Lothrop v. Chirob, Inc., No. S1051-03 CnC (Norton, J., Mar. 4, 2005)

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STATE OF VERMONT SUPERIOR COURT Chittenden County, ss.: Docket No. S1051-03 CnC

LOTHROP

v.

CHIROB, INC.

ENTRY

This is a motion for summary judgment that raises the question of how liability attaches to a corporate officer.

Defendants David Roby and Darren Chiott formed Bul let Boy, Inc., a message and delivery service in northern Vermont. The two incorporated their business as a Vermont corporation and became the company’s sole shareholders, directors, and officers. Ten years l ater, they decided to selltheir business and listed it with the Vermont Busin ess Brokers. The

Brokers generated a packet of information about Bul let Boy. This included an overview of the operations, owner’s information, number of employees, list of equipment, purchase price, and financial st atements of operating income for the past two years. It is unclear who f rom Bullet Boy helped the Vermont Business Brokers prepared this list. It ma y have been Chiott; it may have been Roby; or it may have been both.

At this point, plaintiff Gregory Lothrop entered t he picture. He received the packet of information on Bullet Boy an d began making inquires. He dealt exclusively with Chiott who tal ked with him on the phone and met with him at two meetings in August 20 01. At those meetings, Lothrop, Chiott, and an agent of the Verm ont Business Brokers discussed the details of the business and negotiate d the sale. At one meeting, Chiott gave Lothrop a list of Bullet Boy’s top ten customers by total annual billing amounts. These dealings led t o a letter of intent signed by Chiott and Lothrop. The two physically inspecte d the business’s equipment and assets and signed an asset purchase a greement. Chiott then executed a Bill of Sale, conveying all of Bullet Bo y’s equipment and assets to Lothrop, including its customer lists. Bullet B oy, Inc. then changed its name to Chirob, Inc., which freed Lothrop to create a corporation with that name, essentially taking possession of the company’ s goodwill asset.

Lothrop now claims that Roby and Chiott greatly ov erstated the value of their business. In particular, he points to the customer lists that the parties provided at the time of the Bill of Sale. Lothrop claims that many of

the “active customers” were in fact former or dissa tisfied customers. According to Lothrop, these lists were the most imp ortant asset of the company and its inaccuracies greatly altered the va lue of the business. Lothrop, however, also claims that he was misled by the information givento him before and during the sale by Chiott and the Vermont Business

Brokers, which also exaggerated the business’s hale ness.

In his defense, Roby does not dispute any of these facts or Lothrop’s dissatisfaction. Instead, Roby points to the fact that the entire sale and several of the lists generated during negotiations were produced by Chiott. Roby argues that Chiott, and Chiott alone, bears al l personal liability for

them, and that he should not be held liable because he did not participate in

their manufacture or distribution.

To understand the implications of Roby’s defense a nd its relative merit, it is necessary to isolate Roby in each of h is many roles at Bullet Boy, Inc. See generally C. Fain, Corporate Directo r and Officer Liability

, 18 U. Ark. Little Rock L.J. 417 (1996) (discussing the limits of corporate duties and liabilities for individuals). As a shar eholder Roby enjoys immunity for the tortious actions of officers, othe r shareholders, and directors. 11A V.S.A. § 6.22(b) (noting that perso nal actions are the sole source of liability). In this case, Roby appears t o have acted as a shareholder only to extent that he voted to approve the asset sale. This decision is not at issue in the present litigation. As a director, Roby had similar immunity, so long as he relied in good fait h on information and acted as an ordinary, prudent director. 11A V.S.A. § 8.30. In this case, Roby may have acted as a director when he and Chiot t came up with the idea to sell the assets of the corporation, and it may have been as a director that he and Chiott agreed to have Chiott handle any prospective buyers. He may even have acted as a director in approving the sale to Lothrop. But these activities put Roby too far away from the det ails of the sale that Lothrop cites in his complaint. Roby as director m ay be authorizing the sale and empowering Chiott to provide details, but there is no evidence that Roby as director was ordering Chiott to mislead cus tomers or generatemisleading documents and customer lists. Lothrop’s basis for his claims is

much smaller. He is claiming that Roby and Chiott produced misleading documents that led him to overvalue the corporation . In this respect, he is talking about Roby and Chiott in their role as offi cers of the corporation.

