Fyre Festival...From Instagram Yachting Island Fantasy to a Lawsuit and Liability Ridden Disaster
The internet is filled with stories about the now cancelled Fyre Festival that was to occur this weekend in The Bahamas. There is no doubt that many depositions will be taken and factual details and accounts will be solidified. However, first hand accounts and quotes are on the record with multiple sources from one of the festival’s founders.
Several potential legal issues immediately stand out and serve as a lesson and a reminder of the precautions that all entrepreneurs, musicians, and really anyone forming a corporate entity of any scale should be aware of prior to making commitments and taking on potential liabilities.
The failure to sufficiently capitalize your corporate entity
You are always personally liable for your own torts
It is best not to make future commitments that you may not be able to fulfill and are only making because of previous commitments that you failed to meet
The first two issues deal with piercing the corporate veil. In simplest terms, it allows a court to erase the protections that typically apply when you form a corporate entity, namely, the fact that you can be held personally responsible for debts, liabilities, and obligations of the corporation.
There are a number of factors that courts may take into account when determining whether to hold an individual liable for the corporation's obligations or conduct. Several of the most common ways a court can pierce the corporate veil may potentially be applicable to the Fyre Festival case, however, they can happen to any corporate entity.
There is no exact amount of capital that is required, as courts use a fact based analysis to determine whether a corporation is adequately capitalized.
A band starting out might be just fine with a few hundred dollars.
A music festival promising luxurious accommodations and yachting around with models in The Bahamas should account for much more in order to have sufficient means available to pay its debts.
A 1957 California Supreme Court case that is still applied today ruled that a business that generated over $100,000 of monthly revenue was under capitalized with only $5,000 of initial shareholder capital. (See - Automotriz del Golfo de Cal. S.A. de C.V. v Resnick
You are Personally Liable for your Own Torts
The law of equities provides that an individual who personally commits a tort should not be able to avoid liability simply because they took such actions for the benefit of the corporate entity.
A tort is a wrongful act or an infringement of a right. One of the most common torts is negligence; the failure to act as a reasonable person would under such circumstances.
An artist who knows that a venue cannot provide adequate security to keep their fans safe should avoid playing at that venue, as doing so can be considered negligent and render the artist personally liable.
The responsible party for a music festival taking place on an island that does not have sufficient infrastructure, including basic requirements like water or shelter in place, would be best advised not to encourage some patrons to travel there while telling other VIP people not to bother.
Avoid Making Future Commitments that you May Not be Able to Fulfill
It is not uncommon for unforeseen circumstances to occur or for event preparation to go awry as a result of a myriad of reasons.
When such a scenario occurs, it is best to unwind and account for any current obligations before agreeing to take on additional future obligations.
Liabilities from the initial obligation may prevent you from having the financial or logistical ability to honor the new obligation.
An upstart music festival with untold potential litigation and financial liabilities on the horizon would be best off not promising free admission to an even bigger and better version of the festival next year, that has not even been planned yet.
It is imperative to note that the law does not favor piercing the corporate veil and coming after an individual's personal assets. Taking note of the preceding points though, can help you avoid putting yourself in such a situation.
In the end it all comes down to one thing, common sense.