In a potentially important decision regarding the scope of the Business Organization Code’s limitation of individual liability for corporate shareholders or members of a limited liability company, the Texas Supreme Court has held that the statute does not limit an individual shareholder’s or member’s personal liability under common law for tortious acts committed while acting as a corporate officer or agent.
Mary Alice Keyes and Sean Leo Nadeau v. David Weller and IntegriTech Advisors, LLC (No. 22-1085; June 28, 2024) arose from a dispute between Weller and his former employer over Weller’s terms of employment. Weller, an aviation consultant and sole member of Integritech Advisors, LLC, negotiated an employment agreement with Keyes and Nadeau, owners and agents of MonoCoque Diversified Interests, LLC, under which MonoCoque would pay him a salary, a quarterly training fee, and quarterly, nondiscretionary payments based on a percentage of MonoCoque’s revenues generated by Weller. Weller commenced employment, but a few weeks later he received a term sheet with different (and less favorable) compensation. Weller did not sign the documents, and subsequent negotiations with Keyes and Nadeau ultimately resulted in their taking the position that they never had a deal with Weller other than as an at-will employee. Weller quit, demanded a prorated amount of compensation he claimed under the original deal, and, when Keyes and Nadeau didn’t pay up, sued them and MonoCoque, alleging breach of contract, fraud, and Texas Securities Act claims. He further alleged that Keyes and Nadeau were individually liable for their own fraudulent and tortious conduct. Keyes and Nadeau filed a partial summary judgment motion arguing that § 21.223, Business Organizations Code, shielded them from individual liability, which the trial court granted. The Austin Court of Appeals reversed. Keyes and Nadeau sought review.
In an opinion by Justice Lehrmann, SCOTX affirmed the court of appeals. Commencing with an analysis of the corporate veil-piercing doctrine (alter ego and corporate form as “a sham to perpetrate a fraud”), Justice Lehrmann reviewed the origins and development of § 21.223, the predecessor statute to the Article 2.21 of the old Texas general laws. Under this statute, a corporate shareholder may not be held liable to the corporation or its obligees for, among other things, “any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetuate fraud, or other similar theory” or “any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality.” The statute, however, does not protect a shareholder if the obligee “demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder,” etc.
As Justice Lehrmann observed, a long line of SCOTX authority holds that “[i]ndependent of the ‘vicarious’ liability that may be imposed on corporate shareholders and officers based on veil-piercing theories, . . . corporate agents are ‘personally liable for [their] own fraudulent or tortious acts’ even though ‘they were acting on behalf of the corporation’” (citations omitted). Noting a conflict of opinion in the courts of appeals and federal courts on whether § 21.223 has any effect on the common law rule, Justice Lehrmann states that a majority of courts have answered in the negative. Based on the plain language of the statute and the way the Legislature has modified it over the years, she went on, it is clear that the statute forecloses shareholder liability based on various veil-piercing theories that had been aired in the courts to make shareholders liable for “matters relating to corporate contractual obligations—not the liability of corporate agents for their own misconduct.” In other words, the statute does not exempt corporate agents from direct liability claims arising from their own tortious conduct.
As applied to this case, the Court concluded that Weller’s claims arise from allegedly false “representations and commitments . . . regarding incentive compensation” which Keyes and Nadeau never intended to and never did pay and that they “allowed Weller to commence with his employment knowing that he believed the pre-employment terms to be in effect because they told him that this was so.” Further, while Weller was employed, Keyes and Nadeau took advantage of Weller’s “knowledge and connections knowing that they did not intend to perform on the agreement.” Since the only ground upon which Keyes and Nadeau sought partial summary judgment was § 21.223’s liability protection, the Court sent the case back to the trial court for further proceedings.
Justice Busby filed a concurring opinion emphasizing that the Court “properly does not address under what circumstances Section 21.223 would limit the direct liability of a shareholder for tortious acts not committed as a corporate officer or agent” or to what extent the statute might apply to “non-veil-piercing theories of liability.” Similarly, in concurrence, Justice Bland, joined by Justices Huddle, Blacklock, and Young, to “emphasize . . . [that] Section 21.223 remains a shield to a suit seeking to impose liability based on shareholder conduct for matters relating to a corporate contractual obligation unless the shareholder directly benefits from the transaction.”
It remains to be seen just how far the Court’s ruling actually goes. It appears from the majority and concurring opinions that the procedural posture of the case (partial summary judgment based on statutory immunity) limited the defendants’ ability on appeal to better track their defense to the provisions of the statute. We will also be interested in whether the keepers of the Business Organizations Code (which one might compare to the sacred Jedi texts) perceive this decision as a big enough problem to warrant a visit to the Legislature in 2025 (as have past decisions, pointed out by Justice Lehrmann in the majority opinion).
