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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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A monority preferred stock holder(also an employee) of a private

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A monority preferred stock holder(also an employee) of a private California coorperation signed a severance agreement whe he left the company. If the company went bankrupt(It stops business due to fraud), would the share holder keep the seniority during the liquidation process? Also, does the general release clause inside the severance agreement still bind both parties? Since the person was a CEO(monority owner) of the company,
will he be liable for any fraud if the company is convicted?
Submitted: 4 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 4 years ago.
Preferred stock has priority over common stock, under California law, only if the preference is stated in the Articles of Incorporation. Corporations Code § 203.

The general release is binding, only if the debtor assumes the severance contract (agrees to pay the severance). Bankr. Code § 365.

Re the CEO being personally liable for fraud, if he personally directs fraudulent activity on behalf of the corporation, then he can be held personally liable. See Michaelis v Benavides (1998) 61 CA4th 681, 71 CR2d 776.

Hope this helps.

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Customer: replied 4 years ago.

Re the CEO being personally liable for fraud, if he personally directs fraudulent activity on behalf of the corporation, then he can be held personally liable. See Michaelis v Benavides (1998) 61 CA4th 681, 71 CR2d 776.

 

In this case, the fradulent marketing practice had existed even before the CEO was hired. Also, the business/marketing practice is not a product of one person. It takes a long time to develop and it was designed by many people. During his tenure as an CEO, he just performed as an officer without knowing the wrong doing. The sales representitives are the ones to perform interactions with clients.

1. He is only holding less than 10%.

2. He was not personally engaging the activities.

3. The owners has the professional license and came up with the business/marketing

practice before the CEO was hired.

4. Nothing is personal in this case. He just performed duties as an officer.

Expert:  socrateaser replied 4 years ago.
Directors and officers are not personally liable on contracts signed by them for and on behalf of the corporation unless they purport to bind themselves individually. . . .Directors or officers of a corporation do not incur personal liability for torts of the corporation merely by reason of their official position, unless they participate in the wrong or authorize or direct that it be done. They may be liable, under the rules of tort and agency, for tortious acts committed on behalf of the corporation. {Citations.} They are not responsible to third persons for negligence amounting merely to nonfeasance, to a breach of duty owing to the corporation alone; the act must also constitute a breach of duty owed to the third person. (19 Am.Jur.2d, 1382.) . . . More must be shown than breach of the officer's duty to his corporation to impose personal liability to a third person upon him."

See United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal. 3d 586, at pp. 594-595.

Your facts suggest that the "owners" created the scheme. However, the CEO is a 10% owner. You mention professional licenses, so I assume a professional license. Depending upon the profession, a licensed professionall cannot lawfully delegate responsibility to another person, unless that person is also licensed to practice. This could operate to indemnify the CEO -- however, if there is a criminal statute that prohibits the CEO from managing the business, then the CEO could be jumping from one frying pan to another.

If you recal, the directors and officers of Enron Corporation all used the "I had no idea what was going on" excuse to try to avoid liability. This has not been a very successful defense. The only really successful defense was conducted by Lou Pai, who managed to quit, sell all of his holdings and fly off into the sunset, before there were any fraud charges against the corporation.

I can't evaluate the CEO's liability in this forum, and you would be foolish to start providing specific facts in this venue. However, nothing you have identified, thus far, provides absolute protection to the CEO.

The CEO needs to hire local counsel and lay all of his/her cards on the table in a confidential manner, so that he/she can properly evaluate his/her risk of liability.

Hope this helps.
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34816
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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