The cannabis industry is hurting right now, and most everyone is feeling it. As new and old clients consider pursuing breach of contract and other claims against cannabis businesses that are failing, one question seems to come up again and again: can we sue the owner(s) of the cannabis company personally for the company’s failures (failure to pay, failure to provide goods or services as promised, etc.)?
Unfortunately, the short answer generally is, no you cannot. Most states generally adhere to the principle of limited liability, which shields owners from personal liability for the company’s debts and obligations. That includes cannabis company owners.
Exceptions to the rule
However, there are specific circumstances under which you may be able to sue an owner of a cannabis company personally. These are exceptions and situations in which you might be able to pierce the corporate veil and hold owners personally liable:
Fraud and misrepresentation. If an owner of a cannabis company engages in fraudulent or deceptive conduct that causes harm to you or your business, you may be able to sue them personally for damages. This could include situations where the owner intentionally misrepresents information or conceals material facts to induce you into a transaction. Note fraud claims are held to a heightened pleading standard – so you have to have specifics about the fraud in order to include a fraud claim (and hold an owner liable for it).
Tortious conduct. This is very fact-dependent, but if a cannabis company owner’s actions or negligence result in some damage or other harm, you may be able to sue them individually. This could apply to situations where the owner’s actions go beyond the scope of the company’s regular business activities.
Personal guarantees. Of course, if an owner has personally guaranteed a company debt or obligation, you may be able to sue them personally for any default on that guarantee. Personal guarantees are a direct contractual commitment by the owner to be personally liable for the debt. In times like these, we are using personal guarantees more and more in settlements, because we know all too well that people can just abandon ship and leave their A/P high and dry.
Piercing the corporate veil. This is quite difficult, but courts in California may “pierce the corporate veil” and hold owners personally liable for the company’s debts if it can be proven that the company was not operated as a separate legal entity. The most common ways to show this is if the owner commingled personal and business finances, or failed to observe corporate formalities, or engaged in fraudulent or illegal activities.
Alter ego doctrine. Similar to piercing the corporate veil, the alter ego doctrine can be used to hold owners personally liable if they use the company to perpetrate a fraud or to unfairly shield themselves from personal liability.
It’s important to note that successfully suing a cannabis company owner personally under California law, as well as the laws of other states, can be complex and requires a thorough analysis of the specific facts and circumstances of the case. It’s imperative to consult with an experienced litigation team that specializes in business and corporate law to determine if you have basis to include an owner as an individual defendant.