New York Law Review

Tag: Cohen, Stracher & Bloom, P.C.

  • We’re Associates Co. v. Cohen, Stracher & Bloom, P.C., 65 N.Y.2d 148 (1985): Shareholder Liability for Professional Corporation Debt

    We’re Associates Co. v. Cohen, Stracher & Bloom, P.C., 65 N.Y.2d 148 (1985)

    Shareholders of a professional service corporation are generally not personally liable for the corporation’s ordinary business debts, such as rent, unless there is a specific statutory provision or evidence of abuse of the corporate form.

    Summary

    We’re Associates Co. sued Cohen, Stracher & Bloom, P.C. (CS&B), a professional legal corporation, and its individual shareholders for unpaid rent. The plaintiff argued that the shareholders should be personally liable for the corporation’s debt. The New York Court of Appeals held that shareholders of a professional service corporation are not personally liable for the corporation’s ordinary business debts unless a statute specifically provides otherwise or there is evidence of corporate abuse. The court emphasized that Business Corporation Law § 1505(a) only imposes personal liability for negligent or wrongful acts committed while rendering professional services.

    Facts

    We’re Associates Co. (plaintiff) leased commercial premises to Cohen, Stracher & Bloom, P.C. (CS&B), a professional legal corporation. The lease agreement named CS&B as the tenant. The individual defendants were the sole officers, directors, and shareholders of CS&B. CS&B defaulted on the lease by failing to pay rent. We’re Associates Co. sued CS&B and its individual shareholders to recover the unpaid rent.

    Procedural History

    The individual defendants moved to have their names struck from the lawsuit, arguing that CS&B was the sole tenant and they acted only as corporate officers/directors. Special Term granted the motion, and the Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the shareholders of a professional service corporation organized under Article 15 of the Business Corporation Law may be held liable in their individual capacities for rents due under a lease naming only the professional service corporation as tenant.

    Holding

    No, because Business Corporation Law § 1505(a) limits shareholder liability to instances involving the direct rendition of professional services and does not extend to ordinary business debts like rent, absent abuse of the corporate form.

    Court’s Reasoning

    The Court of Appeals relied on the principle of limited liability afforded to corporate shareholders, a key incentive for incorporating. Business Corporation Law § 1513 states that all articles of the Business Corporation Law apply to domestic professional service corporations unless Article 15 provides otherwise. Section 1505(a) specifically addresses shareholder liability, stating: “Each shareholder, employee or agent of a professional service corporation shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or by any person under his direct supervision and control while rendering professional services on behalf of such corporation.” The court interpreted this section to limit personal liability to situations involving the direct rendering of professional services, not ordinary business debts. The court stated, “The plain words of the statute, imposing personal liability only in connection with the rendition of professional services on behalf of the professional service corporation, cannot be defeated by a liberal construction which would include ordinary business debts within the definition of professional services.”

    The court distinguished the Ohio case of South High Dev. v Weiner, Lippe & Cromley Co. L.P.A., which held shareholders liable for a corporate lease, because the Ohio decision was based on a specific court rule imposing such liability. New York has no such rule. The court emphasized that even single-person businesses can incorporate to limit liability, provided no fraud is committed and the corporate form is respected. The court noted, “Our decision should work no injustice on those who enter into leases or any other contracts with professional service corporations, who are free to seek the personal assurances of the shareholders that the commitments of the professional service corporation will be honored.” The Court cautioned that abuse of the corporate form could lead to a different result, citing Walkovszky v. Carlton.