Running a business comes with a multitude of responsibilities and risks. Business owners are not only responsible for their company’s success but also navigating legal challenges that can arise. Sometimes, a business owner’s worst nightmare arises because a plaintiff attempts to “pierce the corporate veil” and hold the owner personally liable for actions of the business.  A recent case in the US District Court, Eastern District of Virginia (“EDVA”) highlights the importance of understanding how a business owner’s behavior can influence whether they are personally liability for the debts of their business.

On August 31, 2023, Philip Ison (“Philip”) got some good news when he learned that Judge Walker had dismissed the lawsuit against him.  The plaintiff, Shandong Reltex Leihua Co. Ltd. (“Shandong”) sued Philip and his companies, Ison International LLC (“Ison International”) and Ison Furniture MFG, Inc. (“Ison Furniture”) for breach of contract.

Background

In 2018, plaintiff Shandong, a Chinese corporation, entered into a warehousing and distribution agreement with defendant Ison International, a Virginia limited liability company, to store 200,000 tarps. Later, Philip, acting as the CEO of his other company, Ison Furniture, emailed Shandong, proposing to sell the tarps to customers in the US. Subsequently, Philip, this time acting as the owner of Ison International, informed Shandong he had sold the tarps and agreed to wire it $4,830,000.

Shandong followed up with Philip after it did not receive the wire. Philip requested Shandong submit an invoice for payment, which it did.  Philip failed to fully pay the invoice, leading Shandong to file a breach of contract lawsuit.

The lawsuit named all three parties as defendants:  Philip, Ison Furniture, and Ison International. Philip and Ison Furniture filed a motion to dismiss on two seemingly contradictory claims that 1) there was no contract and 2) they were not parties to the contract.

Claim One: No Contract

To understand the implications of this motion, we need to discuss the applied legal standard. Under Federal Rule of Civil Procedure 12(b)(6), a complaint must contain sufficient factual matter to “state a claim to relief that is plausible on its face.” In other words, the plaintiff must provide enough factual information to support the claim that the defendant is liable for the alleged misconduct – in this case, breach of contract by failure to pay.

In Virginia, the elements of a breach of contract action require facts that show the following:

    • a legally enforceable obligation of a defendant to a plaintiff,
    • violation of that obligation, and
    • resulting damage to the plaintiff.

The complaint provided evidence that Ison Furniture, through an email sent by Philip, made an offer related to the sale of tarps, specifying terms, pricing, and payment timelines. While the defendants argued there was no mutual assent, the Court found the email from Ison Furniture contained sufficient terms to constitute an offer. Additionally, Shandong’s complaint stated it accepted the offer over the phone and this is evidenced in subsequent email exchanges; the court agreed.

This case serves as a reminder that businesses should enter into contracts with caution and any communication or offer, even through email, can be legally binding if all elements of a contract are present. While it’s common for people to assume a contract does not exist without a signed document, here the emails referencing an oral agreement and the subsequent actions taken by both parties were enough to satisfy the definition of a contract.

Claim Two: Not Parties

Shandong named Philip (as an individual) and both of his companies, Ison Furniture and Ison International, as defendants in the lawsuit. The plaintiff alleged Philip used the two corporate entities interchangeably and the three defendants were “alter egos for each other”.

Even when acting on behalf of their companies, business owners can be held personally liable for their company’s obligations under certain circumstances. In Virginia, courts may “pierce the corporate veil” (i.e., hold individuals liable for consequences of corporate actions) when there is a unity of interest and ownership that no longer distinguishes the corporation from the individual owner. In other words, an owner such as Philip personally benefited from the actions taken on behalf of their company. Courts are typically reluctant to permit corporate veil piercing, and the bar for the burden of proof is high.

In its motion to dismiss, the defense argued Philip and Ison Furniture were not parties to the agreement between Shandong and Ison International (seemingly contrary to its argument that a contract did not exist in the first place, but lawyers often make alternative arguments).

The court agreed with the plaintiff that Philip acted on behalf of the two companies interchangeably throughout the transaction. Luckily for Philip, the complaint did not provide enough evidence to support piercing the corporate veil – it failed to show Philip benefited as an individual from the companies’ actions. Instead, it ruled he was acting in the interest (albeit to the detriment) of his companies. The court dismissed Philip as a defendant but his second company, Ison Furniture, remained a defendant in the suit. While the impact to his businesses is yet unknown, Philip is at least in the clear for any personal liability.

Key Takeaways for Business Owners

Here are the bottom-line takeaways from this case for business owners:

  1. Work with a business attorney to make sure you understand what constitutes a legally binding agreement – remember, it’s not always a signed document.
  2. Work with a business attorney to create and review contracts for your clients, employees, contractors, and vendors to ensure they are clear, sound, and protect you and your business. At Dunlap Law, we create custom contract templates that business owners can use over and over for clients and employees.
  3. Keep communication channels separate. Don’t use your personal email for business and, if you have more than one business, use a separate email address for each one.
  4. After an oral conversation where you discuss a potential or ongoing agreement, send a follow up email with a written summary and confirm that you require a signed, written agreement (or amendment) to solidify the deal or change.
  5. Business owners may be at risk of personal liability when acting on behalf of their companies. The situations and circumstances are nuanced and varied, so work with your business attorney to learn how to reduce this risk in the unique circumstances of your business.

Only you can protect your business. Schedule a free 30-minute consultation with one of our business lawyers or corporate attorneys to learn how we can help.

This material is for informational purposes only. It is not intended as legal advice and does not create an attorney-client relationship between its readers and Dunlap Law. Consult an attorney before taking action on the issues outlined here. This is attorney ADVERTISING-MATERIAL.

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