Owners of small business form corporations, in part, to insulate themselves from personal liability. A recent trend in Ohio is that the State has become far more aggressive in pursuing owners of small businesses personally in environmental enforcement actions.
A business owner could still be pursued even if the corporate formalities were followed. More and more the State is pursuing any president or owner of a small business who has an active role in managing his company day-to-day.
Due to the high costs associated with environmental compliance, this is a trend that owners of small businesses should be aware of and take prudent steps to try and protect themselves.
"Piercing the Corporate Veil"
A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. There are exceptions to this rule Courts have found that the “veil” of the corporation can be “pierced” and individual shareholders held liable for corporate misdeeds when it would be unjust to allow the shareholders to hide behind the fiction of the corporate entity. This is commonly referred to as "piercing the corporate veil."
The test in Ohio for disregarding the corporate form is whether:
- Control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will or existence of its own;
- Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and
- Injury or unjust loss resulted to the plaintiff from such control and wrong.
[See, Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos. (1993), 67 Ohio St.3d 274, 287, 617 N.E.2d 1075]
It had been a rare instance when the AGO would try to "pierce the corporate veil" and pursue shareholders, owners or officers of a corporate personally for environmental violations. That has changed since the State won a victory in 2006 in case of State of Ohio v. Mercomp. In that case, the State successfully pierced the corporate veil attaching personal liability to Manny Rock, a shareholder of a landfill.
What Actions Gave Rise to Liability?
Here are some of the facts that the Court gave rise to personal liability:
- Mr. Rock was the sole shareholder of the corporation;
- The name of the corporation was based upon his initials;
- Regulatory violations by a corporation, absent affirmative wrongful conduct by the shareholder, is sufficient; and
- The failure of the Corporation to correct the environmental violations threatened public health and the environment.
It is important to note that the Court found liability even though it did not find under-capitalization, failure to observe corporate formalities, insolvency, or diversion of corporate funds for personal use.
Since 2006 State Seeks Individual Liability Frequently
Since the Mercomp decision in 2006, the State of Ohio has frequently sought (and obtained) personal liability of owners of small businesses. Individuals are not only required to perform clean up, they are also subject to civil penalties if they don't perform on a timely basis.
For small businesses that have a sole or large majority shareholder, the Mercomp case increases the liability risks for individuals. If a company has environmental violations that have gone unaddressed, the State may argue for personal liability.
Owners of small businesses must be aware of these risks and take steps to try and protect themselves. .