CORPORATIONS: NOT A LICENSE TO STEAL

Luxury Homes and Estates of Florida

Florida, as well as other states created by statute, corporate entities to shield owners from personal liability in order to promote trade and commerce. Ordinarily a shareholder will not be responsible for the debts of a corporation absent a guaranty to the corporate creditor. However, in certain circumstances the courts will allow a creditor to pierce the corporate veil and recover against individual shareholders.

The Florida Supreme Court established that in order to pierce the corporate veil there must be a showing of “improper conduct”. *Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d, 1114, 1121 (Fla. 1984). It appears from Dania that the required showing is a two-step process: (1) alter ego, together with (2) some form of misconduct, which may be shown in a number of ways, including depletion of corporate assets for personal shareholder benefits or diversion of corporate property into the hands of shareholders.

The facts in Advertects involved shareholders who habitually operated numerous unsuccessful corporations; were the sole shareholders; and handled business affairs poorly. There the court refused to pierce the corporate veil because there was no showing that the shareholders improperly converted any of the corporate property to their own use or abused their positions. Thus, being a poor businessman and having a failed business does not subject one to personal liability. However, the facts in Walton v. Tomax Corp., 632 So.2d 178, 180 (Fla. 5th DCA 1994) achieved a different result. In that case, a fellow named Maguire was the manager of Tomax Corp. and his wife was the sole shareholder. A customer paid Tomax Corp. $20,000 as a deposit to construct a home. Maguire accepted deposit, never contacted the Plaintiff again, and a few months later filed for bankruptcy. The court found that the corporation could not pay its debts when the deposit was paid and that Maguire caused his company to make inappropriate distributions to himself and to his wife at the expense of corporate creditors. The court allowed an action to pierce the corporate veil and stated:

If a corporate officer who is in control of a corporation personally utilizes its assets for payment of personal obligations and generally treats the corporation as a sham, he can be liable on an alter ego theory.

The lessons in the cases are obvious. Establishing a corporation is not a license to steal. The corporate assets must be utilized for legitimate corporate purposes and not consumed or depleted for a shareholder’s personal gain.


*The Dania court relied, in part, on Advertects, Inc. v. Sawyer Industries, Inc.: “[Advertects] We rejected the proposition that a rule could be issued against individual stockholders to show cause why they should not be personally responsible for corporate debts absent a preliminary showing 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 assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not bona fidely established or, in general, the property belonging to the corporation can be traced into the hands of the stockholders.

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Houston Short grew up in the Central Florida area, and continues to reside in Orlando with his family. He provides representation in arbitration actions for the American Arbitration Association and engages in alternative dispute resolutions including mediation both binding and non-binding arbitration, and settlement negotiations. He is an active member of the American Arbitration Association Panel Review Committee, the Orange County Bar Association, and the Florida Bar. He graduated from Florida State University in 1984 with a bachelors of science degree (cum laude) and received his juris doctor from the University of Florida in 1987 (with honors). Houston co-authored, "The Constitutionality of the Legislatures Mandate to Sever Counterclaims in Mortgage Foreclosure Action," the Real Property, Probate and Trust Law Section, The Florida Bar.