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Torts Does Not Survive Active Participation in the Tort
Recently, the Fourth District Court of Appeal found that “a corporate office who actively participates in a fraud can be liable even while acting in a corporate capacity” and reversed a summary judgment that the trial court had entered in favor of a manager, president and controlling principal of an LLC and its wholly-owned subsidiary.
In the case of Costa Investors, LLC., v. Liberty Grande, LLC, So.3d (Fla. 4th DCA 2022), 2022 WL 17825542, Case No. 4D21-2676, December 21, 2022, has lessons for Business Litigators, entity representatives who are needed in order for the entity to act, and for the victims harmed by the wrongful act participated in by the entity representatives.
The opinion refers to torts and fraud and appears to apply to corporations and LLCs as well as fraud and torts. The opinion dealt with and found that the “independent tort doctrine” and the “corporate representative shield from personal liability” (a corporate officer is not personally liable for wrongful actions of the corporation taken in a representative capacity) did not shield the manager/president of an LLC because of his “active participation” in the fraud the LLC committed. In the Costa v. Liberty, Id.,there was no need to “pierce the corporate veil” to get personal liability for the manager/president.
The opinion seems to be concerned with the need to have active participation by a manager/president liability theory to create personal liability for that participating manager/president in entity torts or the participating manager/president “would be able to perpetrate this flagrant fraud and escape liability behind the shield of his representative character.”
The appellate court also dismissed the manager/president’s argument that two “no personal liability for LLC obligations” provisions in the loan documents insulate him from fraud liability. Additionally, an argument that a “merger clause” protected the manager/president did not work. The fact the manager/president was not an individual party to the agreements that contained the fraudulent representations and the protective provisions the manager/president was relying on is mentioned in the opinion that did not accept the argument.
The case originally arose out of the financing for the development of land for a hotel/condominium project. The land was purchased by Liberty Grande, LLC but was conveyed to Costa Hollywood Property, LLC, described as a wholly owned subsidiary of Liberty. An individual, Moses Bensusan, was the manager and controlling principal of Liberty and Coast Hollywood Property; Bensusan, as a representative of the LLC, signed a deed that conveyed the property to Costa Hollywood Property, LLC. He also signed a Loan and Security Agreement that had Liberty grant a security interest, lien and mortgage to property that was no longer owned by Liberty in his LLC representative capacity.
The loan documents from Liberty included provisions that were inconsistent with its recent transfer of the property. The loan documents represented Liberty as owning the property and not Costa Hollywood Property, LLC. Bensusan knew this since he signed the deed and the loan documents. The loan documents also represented that Liberty was granting a security agreement which Liberty could not do since it no longer owned the property. The opinion cites authorities, including one that says: “[I]t appears that a director or officer may be held directly liable for his or her own wrongful act—as is any agent or employee or servant—such as negligence, fraud, illegal or irregular issuance of securities, conversion, and the like.
The cases stress participation—or at least knowledge amounting to acquiescence in the wrongful act.” “What did the [representative] know and when did [they] know it” from years past appears to be relevant. Absolute knowledge of the wrongful act may not be necessary if it is something the representative should have known. The opinion indicates that this liability can extend to personal liability for a breach of an entity contract proximately caused by a tortious act from which the breach proximately resulted.
In addition to not participating in entity tort, because the representative is a prime target, the representative should practice preventative law in the documentation that the representative is unaware of any improper entity conduct. Insisting on third party due diligence by the representative can help a later claim of some wrongful conduct. It appears that more than just blind reliance on the various shields that historically have been the protection of the representatives may be necessary.
The persons harmed by representative participation in torts may find easier ways to pursue the representative that has participated in the harm. The use of active participation theory to get to personal liability may be easier than piercing the veil.
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