Co-authored by Elizabeth D. Langdale.

The US District Court for the Southern District of Indiana recently held that a lender adequately alleged facts sufficient to hold a corporate executive personally liable for the repayment of a corporate loan.

Plaintiff Michael Mathioudakis brought a breach of contract action against defendants Conversational Computing Corporation (CCC) and its founder and Chief Executive Officer Stephen Rondel, alleging that CCC and Mr. Rondel failed to repay a short-term (30-day) $200,000 loan made to the company through an unsecured promissory note. Among other things, plaintiff alleged that in making the loan he relied on false representations by defendant Rondel regarding the existence of a pending new outside investment in CCC that, presumably, would help support CCC’s financial condition.

Defendant Rondel moved to dismiss the complaint on the grounds that: (i) he signed the note as an officer for CCC and not in his individual or personal capacity; (ii) plaintiff did not allege fraud with specificity; and (iii) plaintiff failed to allege he “rightfully relied” upon the alleged false representations.

The District Court found that plaintiff adequately alleged two factors sufficient to justify piercing the corporate veil. First, plaintiff alleged that CCC could not meet payroll and thus was undercapitalized at the time defendant Rondel solicited the note. Second, according to the complaint, defendant Rondel induced the loan by falsely representing that CCC needed financing only in the short term because it had recently obtained a $1 million investment from a foreign citizen (and that the investment was delayed due to Patriot Act issues).

The court concluded that these allegations were sufficiently particularized for purposes of Section 9(b) of the Federal Rules of Civil Procedure and, if true, would be sufficient to pierce the corporate veil and hold defendant Rondel personally liable for the loan. Finally, the court held that the issue of whether plaintiff’s reliance was reasonable could not be resolved at the pleading stage.

Mathioudakis v. Conversational Computing Corporation and Stephen Rondel, No. 1:12-cv-00558-JMS-DKL (S.D. Ind. Sept. 13, 2012).