What about Caveat Emptor?

Perhaps the biggest change in legal philosopy over the past 50 years could be summed up in that the law has changed from a world of "caveat emptor" to one of "I am my brother's keeper".

There is no area of law where this shift can be demonstrated better than in the field of corporate law. Fifty to one hundred years ago, the likes of Conrad Black and Kenneth Lay would have roamed free like the captains of industry that preceded them. Today, the law favors consumer protectionism over the technical protection of corporate officers, directors and shareholders.

Corporations and other limited liability entities like limited liability companies and limited partnerships are formed by entrepreneurs in an effort to limit the entity's owner's risk. A properly formed and run entity should be able to insulate its owners, directors and agents from personal liability for the actions of the entity.

In certain cases, however, a court may still reach through the liability shield and reach the individuals behind a limited liability entity's actions. The concept, known as "piercing the coprorate veil", is one in which a plaintiff is able to break through the limited liability protection of the entity to receive relief from a shareholder, officer or other agent of that entity.

Illinois employs a two-prong for piercing the corporate veil: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences. People ex rel. Scott v. Pintozzi, 50 Ill. 2d 115, 128- 29 (1971).

So, generally, if it can be demonstrated that a person exercises control over a corporation such that the person running the corporation is using the corporation as an alter-ego in a situation where some person is harmed, then the corporation liability shield can be broken and the person in charge can be personally responsible for the corporate action.

The Illinois courts have indicated that a non-shareholder of an Illinois corporation can be found personall liable for the actions of and damages done by the corporation. In the case, Fontana v. TLD Builders, the Illinois courts found a non-shareholder personally liable for the actions of the corporation when it was demonstrated that the corporate officer and not his shareholding spouse was found to have a unity of interest with the corporation and the building contractor corporation had caused over one million dollars in damage to a customer. The corporation was not properly capitalized and failed to follow many of the typical corporate formalities.

Corporations and limited liability entities need to take a long hard look at how they conuct operations. Directors and shareholders need to understand and document what they are doing. In all cases, gross negligence is going to be subject to liability. However, if a corporation wants its liability protection to have real meaning, then the corporation will need to adhere closely to the corporate formalities in a material way.