Walkovszky v. Carlton

Walkovszky v. Carlton Intro The default rule for the corporation is that stockholders face limited liability for the debts of the corporation. The liability of stockholders is limited to the capital they contributed to the corporation. For instance, if a stockholder contributes $100 in equity capital to the corporation by buying stock from the corporation for $100 (assume this represents all the equity capital available to the corporation), and if the corporation has $150 in debts, the corporation may be required to pay all of its equity capital (i.e. $100) to settle the corporation's debts. In most circumstances, stockholders will not be liable for the balance of the corporation's debt of $50. The liability of stockholders is thus limited to only their capital contributions. Although limited liability as described above is the default rule, in extreme cases courts may look through the corporate form, or "pierce the corporate veil", and assign liability for corporate debts to stockholders. The following case is paradigmatic. The owner of the corporation has obviously established the corporations in question specifically to limit his exposure to debts of each of the corporations he controls. In deciding whether the stockholder should receive the benefit of corporate limited liability, the court lays out an equitable test to determine whether it should look through the veil of limited liability protection and find the shareholders liable for the debts of the corporation. If the corporation is a mere "alter ego" of the stockholders (e.g. if the corporation is operated without formality and for mere convenience of its stockholders) and the stockholder used the corporate form to engage in some injustice, it is more likely, though not certain, that a court will look through the corporate form and assign corporate liabilities to stockholders in order to prevent a fraud or inequitable result. 1 New York Court of Appeals Walkovszky v. Carlton 18 N.Y.2d 414 1966-11-29 18 N.Y.2d 414 (1966) Walkovszky v. Carlton This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs. The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be “operated” as a single entity, unit and enterprise" with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.[1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs. The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity". In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge CARDOZO noted, by "general rules of agency". In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the 2 corporation's acts "upon the principle of respondeat superior applicable even where the agent is a natural person". In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible while, in the other, the stockholder would be personally liable. Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter — insofar as his personal liability is concerned — that the enterprise is actually being carried on by a larger "enterprise entity". Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton. The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required 3 by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law. These [420] taxi owner-operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254), and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.[2] This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "sufficiently particular[ized] statements" that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." Such a "perversion of the privilege to do business in a corporate form" would justify imposing personal liability on the individual stockholders. Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.[3] In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation 4