to support a jury finding for a party against whom the verdict is sought. Cadore v. Karp, 91 So.2d 806 (Fla.1957). It does not lie within the province of the Court to weigh evidence or determine questions of credibility and, where there is a possibility of different conclusions or inferences from the evidence the Court should submit the issue to the jury. Bruce Construction Corp. v. The State Exchange Bank, 102 So.2d 288 (Fla.1958). See also 25 F.L.P., Verdict, § 9.

Earlier in its opinion the Supreme Court summarized what should be shown before a a corporate officer or stockholder is to be burdened with going forward with evidence to show why the corporate veil should not be pierced. A preliminary showing is required:

that the corporation is in actuality the alter ego of the stockholders and that it was organized or after organization was employed by the stockholders for fraudulent or misleading purposes, or in some fashion that the corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not bona fidely established or, in general, that property belonging to the corporation can be traced into the hands of the stockholders.

Following Dania Jai-Alai, Florida’s Fifth District Court of Appeal in Walton v. Tomax Corp., 632 So.2d 178 Fla. 5th DCA 1994), vacated the trial Judge’s decision throw out a claim against a corporate officer for his alleged alter ego liability for the corporation’s breach of contract. In Tomax, the plaintiff had signed a contract with a home builder, Tomax Corporation (Tomax), to build a house. The plaintiff paid the builder $20,000 as a deposit. Under the contract, Tomax was required to return the deposit if the contract was not performed. Tomax never built the house and apparently did nothing after getting the deposit. The plaintiff sued Tomax for breach of contract as well as its corporate president, McGuire, alleging he was an alter ego of the corporation and therefore was liable for Tomax’s breach of contract. The appellate court in Tomax explained in pertinent part: “”[W[e find merit … in the appeal with respect to Count VI, an action for breach of contract against McGuire personally based on Tomax’s failure to return Walton’s $20,000 deposit. Walton alleged that McGuire should be held personally liable for Tomax’s breach because Tomax was the ‘alter ego’ of McGuire and that the corporate veil of Tomax should be pierced rather than allowing it to shield McGuire from responsibility. The trial court entered a directed verdict on Count VI indicating that the evidence presented by Walton was insufficient to hold McGuire personally liable for the breach of contract by Tomax. We disagree and find that the trial judge erred by ordering a directed verdict.” The plaintiff’s decision to sue McGuire was an important strategic decision, because Tomax was unable to pay its bills, had filed for bankruptcy, and was essentially uncollectible. Without alter ego liability against McGuire, a jury verdict against the corporate builder would have been a Pyrrhic victory. The evidence showed that Tomax was owned by McGuire’s wife as “the sole stockholder in the corporation and its secretary/treasurer,” but McGuire, as president and chief executive officer, ran the daily operations of the business. Tomax, however, “did not own the lot upon which it represented that the home would be built.” Tomax never built the home. In vacating the trial court’s decision and ordering a jury trial on McGuire’s personal liability as an alter ego of the corporation, Tomax explained that, “[t]he record also indicates that, during that time, McGuire may have caused the corporation to make inappropriate corporate distributions to himself and his family at the expense of Walton and other corporate creditors in what may be eventually determined by the jury to be consumption or depletion of corporate assets for their personal benefit … McGuire caused Tomax to disburse corporate funds to charities to which his son was closely affiliated, and to his son for salary in the round amount of $2,000 although his son had been previously receiving a fixed amount of $662.10 per week. McGuire caused Tomax’s funds to be paid to himself in the amount of $23,501.01 even though the funds were clearly the proceeds of a residential closing that belonged to Tomax when it had been unable to pay its debts for a period of at least four months. Just before Tomax filed a petition in bankruptcy, McGuire also caused Tomax to make largely unexplained distributions to a daughter-in-law. Additionally, corporate agents induced Walton to make a $20,000 deposit in order to justify taking the property [the lot upon which Walton’s home was to be constructed] off the market … when Tomax could not pay its debts but when McGuire and his son continued to receive their regular salaries as though business was to continue ‘as usual.’ The property was never owned by Tomax and the evidence does not indicate that steps were ever taken to obtain the property after receipt of the deposit. Furthermore, the correspondence from Tomax to Walton regarding the construction of their home came to an abrupt halt after Tomax acknowledged receipt of the deposit. Corporate checks placed in evidence indicated that McGuire’s weekly net salary of $1413 did not experience similar cessation … [T]here was evidence which, if accepted by the jury, tended to show that McGuire depleted corporate assets for the personal benefit of himself and his family while the corporation was unable to pay its debts. Accordingly, the directed verdict was improper.” Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.