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Liability for Company Contracts – Fraud:

| Jun 8, 2012 | Bankruptcy |

One of the benefits of forming a separate legal entity such as a corporation or limited liability company (LLC) is that owners generally cannot be held personally liable for breach of company contracts. The Maryland Court of Special Appeals has recently ruled in Serio v. Baystate Properties, LLC that the protection from liability is fairly comprehensive. In Serio an LLC owned by the Defendant promised to set up an escrow account to deposit funds sufficient to pay a construction company draws on work performed on two investment properties. The land was owned by the Defendant and not his LLC. Money was to be received from the sale of the properties and the Defendant was found to have lied about the sale of one of the properties. Nonetheless the court held that the Defendant would not be held to redress the breach of a contractual obligation in the absence of fraud when the party seeking to pierce the corporate shield has dealt with that corporation in the course of its business on a corporate basis.

In In re Marinucci an appeal from a US Bankruptcy Court decision, US District Court Judge William Quarles held that fraud was committed and thus an owner could be held personally liable for his company’s contracts when that owner lied about his construction company obtaining a performance bond and lied in the certifications in monthly payment applications by stating that draws were used only to pay subcontractors and suppliers.

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