Can You Seek Damages if You Lose Business Based on an Opponent’s Conduct During Litigation?

Ordinarily, if someone acts in bad faith, or with malice, and interferes with a contract causing lost profits, a party can potentially bring a claim in court for tortious interference with contractual relations. However, the claim is likely unavailable if the basis for the claim arises from a pending litigation case. For example, assume you have a valuable business contract, and the contract gets cancelled because of something an opponent claimed during a litigation proceeding?  A recent appellate court case case confirms that immunity applies to bar claims of interference with contractual relations when the actionable conduct arises out of a litigation case.  Litigation can be very disruptive to ongoing business relationships.  There could be situations where a party in a litigation case loses business because of something someone does or says during a proceeding in litigation, such as a court hearing.  Unfortunately, some litigants might do this intentionally as a way to gain advantage in a case.   In contrast, some other litigants might seek to raise a claim of interference or infliction of emotional distress even if the conduct in question was fair game in the course of the case.  The courts in Connecticut essentially come down on the side of barring subsequent claims of this type that are based on conduct during a litigation proceeding.  The reason is policy based, in part, because the courts do not want witnesses and litigants to fear reprisals for raising legitimate facts and arguments in court. Essentially, although there is a risk of litigants unfairly seeking to harm an opponent through deliberate efforts, the risk is outweighed by the importance of candor and truth seeking in court proceedings. There are other ways to address improper, baseless or unethical conduct by opponents during a litigation proceeding.  However, if an opponent resorts to filing a separate lawsuit for interfering with a business relationship or for infliction of emotion distress, the case likely will be opposed by a motion to dismiss based on immunity.

 

Does A Limited Liability Company Protect Its Members From Personal Tort Liability?

Not always.  An individual member of an LLC or an officer of a corporation may be individually liable for their own torts.  This rule is well settled and the Connecticut Supreme Court reaffirmed it in Strum v. Harb Development, which will be officially released on August 31, 2010.  

Business owners often chose to a form a business entity to operate under, such as a limited liability company (LLC), limited liability partnership, or professional corporation.  In basic terms, the entity operates as an individual for legal purposes. There are many reasons to form a business entity. One of the more common reasons is to limit your personal liability and protect your assets.  The idea is, if you make a mistake in business, the entity is responsible, not you personally.  

Many times, a properly formed and maintained business entity, like an LLC or corporation, can provide a shield or "veil" of protection for an individual member or officer.  However, the protection is not absolute, and there are many instances where you can be personally liable in business despite the formation and operation of a business entity.    Two of the most common methods of establishing personal liability are "piercing the corporate veil" and individual responsibility for torts, such as breach of fiduciary duty, negligence, fraud, and misrepresentation. 

In the Strum case, the Connecticut Supreme Court addressed the later situation involving personal liability for torts (I will do a post on veil piercing soon). The Strum case involved a homeowner alleging poor workmanship and breach of a construction contract for new home construction.  The plaintiff homeowners in the case brought a lawsuit against not only the entity, Harb Development, LLC, but also its principal member, John Harb.   The plaintiffs alleged, among other claims, that Mr. Harb was personally liable for negligence.  Mr. Harb moved the trial court to strike the allegations against him personally seeking protections of his LLC, Harb Development.   His attorney argued that absent facts sufficient to pierce the veil of protection of the LLC, Mr. Harb personally was immune from liability.

At the lower level, the trial court granted the motion to strike primarily on the grounds that there were no facts in the complaint to pierce the veil of the LLC.  Although the Supreme Court ultimately found that there were insufficient facts alleged in the complaint to establish the negligence claim against Mr. Harb personally, the Court rejected the argument that Mr. Harb could not be personally liable for negligence merely because he was a member of an LLC. 

The Supreme Court noted that Connecticut’s common law provides for personal liability of officers of a corporation for torts personally committed (such as negligence) that injure third parties provided  the injured party can show a legal duty, breach of that duty, causation, and damages.   As such, if an officer of a corporation commits a tort in business, the officer may be personally liable even if the corporation is also responsible.  The Strum case makes clear that this common law rule applies even in the absence of facts sufficient to pierce the corporate veil.  This same common law rule also applies to members of an LLC. 

The Strum case serves as a reminder to business owners that formation of a business entity will not protect you from personal liability in all circumstances.  Liability for individual torts and piercing the veil of a business entity are two common scenarios where business owners may face personal liability despite the shield that a business entity may provide.  Whether a business owner can face personal liability for negligence, fraud, or misrepresentation involving the business will often depend on the facts of the case.