Are You A Corporate Officer Sued As An Individual?

“Why am I being sued as an individual?”, President says.

“What is the benefit of having an entity if I am going to be sued as an individual?”

I do not know about you but regardless of the claims in litigation these days, whether defending a direct claim or a cross-claim, director’s and officers are being sued as individuals way too often. Clients ask why is this possible and why aren’t plaintiff’s counsel held to a standard preventing this type of pleading.

Rules for the Road: (1) Plaintiff of course must have a good faith basis for any claim made in complaint and lawyer is held in California to the obligation to “support state laws” See Cal CCP 128.5 re “frivolous claims” and Cal. B&P 6068(a) Cal B&P 6068(a) (2) Plaintiff has burden of establish facts to support claims. CCP 425.10

<1) Don’t forget about tendering claims to insurance and requesting appointment as Cumis counsel 
Before I go into the substantive issue, remember to advise your clients that when they – in any form – are sued, they may be entitled to have their own lawyer in addition to the lawyer appointed by their insuror, and the insuror may be forced to pick up the fees. Of course, read the reservation of rights letter that comes from the insuror after tendering and consult insurance counsel to determine whether the client has right to appoint Cumis counsel. (See generally Reservation of Rights and e.g. Original Cumis Case See also California Civil Code §2860, as outlined in Buss v. Superior Court, (1997) 16 Cal.4th 35 . Under that statute, a conflict of interest may exist “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim…”

(2) Are facts alleged that the officer acted independently to participate or sanction the wrongful act?
Directors and shareholders of a corporation do not incur personal liability for torts of the corporation merely by reason of their official positions, unless they participate in the wrong or authorize that it be done (see Frances T. v. Village Green Owners Assn. (1986) 42 Cal. 3d 490, 503-504). The facts must show that the officer, shareholder, director “directed, authorized, or in some meaningful sense participated” in the wrongful act. It is not enough that they were the officer of the entity at the time the wrongful act “occurred.”

(3) Failure to Supervise Does Not Establish Individual Liability on Part of Officer.
Further cases state that absent personal misconduct by the supervising broker, the designated officer of a corporate broker does not assume personal civil liability to third persons based solely on failure to supervise a salesperson (see In re Grabau (N.D. Cal 1993) 151 B.R. 227; Walters v. Marler (1978) 83 Cal. App. 3d 1, 35). An officer or director of a corporate broker who is negligent in failing to properly supervise the activities of a fraudulent or negligent salesperson is not liable to third persons for the salesperson’s conduct. (Walters v. Marler at 35).