Smith v. Isaacs, 88-SC-869-DG
| Decision Date | 19 October 1989 |
| Docket Number | No. 88-SC-869-DG,88-SC-869-DG |
| Citation | 777 S.W.2d 912 |
| Parties | Michael K. SMITH, Appellant, v. William ISAACS, Nite Life, Inc., D/B/A Camelot East, and Robert Lee Shields, Individually, Appellees. |
| Court | United States State Supreme Court — District of Kentucky |
David A. Weinberg, Lexington, for appellant.
William Isaacs, Lexington, for Isaacs.
Leslie P. Vose, Kristine Y. Brower, Lexington, for Nite Life, Inc. and Shields.
On March 31, 1986, the appellant, Michael K. Smith, a patron at Camelot East, a drinking establishment located in Lexington, Kentucky, was shot in the back by another customer. He filed a tort claim for damages alleging negligence and wanton and willful misconduct against William Isaacs, the customer who shot him, alleging dramshop liability against the corporation, Nite Life, Inc., which owns and operates the drinking establishment, and alleging two theories of liability against the appellee, Robert Lee Shields, "Individually": liability as officer, director and principal shareholder of the corporation and liability for "his personal negligence."
Arguably, the Complaint lacks clarity. 1 Nevertheless, there are ample allegations in the Complaint specifying Shields' "personal negligence" was a contributing factor: this includes, in paragraph 3 of Count I, stating Shields took "a primary and active role in the operation, management, and supervision of the Nite Life," and in paragraph 22 of Count III, stating:
"That prior to and at all times mentioned herein, the Defendant, Robert Lee Shields, was careless, reckless and negligent in the operation, management, and supervision of the Nite Life, and its employees."
Counsel for the appellee, Shields, has insisted throughout, so persistently and vehemently as to persuade both the trial court and the Court of Appeals, that Shields is shielded from individual liability for Smith's injury, regardless of whether there may be evidence to prove Shields' personal negligence. Shields' position is that, because it is alleged that Shields was an officer, director and principal shareholder in the corporation, he cannot be held individually to account. The Answer to the Complaint filed on behalf of the corporation and Shields, individually, was accompanied by a Motion to Dismiss on behalf of Shields. The Motion asserts his "personal immunity" under the "fundamental corporate law that a shareholder is not liable for a debt of the corporation unless extraordinary circumstances exist to impose liability." Morgan v. O'Neil, Ky., 652 S.W.2d 83, 85 (1983). The key element in this quote, overlooked to this point, is that it pertains to liability "for a debt of the corporation."
This rule governs the vicarious liability of a shareholder for the debts of a corporation. It protects a shareholder from liability for the corporate debt except upon proof of circumstances that justify "piercing the corporate veil" or unless there is "a particular statute imposing liability" for the corporate debt. Id. It should be noted that an officer, director or shareholder, when acting as an agent of the corporation, is also protected from personal liability for making a contract where acting within his authority to bind the principal. Restatement (Second) of Agency, Section 328 (1958). These rules have nothing whatsoever to do with personal liability in tort for misfeasance or nonfeasance (Restatement (Second) of Agency, Section 343, et seq.), including liability for negligence "An agent is subject to liability if, by his acts, he creates an unreasonable risk of harm to the interests of others protected against negligent invasion." Id., Section 350.
The trial court sustained Shields' Motion to Dismiss and entered a final and appealable judgment dismissing him as a defendant, and the Court of Appeals has affirmed. Both courts below proceeded on the premise that the Complaint failed to allege a basis for holding Shields personally liable for the debt of the corporation. Neither court below confronted the alternative theory of liability against Shields alleged in the Complaint, charging that his negligence in the operation, management, and supervision of the business was a contributing factor in causing the claimant's injuries. The issue in this case is not whether Shields is liable to the appellant because he is a shareholder, or the principal shareholder, or because he is a corporate officer. The issue is whether his position as an officer or shareholder in the corporation immunizes him from tort liability in circumstances where he would be otherwise liable if he were not a shareholder. It should be obvious that it does not.
Morgan v. O'Neil, supra, cited in support of Shields, is factually inapposite. The only basis for liability stated in the Complaint against O'Neil was liability for the debt of the corporation. O'Neil holds that thus framed the Complaint failed to state a claim for relief, as required by Civil Rule 8.01. O'Neil has no application to present circumstances where a viable alternative theory of relief is stated in the Complaint.
At oral argument, appellee's counsel insisted, as she had successfully argued in the courts below, that a shareholder cannot be held personally liable for negligent acts in managing and supervising employees of the corporation even though such acts are a contributing factor in causing injury. The law is otherwise. Peters v. Frey, Ky., 429 S.W.2d 847 (1968), in line with black letter, hornbook law as quoted above from the Restatement (Second) of Agency, is squarely in point. It holds that the agent of a corporation, albeit a principal shareholder and officer of the corporation, "is personally liable for a tort committed by him although he was acting for the corporation." Id. at 849. We state:
This is a rule of long-standing. See Pirtle's Adm'x v. Hargis Bank & Trust Co., 241 Ky. 455, 44 S.W.2d 541 (1931); Small v. Bailey, Ky., 356 S.W.2d 756 (1962); and Henkin, Inc. v. Berea Bank & Trust Co., Ky.App., 566 S.W.2d 420 (1978). It applies here.
Liability to third persons, regardless of the corporate entity, for personal negligence in management and supervision of corporate employees and corporate activities is covered by the Restatement (Second) of Agency, Sections 350-358, and the Restatement (Second) of Torts, Section 877. Additionally, Restatement (Second) of Agency, Section 213, specifically addresses personal liability for "conducting an activity through servants or other agents ... if he is negligent or reckless:
(a) in giving improper or ambiguous orders or in failing to make proper regulations; or
(b) in the employment of improper persons or instrumentalities in work involving risk of harm to others; or
(c) in the supervision of the activity; or
(d) in permitting, or failing to prevent negligent or other tortious conduct by persons whether or not his servants or agents, upon premises or with instrumentalities under his control."
Comment a to Section 213 explains:
The hornbook on this subject, Henn & Alexander, Laws of Corporations, 3d Ed. (1983), in Section 230, Officer's Liabilities, states the black letter law as follows:
"An officer who personally participates in a tort is personally liable to the victim, even though the corporation...
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