December 6, 2013by Robert M. Bovarnick

In the world of corporate law, there may be no more important concept than the corporate shield and limited personal liability. The concept is very simple. Generally speaking, if you are a shareholder of a corporation (or a member of a limited liability company), you are personally protected against any claims against the business. The complaining party is limited to collecting against the assets of the company—they cannot go after your personal assets.

This fundamental principal of law is now under attack. A limited liability company called Maxfield and Oberton Holdings, LLC manufactured a product called Buckyballs. In case you have never heard of them, Buckyballs are small, magnetic balls that can be used to create different shapes. The packages come with all types of warnings, including warnings that the product is not to be used by anyone under the age of 14. However, notwithstanding the warnings, a number of young children swallowed the item, resulting in the kids being hurt.

The Consumer Product Safety Commission filed an administrative complaint against the company, seeking to stop all sales of Buckyballs and requiring a recall, together with providing full refunds. Setting aside whether the CPSC should have taken this position, it was not completely without precedent.

However, what they did next was, and is, completely without precedent. In May, 2013, the CPSC amended its administrative complaint, naming Craig Zucker, the CEO of Maxfield, in order to hold him personally liable for the product recall. The amended complaint seeks to have Zucker personally conduct the recall and remedial efforts for Buckyballs. If the CPSC is successful, Zucker will be personally responsible for everything from the cost of the recall to the refunds, all with an estimated price tag of $53,000,000.00 (that is $53 million).

What is the alleged basis for attempting to hold Zucker personal liable? The CPSC claims that Zucker should be personally liable under the “responsible corporate officer doctrine.” The responsible corporate officer doctrine allows for the imposition of liability on a corporate executive who, by reason of his or her position with a company, was charged with either preventing or correcting the company’s unlawful conduct. The doctrine is based on a 1943 U.S. Supreme Court decision, which was revisited by that Court in a decision in 1971. What is interesting is that both of those cases impose liability on the responsible corporate officer when the underlying offense is criminal, not civil.

Truth be told, the Zucker case is not the first time there has been an attempt to hold a corporate officer personally liable for an underlying civil violation. However, the other cases appear to be exclusively in the environmental context. It now looks like there is an attempt to expand this remedy. The issue becomes clear—where does it stop?

For those of you old enough to remember the Ford Pinto, in the late 1970s a number of the engines caught on fire as a result of what was said to be a structural design defect that allowed the fuel tank filter to break off. There was an allegation that the company was aware of the defect, refused to pay for a redesign, deciding it would be cheaper to pay off possible lawsuits. In one lawsuit in California, a judgment was rendered against Ford for a total of $7 million. There was also a recall of the Pinto. I don’t recall there being any attempt to hold the Chairman or President of Ford personally responsible for any of the damages.

Where are we headed? Is the Buckyballs case an anomaly, or is it the beginning of the expansion of the ability to “pierce the corporate veil” and hold the principals of companies personally liable? If this is the beginning of the erosion of the corporate veil, just think of the impact it will have on all businesses in this country, large and small.

by Robert M. Bovarnick

Rob Bovarnick is a graduate of the University of Miami School of Law. Prior to starting his firm, he was Vice Chair of the Bankruptcy Group at a 170 lawyer firm and head of the Creditor’s Rights practice at a 20 lawyer firm. He is the former Chair of the Eastern District of Pennsylvania Bankruptcy Conference.