Wednesday, August 1, 2012

Observe Corporate Formalities - Court Holds Construction Company Owners Liable if They Don't

In Georgia, recently, a court held the officers of a corporation liable despite the fact that contracts for construction were with the corporation.  In Christopher v. Sinyard a construction company constructed residences.  When certain items were incomplete, a punch list was produced, and the company promised to complete the punch list items after the closing. At closing, one of the corporation’s officers singed an affidavit stating that the residence had been completed and that the work and materials were warranted for one year.

After the closing, the homeowner met with the builder to go over the punchlist and threats of liens by subcontractors. The builder failed to do anything on the punchlist or with regard to the unpaid subcontractors. When the homeowner sued, he sought to obtain a judgment against the company and its individual officers. Because of evidence that the corporate officers had commingled corporate and personal properties and records; failed to observe corporate formalities; the corporation was under-capitalized; and fraud was committed at the closing by executing a seller’s affidavit the officers knew was false, the court entered judgment against the corporation.

In what has become a normal occurrence among smaller companies, the officers never signed bylaws, never issued stock certificates, never kept meeting minutes, and never filed annual registrations. With that argument in tow, the officers requested that the appellate division overturn the lower court's ruling of personal liability.  But the appellate court had little sympathy, stating that “if the individual who is the principal shareholder or owner of the corporation conducts his private and corporate business on an interchangeable or joint basis as if they were one, then he is without standing to complain when an injured party does the same. Under such circumstances, the court may disregard the corporate entity.”

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