Court: Corporate officers held liable for debt - East Valley Tribune: News

Court: Corporate officers held liable for debt

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Posted: Friday, February 12, 2010 5:45 pm | Updated: 3:40 am, Sat Oct 8, 2011.

Corporate officers can be held personally liable in some situations when their defunct firms don't pay their suppliers, the Arizona Court of Appeals has ruled.

Corporate officers can be held personally liable in some situations when their defunct firms don't pay their suppliers, the Arizona Court of Appeals has ruled.

The judges did not dispute that lawsuits against a corporation for failing to pay a debt are valid only against the corporate entity. And when the corporation goes away, the creditors generally cannot go after the individual shareholders or directors.

But Judge Sheldon Weisberg, writing for the unanimous court, said there is another law on the books which requires contractors who get money from homeowners for projects to hold that money "in trust." More to the point, the law says those funds cannot be used for any other purpose until the suppliers for that project are paid off.

And Weisberg said the evidence here was the owners of Designer Surfaces Inc. had spent the money it was supposed to hold in trust.

Court records show Arizona Tile LLC sold materials on open account to Designer Surfaces. The board of Designer Surfaces consisted of two people, Howard Berger and John McCarthy.

After Designer Surfaces became insolvent and failed to pay nearly $26,800, Arizona Tile filed suit against Berger and his wife as well as McCarthy.

Arizona Tile did pick up nearly $3,700 from the bank account of Designer Tile. When a trial judge agreed to make the directors of Designer Surfaces liable for the balance, they appealed.

Weisberg said the law in question does more than simply require that the funds paid by homeowners to contractors be held in trust.

He noted it also says that funds "shall neither be diverted nor used for any purpose other than to satisfy the claims of those for whom the trust is created." And Weisberg said the law says those funds "shall be paid when due to the person or persons entitled thereto."

"Applying the statute's plain language, we conclude (the law) created a trust obligation upon Designer Surfaces in favor of Arizona Tile," Weisberg wrote for the court. And that, the judge said, governed how Designer Surfaces could use the money.

Attorneys for Designer Surfaces said there was no evidence the company or its officers decided to pay certain suppliers but not others.

But the lawyers for Arizona Tile pointed to Berger's own deposition where he said that, in the last few months of the company's operations, he, McCarthy and an employee decided what to do with the available funds.

In that deposition, Berger said they did pay suppliers to finish jobs.

But he also said that if the money wasn't immediately needed, then the balance went to two banks which had loaned the company some money, loans that Berger and McCarthy had personally guaranteed.

"Because defendants participated in or caused the corporation to breach its trust obligation, they can be personally liable for the loss resulting from that breach of trust," Weisberg wrote.

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