On June 24, 2019, an Ohio federal court handed down a decision that should give pause to employees and officers of contractors. In Decker Constr. Co. v. Wesex Corp., the court refused to dismiss an owner’s claim against the officer of a contractor for fraudulent misrepresentation. 2019 U.S. Dist. LEXIS 105121 (S.D. Ohio). The court found a valid claim when the owner alleged that the officer knowingly falsified lien waiver affidavits with the intent to deceive.
The lawsuit was initiated by a subcontractor, Decker Construction (Decker), after not being paid for the work it performed. Decker pleaded claims against both the owner, CCL Label, Inc. (CCL) and the design-builder, Wesex Corporation (Wesex) under numerous theories of recovery. In response, CCL filed a cross-claim against Wesex. In conjunction, it filed a third-party complaint against several officers of Wesex, including its CFO, Mark Schrader. Schrader sought dismissal of the claim against him under Federal Rule of Civil Procedure 12(b)(6). This rule allows dismissal if a pleader fails to state a viable claim as a matter of law. The basis of Schrader’s motion was that CCL failed to plead the fraudulent misrepresentation claim with particularity. Id. at *16. The court, in analyzing the facts pleaded by CCL, felt it had pleaded with sufficient particularity.
In reviewing the viability of the pleading, the court recited the pertinent allegations of the third-party complaint. The agreement between CCL and Wesex required Wesex to pay all subcontractors and deliver a lien-free project. Id. at *2. Shortly after execution of the agreement between CCL and Wesex, Schrader became the CFO of Wesex. Id. Schrader served as Wesex’s CFO during the construction of the project and was heavily involved in the project. Id. The contract required delivery of pay applications that constituted a representation from Wesex that title to the work would pass to CCL lien free. See Design-Build Agreement, § 6.2.4, attached to CCL’s Third-Party Compl. (Doc. No. 9-3). The pay applications were to be accompanied by lien waivers from subcontractors for previous months’ work. Id. § 6.1.2. It appears, however, that Wesex did not make it a practice to deliver subcontractor lien waivers and CCL did not object. Decker Constr. Co., 2019 U.S. Dist. LEXIS 105121, at *17-18. What is clear from the facts pleaded by CCL is that Schrader executed and delivered affidavits swearing that the subcontractors had been paid. Id. at *3. Schrader also contacted CCL’s Manager of Design on a regular basis about the pay applications to “make sure they were going smoothly.” Id. at *2–3. After liens were filed, Schrader also assured CCL that the issues were being cleared up. Id. at *3.
In order to establish fraudulent misrepresentation, in Ohio, one must establish:
(a) a representation or, where there is a duty to disclose, concealment of a fact, (b) which is material to the transaction at hand, (c) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (d) with the intent of misleading another into relying upon it, (e) justifiable reliance upon the representation or concealment, and (f) a resulting injury proximately caused by the reliance.
Decker Constr. Co., 2019 U.S. Dist. LEXIS 105121, *16.
In analyzing these elements, it is easy to pair the allegations of the third-party complaint with the elements of the tort. A lien waiver affidavit is clearly a material representation on which one can typically justifiably rely. The third-party complaint also clearly laid out claims of Schrader’s knowledge and intent.
What most find shocking about this case is that there could be personal liability for the officer of the company. It is, however, well-established law that an agent may be liable personally when his actions are tortious, even if acting on behalf of his principal. Kentucky-Tennessee Light & Power Co. v. Nashville Coal Co., 37 F. Supp. 728 (W.D.Ky. 1941), aff’d, 136 F.2d 12 (6th Cir. 1943) (“It is a well-established rule of principal and agent that an agent is liable for his own tortious acts even though performed within the scope of his employment, and under conditions which impose liability upon the principal also”); Restatement (Second) of Agency § 343 (1957); Comer v. Risko, 833 N.E.2d 712, 716 (Ohio 2005) (“an agent who committed the tort is primarily liable for its actions”).
It is also important to recognize that a corporation cannot execute an affidavit. Entities are incapable of making sworn statements. When an individual signs an affidavit, he swears, under penalty of perjury, that the statements therein are true to the best of that individual’s knowledge. Making the affidavit in one’s capacity as a corporate officer may be helpful, but it will not shield one from tort liability. Therefore, if an individual makes material false sworn statements with intent to mislead, that individual is subjecting himself to potential personal liability.
The activities alleged by CCL go beyond claims that a contractor, or its officer, sent pay applications with incorrect representations that subcontractors had been paid. The facts alleged paint a picture of Wesex’s officers implementing a scheme to “keep [the money] for themselves.” Id. at *19. While personal retention of funds is not an element of the tort, it is evidence of an intent to mislead into reliance. Moreover, the court dismissed Schrader’s defense that CCL waived its right to subcontractor lien waivers by failing to demand the same throughout the project. Id. at *18. The court noted that such a defense is not applicable to fraud claims. Id.
It will be interesting to see the outcome of Decker Constr. Co. The extent of Schrader’s knowledge, and his intent, will be heavily litigated. Intent is often difficult to prove. Regardless, officers and employees of contractors should be wary when submitting lien waiver affidavits. These documents are sworn statements and the signatory should make reasonable efforts to ensure the accuracy of the statements. Failure to do so, with the requisite level of knowledge and intent to mislead, could result in personal liability.