“John Brown Motors”, is a used car lot owned by John Brown, Inc., whose sole owner, and sole employee is John Brown. You buy a used car at John Brown Motors, and deal with John Brown, who tells you a pack of lies and convinces you to buy a pig with lipstick. After a few weeks you realize the car has no business being called a car, and to boot, you are bound to be making monthly payments to a finance company for the next three years. Clearly you have been had. Assuming you can prove legal fraud (no easy task), who do you go after? John Brown is the one who told you all those lies, and he owns the company. Shouldn’t he be liable? Most likely in Texas, the answer is a big NO! If the sales contract said “John Brown Motors, Inc., and you wrote a check to “John Brown Motors” that was deposited in a bank account under the name of John Brown Motors, Inc., John Brown individually is off the hook, no matter how many lies he told you.
This same scenario is repeated regularly in Texas, most notably involving home repairs and investment scams. While the vast majority of businesspersons are honest, some are not, and Texas law protects the dishonest ones, as long as they keep the ill-gotten money in their corporate business accounts.
Sounds harsh, but it is the law as stated in the Texas Business Code Sect. 21.223(a) and affirmed by the Texas Supreme Court:
Under current law, by statute, a shareholder “may not be held liable to the corporation or its obliges with respect to . . . any contractual obligation of the corporation . . . on the basis that the holder . . . is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory . . . .” Willis v. Donnelly, 199 S.W.3d 262 at 272, 2006 Tex.
Texas law and Texas jurisprudence are made by elected officials and judges. Who have you voted for? More significantly, have you voted?