Saturday, January 8, 2011

Personal Liability of New York Shareholders

In this blog post I would like to highlight one important but not widely known fact about New York privately held corporations: top ten shareholders of such corporation may be held personally liable for any unpaid compensation to the corporation’s employees.


This law may come as a surprise to those who incorporated their business in order to limit their personal liability. Well, incorporation does not offer absolute protection to the business owners. There are exceptions, and one of them is that ten largest shareholders may be personally liable for unpaid compensation.

This law is found in Section 630(a) of the New York Business Corporation Law. Several things to note here:
  • The law applies only to privately held corporations (not to LLCs or investment companies).
  • It covers not just wages, but other types of monetary compensation as well, including overtime, vacation, severance pay, contributions to insurance or welfare benefits, pension or annuity funds.
  • It excludes contractors.
  • The shareholders are liable jointly and severally. This means that the employees can choose to go after one wealthiest shareholder for the whole amount instead of all ten. The law allows that shareholder to seek pro rata contributions from the other largest shareholders.
  • The employee needs to first try to recover the unpaid amounts from the corporation. Only if the judgment remains unsatisfied, can the shareholder pursue the claim against the shareholders.
  • The law establishes a procedure that employees have to follow. It consists of a written notice to be given within a specified period of time to the target shareholders that the employee intends to hold such shareholders personally liable under section 630(a).
One additional note: the law extends only to New York corporations and does not include corporations formed in other states that do business in New York. This question was tested as recently as October 2010 in New York courts. See Stuto v Kerber, 2010 NY Slip Op. 7646 (NY Appellate Div, 3rd Dept. 2010). So, all a business owner needs to do to escape from the reach of this law is to incorporate elsewhere and then register in New York as a foreign corporation. For example, Delaware does not have a similar provision.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

7 comments:

  1. Be careful before advising your clients that they can simply avoid liability by incorporating outside of new York. The NY Court of Appeals has, using its discretion, granted Stuto leave to appeal. It will be interesting to see what the Court decides to do with this.

    ReplyDelete
  2. Indeed anonymous. Also, depending on the size of the corporation, if the corporation is private, NY may not defer to Delaware law on all issues concerning foreign corps operating within the state. IDK if this provision falls under the laws covered by the non-deferment clause, but it's something to lookout for.

    ReplyDelete
    Replies
    1. http://www.nycourts.gov/ctapps/Decisions/2012/Feb12/19mem12.pdf


      This memorandum is uncorrected and subject to revision before
      publication in the New York Reports.
      -----------------------------------------------------------------
      No. 19

      Christine M. Stuto,
      Appellant,
      v.
      Gregory G. Kerber et al.,
      Defendants,
      William J. McNeary III et al.,
      Respondents.
      Phillip G. Steck, for appellant.
      John D. Hoggan, Jr., for respondents.

      MEMORANDUM:

      The order of the Appellate Division should be affirmed,
      with costs.

      Plaintiff Christine M. Stuto was employed by Wurld
      Media, Inc., a corporation organized under the laws of the State
      of Delaware. In May 2006, after encountering financial
      difficulties, Wurld Media stopped paying plaintiff's salary. She
      continued working, however, in the hope that the corporation's
      financial position would improve. It did not, and the
      corporation closed. Plaintiff thereafter obtained a judgment
      against Wurld Media for unpaid wages and commenced this action
      against Wurld Media's ten largest shareholders to recover the
      unpaid wages pursuant to Business Corporation Law § 630. Supreme
      Court granted the motion of three defendant shareholders to
      dismiss the complaint on the ground that the statute does not
      apply to foreign corporations, and the Appellate Division
      affirmed.

      We agree with the courts below that the plain language and history of Business Corporation Law § 630 (see Armstrong v Dyer, 268 NY 671 [1935]), as well as other relevant portions of the Business Corporation Law (see Business Corporation Law §§ 102 [a] [4], [7]; § 1319 ), reveal that section 630 applies to only domestic corporations, and not to foreign corporations.

      *****************

      Order affirmed, with costs, in a memorandum. Chief Judge Lippman
      and Judges Ciparick, Graffeo, Read, Smith, Pigott and Jones
      concur.

      Decided February 16, 2012

      Delete
  3. http://www.nycourts.gov/ctapps/Decisions/2012/Feb12/19mem12.pdf


    This memorandum is uncorrected and subject to revision before
    publication in the New York Reports.
    -----------------------------------------------------------------
    No. 19

    Christine M. Stuto,
    Appellant,
    v.
    Gregory G. Kerber et al.,
    Defendants,
    William J. McNeary III et al.,
    Respondents.
    Phillip G. Steck, for appellant.
    John D. Hoggan, Jr., for respondents.

    MEMORANDUM:

    The order of the Appellate Division should be affirmed,
    with costs.

    Plaintiff Christine M. Stuto was employed by Wurld
    Media, Inc., a corporation organized under the laws of the State
    of Delaware. In May 2006, after encountering financial
    difficulties, Wurld Media stopped paying plaintiff's salary. She
    continued working, however, in the hope that the corporation's
    financial position would improve. It did not, and the
    corporation closed. Plaintiff thereafter obtained a judgment
    against Wurld Media for unpaid wages and commenced this action
    against Wurld Media's ten largest shareholders to recover the
    unpaid wages pursuant to Business Corporation Law § 630. Supreme
    Court granted the motion of three defendant shareholders to
    dismiss the complaint on the ground that the statute does not
    apply to foreign corporations, and the Appellate Division
    affirmed.

    We agree with the courts below that the plain language and history of Business Corporation Law § 630 (see Armstrong v Dyer, 268 NY 671 [1935]), as well as other relevant portions of the Business Corporation Law (see Business Corporation Law §§ 102 [a] [4], [7]; § 1319 ), reveal that section 630 applies to only domestic corporations, and not to foreign corporations.

    *****************

    Order affirmed, with costs, in a memorandum. Chief Judge Lippman
    and Judges Ciparick, Graffeo, Read, Smith, Pigott and Jones
    concur.

    Decided February 16, 2012

    ReplyDelete
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