Walkovsky vs. Carlton

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Walkovsky vs. Carlton by Mind Map: Walkovsky vs. Carlton

1. Facts

1.1. Walkovsky, the plaintiff in this case, was struck by a NYC taxi cab of Seon Cab Corporation.

1.1.1. Carlton, the Defendant, owned the Seon Cab Corporation which operated the taxi that struck Walkovsky.

1.1.1.1. In addition to Seon, Carlton owned 9 other tax cab corporations in the city.

1.1.1.1.1. Each of the corporations operated only 1 or 2 cabs. This practice is common in the tax industry.

1.1.1.2. Carlton’s 10 corporations operated with $10,000 of liability insurance each which is the statutory minimum.

1.2. The assets of Seon and the liability coverage were not enough to potentially meet the amount in damages Walkovsky sought.

1.2.1. Carlton’s corporate status allowed them to be insulated from Walkovsky’s personal liability claim.

1.2.2. In order to get around this, Walkovsky tried to pierce the corporate veil via the equitable doctrine.

1.3. Walkovsky claimed the 10 separate taxi corporations owned by Carlton operated as one single company.

1.3.1. The court rejected this notion.

1.3.1.1. Splitting a single business into many corporations doesn’t necessitate Carlton being held personally liable for Walkovsky’s injury.

1.4. Walkovsky then changed tactic by claiming Carlton’s corporate structure is fraudulent.

1.4.1. This argument was rejected as Carlton didn’t commit fraud.

1.4.1.1. Deciding to incorporate or split up a company into many doesn’t constitute fraud.

2. Rule of Law

2.1. The issue in this case is whether or not the defendant, Carlton, can be held personally liable for injuries sustained by Walkovsky, trying to pierce the corporate veil.

2.1.1. The Defendant will be held liable under the Respondeat superior principle if the plaintiff can prove the defendant used the corporation to further his personal interests

2.1.1.1. Respondeat superior allows the plaintiff to hold the whole enterprise responsible for the acts of one of its agents.

3. Application

3.1. Walkovsky’s attempt to pierce the corporate veil did not succeed.

3.1.1. Walkovsky alleged that Carlton’s corporations fraudulently operated as one to benefit himself at the expense of the corporation.

3.1.1.1. Walkovsky could not provide adequate evidence and prove his claim was true.

3.1.1.1.1. Carlton didn’t use or control his companies in a manner that would benefit himself at the expense of the 10 corporations he ran. Therefore, Carlton could not be held personally liable.

4. Conclusion

4.1. The court of appeals affirmed the lower court’s decision and dismissal of the case against Carlton.

4.1.1. Walkovsky was not awarded damages.

5. Decision Impact

5.1. This impacts future business practices as the court affirmed an owner’s ability to setup thinly capitalized firms, requiring minimum insurance coverage, that likely won’t provide proper restitution to individuals hurt or negatively impacted by the company’s product or service.

5.2. The case highlights and upholds a business owner’s ability to set-up multiple undercapitalized firms without being held personally liable.

5.2.1. Clouding the issue is the fact that it’s the legislative mandate that must be changed instead of the courts changing the interpretation of the law.

5.3. Other cases that have referenced Walkovsky vs Carlton.

5.3.1. Federal Leasing Inc. v Xyram Corporation.

5.3.1.1. Plaintiff alleged that Fellner was so dominant as the president of Xyram Corporation that he put his gains above the business and thus the corporate form was illusionary.

5.3.1.2. The court found that the plaintiff failed to prove this with "sufficiently particularized statements" per Walkovsky v Carlton.

5.3.1.3. No. 87 Civ. 5414 (MJL) UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK Decided; April 11, 1989, Filed

5.3.2. Cane v Herman

5.3.2.1. Plaintiff claimed insufficient corporate funds and abuse of corporate privilege as a means to seek compensation direct from the defendant.

5.3.2.2. In conjunction with Walkovsky v Carlton, the court found no evidence of shareholder abuse nor justification to insufficient corporate funds as a means to pierce the corporate veil.

5.3.2.3. 150342/11 SUPREME COURT OF NEW YORK, NEW YORK COUNTY January 18, 2013, Decided

5.3.3. Goldberg v Lee Express Cab Corporation

5.3.3.1. Similarly to Walkovsky v Carlton, a pedestrian was hit by a taxi cab of which the owner utilized multiple corporations like Carlton.

5.3.3.2. The defendant did not adequately separate the receipts and assets of each of the corporations, were managed by a single unit, and even housed the cabs in a central location.

5.3.3.3. Due to the lack of corporate separation, the court viewed all as a single entity liable for the incident.

5.3.3.4. 60121N SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT February 27, 1997, Decided

6. Why Business Should Care?

6.1. Victims like Wolkovsky can’t possibly know when they’ll be injured but if they are, this court case makes it difficult for victims to bargain with corporations since precedent favors the company.

6.2. Managers and entrepreneurs choosing to operate undercapitalized entities are likely to be viewed as unethical by the public at large.

6.2.1. It appears, to a certain extent, this ruling incentivizes business owners to abuse the laws requiring minimum coverage by purposefully undercapitalizing the operating entity since personal liability of the business owner is effectively a non-issue.

6.3. This case poses reputational risk and societal backlash for businesses operating in this manner.

7. Business Practices Influenced by Case

7.1. Two practices influenced by case are 1) separation of the owner with the company and 2) whether fraud or injustice exist.

7.1.1. Practices to ensure separation of owner and company.

7.1.1.1. Separation of financial accounts for owner and company.

7.1.1.2. Adherence to corporate formalities.

7.1.1.3. Adequate capitalization.

7.1.1.4. Having regular board meetings.

7.1.1.5. Proper bookepping.

7.1.1.6. Recording and distributing meeting minutes of board meetings.

7.1.2. Practices to avoid fraud or injustice.

7.1.2.1. Avoid non compliance with the "spirit of the law".

7.1.2.2. No over commitment of ability to perform obligations.

7.1.2.3. Avoid inference that owner supports debt obligations to creditors.

7.1.3. Werner, Aaron. (2016, October 1). Best Practices to Prevent “Piercing of your Corporate Veil” – Keep Your Liability Shield Intact. National Law Review. Retrieved from http://www.natlawreview.com/article/best-practices-to-prevent-piercing-your-corporate-veil-keep-your-liability-shield

7.2. A vast majority of closely held businesses (not publicly traded) are incorporated to ensure protection from personal liability.

7.2.1. Walkovsky v Carlton ensured the benefit of this practice to allow under capitalization and protection as long as the corporation is valid and not performing fraud.