An officer of a corporation is charged with perfor ming duties listed in the corporate bylaws and any duties prescribed o r directed by the board of directors. 11A V.S.A. § 8.41. When dealing wit h external parties, an officer is often an agent of the corporation, but h e is not an agent of other officers. It is generally held that an officer, ev en one acting in an official capacity, is liable only for torts that she commits . 3A W. Fletcher, Fletcher Cyclopedia of the Law of Corporations § 1135 (2002). Conversely, an officer is not personally liable for the torts of a corporation merely by virtue

of her office. Id . at § 1137; see also Bowling v. Ansted Chrysler-Pl ymouthDodge, Inc. , 425 S.E.2d 144, 148–49 (W.Va. 1992) (collecting c ases). Roby’s argument for summary judgment focuses on his non-participation in any direct dealings with Lothrop. In respect to th e general rule, this position has some merit. Since there is no evidenc e that Roby and Chiott conspired from the beginning to mislead any buyers, Chiott’s misrepresentations made during the negotiations and through documents that he generated are not attributable to other off icers, directors, or shareholders. To the extent that they are misrepre sentations, they are attributable to Chiott and the corporation.

The problem with granting summary judgment in this case, however, is that despite his evidence, Roby does not discuss the manufacture of the initial information provided to the Vermont Busines s Brokers or the final customer list provided at the sale. More important ly, these two exceptions are indicative of the lack of evidence showing that Chiott, and not Roby, was the sole officer responsible for generating and handling all of thematerial for the sale. This is important because t here is an exception the

rule against officer liability.

The responsible corporate officer doctrine states that “if a corporate officer participates in the wrongful conduct, or kn owingly approves the conduct, the officer, as well as the corporation is liable for the penalties.” 3A Fletcher, at § 1135, at 202. As one court phras ed the duty:

An individual director [or officer] cannot escape l iability for fraudulent corporate action taken under authorizati on affirmatively approved by him merely by asserting his ignorance o f facts he had a duty to know and should have known. Where the du ty of knowing facts exists, ignorance due to neglect of d uty on the part of a director creates the same liability as actual knowledge and a

failure to act thereon.

Fowler v. Elm Creek State Bank, Inc. , 254 N.W.2d 415, 419 (Neb. 1977).

This exception to officer liability is not a pierc ing of the “corporate veil.” Cf. Agway, Inc. v. Brooks , 173 Vt. 259, 262–63 (2001). When a court pierces the “corporate veil,” the court is es sentially ignoring the corporate structure with its inherent liability bec ause the owners and officers of the corporation through underfinancing or fraudulent behavior have abused the corporate form and behaved outside the corporate structure. In this case there is no evidence by pl aintiff to suggest that Chiott or Roby abused the corporate structure itsel f or that there is any

reason to treat them outside their roles as officer s, directors, and

shareholders.

Instead, what Lothrop is arguing is that it is unc lear who in the corporation was responsible for generating the misr epresenting documents and who approved them before they were sent out. W hile Roby disclaimsseveral of them, he does not disclaim them all, and he does not delineate his

responsibilities in the corporation from Chiott. T o the extent that Roby seeks to assert the defense of non-responsibility, the burden falls on him to

make this clear and demonstrate that he was not res ponsible in any official capacity for generating, approving, sanctioning, or ratifying the alleged misrepresentations. There is also caselaw to suppo rt the idea that this determination is ultimately be a factual one and th e province of the fact finder. Bowling , 425 S.E.2d at 149 (“In sanctioning a fraudulent a ct, the officer need not have actual knowledge because cons tructive knowledge may suffice.”); 3A Fletcher, at § 1137, at 218–19. Still, it is important to note that this constructive knowledge is limited an d liability will only attach where there is evidence of affirmative parti cipation and not simply an isolated failure. See, e.g., Shay v. Flight C H elicopter Services, Inc.

, 822 A.2d 1, 17–19 (Pa. 2003) (noting that liability through the participation theory attaches for misfeasance but not for mere no nfeasance).

Because Roby’s evidence fails to fully isolate him from the corporate process that created the alleged misrepre sentations, summary judgment at this juncture would be improper. There fore, based on the foregoing, Roby’s motion for summary judgment is de nied.

Dated at Burlington, Vermont________________, 2005

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________________________ Judge