Page 17 - John Hundley 2011

Sharp Thinking

No. 49 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. July 2011

Corporate Form Doesn’t Insulate Owner From

Liability in All Instances, Decision Shows

By Terry Sharp, tsharp@lotsharp.com, 618-242-0246

Conventional wisdom is that most businesses are best served by limited liability through
corporations and limited liability companies. While that is not bad advice, a recent decision of a
bankruptcy court illustrates that limited liability is not a panacea for the owner/executive.

In re Jacobs, 448 B.R. 453 (Bankr. N.D. Ill. 2011), involved actions of
the owner, Jacobs, in a case brought by one of his company’s employees.
Jacobs, as president, sole owner and chief operating officer of
Northwestern Plating Works, Inc., oversaw the day-to-day affairs of the
company, was a signatory of the corporate bank account, signed the
paychecks and was responsible for insuring that plaintiff was paid and
received various employee benefits.

As Northwestern was sliding toward bankruptcy, it failed to pay its
federal tax obligations and premiums on group health insurance. The
company also continued to deduct employees’ contributions to the health
insurance from their paychecks even though the insurance had lapsed, and
issued payroll checks against insufficient funds. Sharp

As the plant closed, the plaintiff-employee filed suit and obtained a default judgment for
$278,876.90 in actual damages and legal fees and $275,000 in punitive damages. The Department
of Justice seized all the corporate records and Jacobs filed bankruptcy.

The Secretary of Labor initiated an adversary proceeding for diversion of plan
assets in violation of the Employee Retirement Income Security Act (“ERISA”) and
filed a charge that a substantial portion of those damages were non-dischargeable.
Next, the U.S. Attorney initiated a criminal case for embezzling and stealing the funds
from the pension plan, for which defendant was convicted and incarcerated.
Defendant also was convicted of improperly storing and disposing of hazardous
waste at the facility.

The court noted it was well established that “corporate officers who actively participate in the
commission of fraudulent or tortious conduct may be held personally liable”. The court also noted
that much of Jacobs’ conduct violated the Illinois Wage Payment & Collection Act (820 ILCS 115)
(“IWPCA”), which expressly makes corporate officials personally liable if they “knowingly permit” the

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
constitute educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal
advice on your particular situation, contact a Sharp lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.