One of the main reasons that business owners form corporations is to protect their personal assets. If the business is then sued, and loses, the business owner can, at worst, only lose the assets of the business. He or she will not lose his or her personal assets. However, if the business owner personally engages in outright fraudulent behavior, courts have ruled that the owner can be personally sued. If the owner loses, then his or her personal assets will be in jeopardy.
Suppose, though, the owner doesn’t commit fraud. What if he or she only violates a state consumer protection regulation? For example, some regulations require a business to use specific words in certain types of contracts with consumers. If the business fails to include the required language in a contract, and the consumer suffers a financial loss, it is clear that the consumer can sue the business under the New Jersey Consumer Fraud Act. If the consumer wins, the consumer can recover triple the amount of his or her monetary loss, plus legal fees.
But can the consumer also sue the business owner, personally? Sometimes, it is not practical for the consumer to sue just the business. Some businesses do not have enough assets in them to cover the damages that the consumer suffered. On the other hand, it may not be fair to take away the house of a business owner who just technically violates some regulation.
In a recent case, a couple purchased a home in Princeton. The property was in need of landscaping. They had been satisfied with the work performed by the landscaper on their previous home, so they engaged it to do the landscaping work in Princeton. These consumers planned to build an in-ground swimming pool in the backyard. Because the lot on which the Princeton home was built was steeply sloped, the landscaping work included building a retaining wall. The wall would create a level area to install the pool in.
The landscaper built the wall. It installed the pool. The consumers asserted that the wall was defective. They claimed that the pool began to show signs that it was tilting in place. How did they know this? The water level at one side was significantly higher than on the other side.
The consumers sued the landscaping corporation. They also sued the corporation’s owners personally for triple damages, under the Consumer Fraud Act. Among other things, they claimed that the owners failed to provide them with a written contract. (A written contract is required by state regulation for home improvement contractors.)
The trial judge ruled that the business owners could not be sued personally. The consumers appealed. An appellate court reversed that ruling. It held that the consumers could sue the owners personally. Now the business owners appealed, to the New Jersey Supreme Court.
The Supremes ruled that the owners of a corporation can indeed be personally sued under the Consumer Fraud Act, even for just violating a regulation. In fact, in some cases, even an employee of a business, who does not own it, can be personally responsible to a consumer for violating a regulation. The Court indicated, though, that owners were more likely to be held responsible than mere employees. (The reason being that the owners presumably set policy. Therefore, they are in the best position to make sure that all applicable regulations are satisfied. )
What are the lessons of this soggy tale? First, business owners need to find out about all government regulations that apply to their business and make sure that the regulations are satisfied. Second, if you are a consumer who has suffered a loss on account of goods or services that you purchased or rented, you may have a better chance to recover your loss than you otherwise might have thought. Third, if you are a landscaper who is sued for causing a swimming pool to tilt, you could try and argue that the consumers really suffered no damages. After all, they only paid for a simple pool, and you gave them a water slide.