Walkovszky v. Carlton, 18 N.Y.2d 414 (1966)

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Walkovszky v. Carlton, 18 N.Y.2d 414 (1966) by Mind Map: Walkovszky v. Carlton, 18 N.Y.2d 414 (1966)

1. Facts

1.1. Parties

1.1.1. John Walkovsky (Respondent)

1.1.2. William Carlton, et al. (Appellant)

1.2. What happened?

1.2.1. Walkovsky was injured after being run down by a cab

1.2.1.1. Carlton was the owner of a corporation responsible for hitting Walkovsky

1.2.2. In total, Carlton was a owner of 10 corporations, each with one or two registered cabs

1.2.2.1. As required by New York, each cab had the minimum automobile liability insurance ($10,000)

1.2.2.2. Carlton alleges that the cabs operated as one entity and not 10 separate entities or corporations

1.2.2.2.1. Walkovsky claimed that the corporate structure constituted an unlawful attempt to defraud member of the public injured by his cabs

1.2.3. Walkovsky brought suit against the corporation in which the cab was registered to, the driver of the cab, and other nine corporations owned by Carlton

1.3. Procedural history

1.3.1. Trial court ruled in favor of Walkovsky

1.3.2. Carlton appealed to Court of Appeals

1.3.3. Appellate court reversed lower court ruling

1.3.3.1. Ruling based on the inability of Walkovsky to state cause of action against Carlton in his individual capacity

2. Issue(s)

2.1. The central question (issue) of this case was, “can a party maintain a cause of action to pierce the corporate veil without alleging that a shareholder used the corporate form to conduct business in an individual capacity?”

3. Rule

3.1. In order to maintain a cause of action piercing the corporate veil, the plaintiff must prove that a shareholder used the corporate form to conduct business in his individual capacity.

3.1.1. Rationale

3.1.1.1. At the time under New York law, courts could pierce the corporate veil when necessary to prevent fraud or achieve equity. Essentially, the agency law principles guided the inquiry into possible abuse of the corporate form.

3.1.1.1.1. 1. When a corporation functions merely as an agent of its shareholder, courts will hold the principal vicariously liable for the corporation’s conduct on the theory of respondeat superior.

3.1.1.1.2. 2. At the pleadings stage, it is insufficient to state that a corporation lacked a separate identity, was part of a single enterprise, and was deliberately undercapitalized.

3.1.1.1.3. 3. The plaintiff must show that a shareholder used the corporation as his agent to conduct business in an individual capacity. Here, Walkovsky’s complaint is inadequate.

4. Application

4.1. Defendant has appealed this case in an effort to dismiss the Plaintiff’s complaint on the grounds that is ‘fails to state a cause of action’.

4.2. Plaintiff has burden of proving an adequate cause of action against the defendant.

4.2.1. Does the deliberate split of the fleet ownership ease plaintiff’s burden?

4.2.1.1. No

4.2.2. Can we assign individual responsibility to the defendant and attempt personal liability on the corporation’s stakeholders?

4.2.2.1. The corporation cannot be ignored, but cannot impose personal liability on defendant

4.2.2.2. Taxi drivers are working within the law- may be need for the legislature to be changed to accommodate higher insurance minimums for certain corporations

4.3. Did plaintiff state valid cause of action against defendant either ‘alternatively’ or ‘hypothetically’

4.3.1. No

4.3.1.1. Plaintiff did not make it clear / show definite proof that drivers are doing business in their individual capacities

4.3.1.2. If the drivers were doing business in their individual capacities, we would also look at why

4.3.1.2.1. If there was evidence of the misuse of the corporation to use their personal funds without formality, that would warrant imposing personal liability on the individuals.

5. Conclusion

5.1. Walkovsky wishes to pierce the corporate veil of Seon Cab Corporation, but he was not able to prove that Seon Cab Corporation was fraudulently used by either Carlton or the larger enterprise.

5.1.1. The decision of the appellate court is therefore reversed. Carlton’s motion to dismiss is granted, though Walkovsky is given leave to file an amended complaint.

6. 3 I's

6.1. Impact

6.1.1. A/S Domino Mobler v. Braverman, 669 F.Supp. 592, (S.D.N.Y. 1987)

6.1.1.1. In this case, creditors representing a Danish furniture manufacturing business attempted to collect debts under the claim that a company called Great North Woods misrepresented its corporate structure. The court references Walkovsky v. Carlton to vindicate the defendants in this case. The court explained that "since [defendant] Atlas himself carefully respected the separate identities of the corporations, and each corporation was pursuing its separate corporate business, rather than the purely personal business of Atlas, we conclude that the corporate veils of the defendant corporations should not be ‘pierced.’ Id., 389 N.Y.S.2d at 331, 357 N.E.2d 983."

6.1.2. Marine Midland Bank, N.A. v. James W. Miller, 664 F.2d 899 (2d Cir. 1981)

6.1.2.1. Marine Midland Bank accused Mr. Miller of operating a shell organization that blurred the lines of personal and commercial dealings. The case was initially dismissed on the grounds of jurisdiction. The 2nd Court of Appeals reversed and remanded the decision. In doing so, it cited Walkovsky v. Carlton as an example of how to determine whether or not a corporation had committed fraud.

6.2. Importance

6.2.1. Shortly after the case was decided, the state of NY increased the minimum amount of liability insurance required by corporations.

6.2.2. This particular corporate structure is a legally protected operating procedure for close corporations, and does not in and of itself allow for personal liability of shareholders. The courts have generally protected this.

6.2.3. If the corporate veil is pierced, there may be an increased tax exposure in addition to the liability exposure. The IRS has recaptured of taxes from shareholders in this setting.

6.3. Influence

6.3.1. Corporations should, and usually are, meticulous about maintaining the required corporate formalities and filings (compliance).

6.3.1.1. Close corporations and smaller corporations are much more likely to have the corporate veil pierced and liability transferred to individuals.

6.3.2. State laws govern corporations, which often influences geographic locations.

6.3.2.1. Companies will choose to incorporate and do business out of ‘business friendly’ states (Wyoming, Delaware, and Nevada).

6.3.2.2. These state courts have tended to protect the corporate entity and limit transfer of liability to individuals.