Opinion ID: 1692084
Heading Depth: 2
Heading Rank: 2

Heading: Individual Liability of Directors

Text: ¶ 22. The trustee argues that the trial court erred in failing to find the directors personally liable for their actions. We have held that [t]he rationale used by courts in permitting the corporate veil to be pierced is that if a principal shareholder or owner conducts his private and corporate business on an interchangeable or joint basis as if they were one, he is without standing to complain when an injured party does the same. A & L, Inc. v. Grantham, 747 So.2d 832, 843-44 (Miss. 1999) (citing Bone Constr. Co. v. Lewis, 148 Ga.App. 61, 250 S.E.2d 851, 853 (1978)). Additionally, the chancellor correctly recites the rule that piercing the corporate veil is appropriate where the corporation exists to perpetuate a fraud. [4] See North Am. Plastics, Inc. v. Inland Shoe Mfg. Co., 592 F.Supp. 875, 877-78 (N.D.Miss.1984) (citing Johnson & Higgins of Miss., Inc. v. Comm'r of Ins. of Miss., 321 So.2d 281, 285 (Miss.1975) (accepting the piercing doctrine in Mississippi)). ¶ 23. However, the chancellor went on to find that the individual defendants are not personally liable even though they fraudulently conveyed their entire business: In the instant case, their [sic] was no evidence that the individual owners of Gulfport Pilots Association treated the assets of the corporation as their own or used corporate funds to pay private debts. There was no evidence that they failed to observe corporate formalities or keep separate corporate books. The pilots wrongfully conveyed the Gulfport Pilot II to their new corporation, but there was no evidence that they used the corporation's status as a corporate entity to perpetuate a fraud. While they created the second corporation to avoid the tort liability incurred by the first, this constituted an avoidance of a corporate obligation, not a personal one. (emphasis in original). ¶ 24. The trial court erred in finding that there was no evidence that the directors treated corporate assets as their own. As discussed in Part I, the directors distributed the profits of the old corporation to themselves. In doing so, the directors preferred themselves over other creditors and thereby committed fraud. Our case law clearly holds that directors may not violate their fiduciary duties to the corporation and prefer themselves over other legitimate creditors. Cooper, 220 So.2d at 304. ¶ 25. Furthermore, the purpose of piercing the corporate veil is to make individuals personally liable for corporate obligations. The personal liability of [Defendants] arises from their diversion of corporate assets. Morris, 546 So.2d at 972. Corporate officers who participate in illegal diversions of corporate assets are liable therefor. Gibson v. Manuel, 534 So.2d 199, 202 (Miss.1988) (citing Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 769, 89 So.2d 799, 828 (1956)). ¶ 26. Additionally, the findings of the trial court only pertain to a certain number of situations which warrant disregarding the corporate entity. Because of the equitable nature of this doctrine, the corporate veil may be pierced in a variety of situations. F.M.C. Finance Corp. v. Murphree, 632 F.2d 413, 422 (5th Cir.1980). See Laya v. Erin Homes, Inc., 177 W.Va. 343, 352 S.E.2d 93, 98-99 (1986) (listing nineteen circumstances that permit a finding of personal liability, including the formation and use of the corporation to assume the existing liabilities of another entity). This Court has previously held that conveying a business to a new corporation in order to avoid a corporate obligation was sufficient to find personal liability. Morris, 546 So.2d 969. Similarly, because the directors have abused the corporate entity to knowingly defraud a legitimate creditor they can be held personally liable, to the extent that the new corporation has acquired the assets of the old corporation. Id. at 972. Finally, the chancellor would have required that the directors knowingly contracted with a financially unreliable insurance company in order to hold them individually liable. While the judgment cites no authority, it apparently relies on the rule adopted in some jurisdictions that undercapitalization may warrant disregarding the corporate entity. See e.g., Hambleton Bros. Lumber Co. v. Balkin Enters., 397 F.3d 1217, 1229 (9th Cir.2005) (applying Oregon law). This is too stringent a test and is not the rule in Mississippi. Because there is more than sufficient evidence to support a finding of individual personal liability, we decline to address this issue in the present case.