Texas Supreme Court Clarifies Limits on Corporate Officer Liability
KEYES V. WELLER, NO. 22-1085, 2024 TEX. LEXIS 548*, 67 TEX. SUP. J. 1357 (JUNE 28, 2024).
In Keyes v. Weller, the Texas Supreme Court considered whether the Texas Business Organizations Code imposes limitations on liability under the common law for individuals who allegedly commit tortious acts while acting as corporate officers or agents, even when those individuals are also shareholders or members. This decision clarifies the scope of personal liability for corporate actors who commit tortious conduct while acting in a corporate capacity.
David Weller and IntegriTech Advisors, LLC, a sole-member LLC for which Weller provides aviation consulting services, brought various fraud claims against Mary Alice Keyes and Sean Leo Nadeau, owners and agents of MonoCoque Diversified Interests, LLC, alleging that Keyes and Nadeau made fraudulent misrepresentations and omissions regarding Weller’s future compensation to induce him to provide employment and consulting services to MonoCoque. Keyes and Nadeau moved for partial summary judgment on the fraud claims in the trial court,[1] arguing that Texas Business Organizations Code § 21.223 barred those claims against them individually because they performed the alleged acts in their capacities as authorized agents of MonoCoque. The trial court granted summary judgment in favor of Keyes and Nadeau and severed the claims against them into a separate action, resulting in a final judgment for Keyes and Nadeau.[2] Weller and IntegriTech appealed, and the Court of Appeals for the Third District of Texas reversed.
The Texas Supreme Court has long held that “corporate agents are ‘personally liable for [their] own fraudulent or tortious acts’ ‘even though they were acting on behalf of the corporation.’” Miller v. Keyser, 90 S.W.3d 712, 717 (Tex. 2002) (citing Weitzel v. Barnes, 691 S.W.2d 598, 601 (Tex. 1985); Leyendecker & Assocs. v. Wechter, 683 S.W.2d 369, 375 (Tex. 1984)). But the Court in Keyes was called upon to resolve a circuit split[3] regarding what effect, if any, Section 21.223 of the Texas Business Organizations Code has on this principle.
Texas Business Organizations Code § 21.223 provides in pertinent part:
(a) A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares… or any affiliate of such a holder, owner, or subscriber or of the corporation, may not be held liable to the corporation or its obligees with respect to:
(2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetuate a fraud, or other similar theory; or
(3) any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality….
(b) Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.[4]
In answering the question before it, the Court, in an opinion written by Justice Lehrmann, first looked to the plain language of Section 21.223, noting that the following questions are determinative of whether the general nonliability rule articulated in Section 21.223(a)(2) applies: “(1) is the plaintiff a corporation or LLC or its obligee, and is the defendant a shareholder[5] in the entity or an affiliate of such a shareholder or of the entity; and (2) does the plaintiff’s claim (a) seek to recover for a contractual obligation of the entity or a matter relating to or arising from such an obligation and (b) seek to hold the defendant liable for that recovery on the basis of alter ego, actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory?” Keyes, 2024 Tex. App. LEXIS 548, at *13. If these questions are answered in the affirmative, the nonliability rule applies unless the plaintiff can meet the exception outlined in Section 21.223(b). Id. at *14.
The Court then looked to the statutory history of Section 21.223, concluding that the focus of this statute and its predecessor versions “has always been, and continues to be, on the liability of shareholders for matters relating to corporate contractual obligations—not the liability of corporate agents for their own misconduct.” Id. at *14–15.
Ultimately, the Court clarified that “we do not understand Section 21.223 to shield a corporate agent who commits tortious conduct from direct liability ‘merely because the officer or agent also possesses an ownership interest in the corporation.’” Id. at *16 (citing Kingston v. Helm, 82 S.W.3d 755, 765 (Tex. App.—Corpus Christi-Edinburg 2002, pet. denied)). Accordingly, the Court held that “Section 21.223 has no effect on the independent common-law principle that corporate agents who direct or engage in tortious conduct are personally liable for that conduct.” Id. Because Keyes and Nadeau were insulated from liability neither under the common law nor under Section 21.223, the Court found that the absence of evidence that Keyes and Nadeau perpetrated a fraud for their “direct personal benefit” was not determinative of the plaintiffs’ fraud claims, which challenge acts allegedly taken by Keyes and Nadeau in their capacities as corporate agents, not as owners of MonoCoque. The Court affirmed the appellate court’s decision reversing the trial court’s award of summary judgment for Keyes and Nadeau.
Justice Bland, in a concurring opinion joined by Justices Blacklock, Huddle and Young, wrote separately to emphasize that the corporate form is “not a veil but armor” and the “law imposes individual liability only in ‘extraordinary circumstances.’” Id. at *22. She highlighted the difference between conduct committed as a shareholder and conduct committed as a corporate officer. “Conduct done not as a corporate officer but instead as an owner of an organization remains shielded from lawsuits seeking to impose liability for corporate obligations” “unless the shareholder directly benefits from” a challenged transaction. Id. at *21, 25.
The Keyes decision reaffirms the long-standing principle that corporate agents are personally accountable for their own tortious conduct. In the context of litigation against corporate officers and directors, individuals cannot shield themselves from liability for actions taken as agents of the corporation merely by hiding behind the corporate structure.
[1] Weller also asserted a breach of contract claim against MonoCoque and a Texas Securities Act claim against all three defendants.
[2] Weller and IntegriTech did not complain on appeal about the trial court’s judgment disposing of the Texas Securities Act claim against Keyes and Nadeau.
[3] The majority of appellate courts determined, as the Third Court of Appeals did in this case, that Section 21.223 only applies “to veil piercing theories (for both contract and related tort claims),… not to direct liability claims for an individual’s own tortious conduct.” Bates Energy Oil & Gas v. Complete Oilfield Servs., 361 F. Supp. 3d 633, 672–73 (W.D. Tex. 2019). The minority held that Section 21.223 applies to liability for all tort claims so long as the claims arise from or relate to the individual’s corporate obligation, meaning that liability for tort claims—even if such claims arise solely from the individual’s own conduct—is barred unless the individual “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the [share]holder.” Tex. Bus. Orgs. Code § 21.223(b).
[4] Section 21.224 of the Texas Business Organizations Code provides that liability for an obligation limited by Section 21.223 “is exclusive and preempts any other liability imposed for that obligation under common law or otherwise,” while Section 21.225 extends the original statute’s exceptions for liability expressly assumed or imposed by statute.
[5] The Court noted that it uses “shareholder” to “encompass the statute’s applicability to ‘[a] holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted,’” citing Texas Business Organizations Code § 21.223(a), “as well as a member of a limited liability company,” citing Texas Business Organizations Code § 101.002(a).