Ohio Legislature Seeks to Close the Common-Law Gap Allowing Former Shareholder Liability
One of the largest benefits of conducting business in the corporate form is the limitation on shareholders' liability for claims against the corporation. Most shareholders of Ohio corporations know and rely upon the fact that, provided they observe corporate formalities, they cannot be personally accountable for the debts incurred by their corporate entities. However, in Ohio, this fundamental tenet of corporate law has a large but seldom-discussed exception.
In Ohio, former shareholders may be forced to pay for claims against dissolved corporations under the "trust fund doctrine." This doctrine holds that former shareholders, to the extent of the assets distributed to them upon dissolution, are personally liable for claims against the dissolved corporation. In other words, former shareholders hold the assets distributed at dissolution "in trust" for the satisfaction of claims against the corporation.
Ohio courts have justified the trust fund doctrine by pointing out that plaintiffs may only recover as much as they would had the corporation not been dissolved. Despite the logic behind this justification, most former shareholders consider the assets distributed to them at dissolution as personal assets and therefore not subject to claims against the corporation. The doctrine has nevertheless been applied to hold that, even when a successor corporation purchases all the assets of the dissolving corporation and explicitly assumes the dissolving corporation's liabilities, the former shareholders of the dissolved corporation may be held legally responsible for the outstanding debts of the dissolved entity.
The trust fund doctrine is not limited to any specific claim or time period. For example, the doctrine has been applied to not only contractual debts - in which the amount is clear and foreseeable - but also to personal injury claims, in which the amount of the eventual debt is much less certain. At present, the only limitation on the doctrine is the statute of limitations governing the claim against the dissolved corporation, which, for many contracts, can be up to fifteen years from the time of breach.
The Ohio legislature is considering a bill that would substantially change the law regarding the dissolution of Ohio corporations. Once amended, the Ohio Revised Code sections dealing with corporate dissolution will provide a measure of control over the trust fund doctrine.
Under the new law, a dissolving corporation must follow certain guidelines when dissolving. First, notice of dissolution must be transmitted to each known creditor as well as any person that may have a claim against the corporation, even if that claim is "conditional, unmatured, or contingent." This notice cannot later be used against the corporation as acknowledgement of a valid claim.
The notice will instruct any potential claimants to reduce their claims to a writing that contains "sufficient information to reasonably inform the corporation of the substance of the claim." The corporation then has the option to either pay or reject any matured claim. Following receipt of any rejection notice, a claimant would have only thirty (30) days to enforce a matured claim.
For conditional, unmatured, or contingent claims, the corporation may determine an amount calculated to compensate for any future cause of action and offer that amount as security to the potential claimant. This offer would be communicated in a notice to the potential claimant and, if the potential claimant does not reject the amount offered as security within thirty (30) days, that claimant is then legally deemed to have accepted the security as the sole source of satisfaction of any future claim.
Finally, the statute as amended would provide a dissolving corporation with the right to file an application with a court of competent jurisdiction in order to determine the amount of insurance necessary to (1) provide security for any contingent claims in the event that claimants reject the corporation's offers and (2) provide the amount of security reasonably likely to be sufficient to compensate for claims not yet known to the dissolving corporation but which may arise within the next five (5) years.
The newly amended law would also statutorily recognize the trust fund doctrine and the ability to pursue assets held by former shareholders. However, these newly imposed time limits provide some measure of control, enabling former shareholders to protect the assets distributed to them. Therefore, dissolving corporations would have the ability to significantly limit their exposure to claims filed post-dissolution provided that they follow the new guidelines set forth in this proposed legislation. This, in turn, restrains any claimants' ability to pursue the distributed assets of the dissolved corporation that now lie in the hands of the former shareholders. If this law is enacted, shareholders of Ohio corporations should follow these statutory guidelines in order to gain a measure of predictability and assurance that currently does not exist in Ohio corporate law.
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