Walkovsky v. Carlton, 223 N.E. 2d 6 (N.Y. 1966)

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Walkovsky v. Carlton, 223 N.E. 2d 6 (N.Y. 1966) by Mind Map: Walkovsky v. Carlton, 223  N.E. 2d 6 (N.Y. 1966)

1. Facts

1.1. Parties Involved

1.1.1. William Carlton (Defendant)

1.1.2. John Walkovszky (Plaintiff)

1.2. What Happened

1.2.1. Defendant (Carlton) owned a fleet of 20 cabs and was the stockholder in 10 separate corporations, each encompassing 2 cabs.

1.2.2. Plaintiff, John Walkovszky, was injured by a taxi under Seon Cab Corporation and operated and owned by Defendant, William Carlton.

1.2.3. Plaintiff sought to hold Defendant personally liable for his injuries

1.2.3.1. The Defendant 's corporation affected had two cabs registered under his name and had $10,000 in liability insurance for each cab.

1.2.3.1.1. Plaintiff sued but could only sue one corporation and asked the courts to "pierce the corporate veil" so he could sue all of the corporations. He argued that he was injured as a result of negligent operations of a cab corporation owned by the Defendant

1.3. Procedural History

1.3.1. Defendant moved to dismiss the complaint on the ground that it fails to state a cause of action

1.3.1.1. Trial Court granted defendant's motion to dismiss

1.3.2. Plaintiff appealed to the intermediate appeals court

1.3.2.1. Intermediate appeleate court ruled in favor of the plaintiff and denied defenedents motion to dismiss

1.3.3. In the Court of Appeals NY

1.3.3.1. Plaintiff stated that Defendant's business was fraudulent because he was the owner of several corporations but was limiting his liability since they are under different names.

1.3.3.1.1. Defendant argued that suing him individually rather than the corporation 'fails to state a cause of action"

2. Issue

2.1. Can an individual can be held liable for the acts of a corporation?

2.1.1. If it can be shown that the individual used his control of the corporation for personal gain, the individual can be held liable for damages under respondeat superior.

3. Impact

3.1. Wang Laboratories, Inc. v. Dataword, 680 F.Supp. 110, 112 (S.D.N.Y.1988)

3.1.1. In this case, Wang Laboratories, Inc. created computer hardware, and sold to reseller Dataword Corp. to add their own software before resale. Furthermore, Schmones, Dataword Corp.’s only shareholder, made a personal guarantee to pay Wang Laboratories, Inc. for the hardware. As its only shareholder, Schmones collected its assets, and Wang Laboratories, Inc. was never paid. The court states that this case does not withstand the tests of Walkovsky v. Carlton because although Wang could not expressly prove fraud, Dataword was never formally capitalized to conduct its business, and Schmones made a personal guarantee to Wang. Schmones never recognized the separate corporate existence of Dataword, and therefore can be held personally liable.

3.2. Bowles v. Errico, 163 A.D.2d 771 [1990]

3.2.1. Plaintiff's spouse was killed by an out of control moving truck owned by Prudential company, of which the defendant was the only shareholder. The moving truck was operated by an employee of Prudential. Plaintiff argued defendant was personally liable and was using the corporation as a facade. Court ruled in favor of the defendant; as plaintiff failed to show that fraud or illegal acts had been committed. Court cited Walkovsky v. Carlton establishes that a business can be formed to protect the personal liability of proprietors.

4. Influence

4.1. The Racketeer Influenced and Corrupt Organizations Act (RICO) was enacted in 1970 as part of an overall congressional effort to combat organized crime, specifically in Securities Fraud where employers can be responsible for types of fraud, like “Churning”.

4.1.1. Part I of this article outlines RIC0’s statutory scheme. It reviews the common law doctrines under which a principal may be liable for the acts of its agent and the policies behind these doctrines.

4.2. The Responeat Superior doctrine has also influenced Computer Crimes such as Cybersmearing, Copyright Infringement, Computer Viruses and Worms, and Internet Gambling.

5. Conclusion

5.1. If the corporation was run purely for personal ends and not for the benefit of the corporation then there would be a basis for making the shareholder liable, however, this is not the case here. A corporation with a minimum amount of assets is a valid one and cannot be ignored.The fact that the corporations may have been one large corporation, however, does not prove that Defendant was controlling the corporations for his own behalf. In this case the NY Court of Appeals held that this was not an example of piercing the corporate veil

6. Importance

6.1. A business professional would care about this because 1)their perceived corporate liability protection could be pierced if certain criteria are met 2) the liability insurance they must keep increased

6.1.1. While Limited Liability "is the rule not the exception" a corporation needs to ensure they are protecting themselves and their stakeholders and not committing fraud or other variations that could cause an exception to their protection

6.1.1.1. Examples: CEO is moving money between personal account and corporate account, co-mingling funds.

6.1.1.1.1. Businesses need to have proper accounting processes and compliance procedures.

6.1.2. New legislation came out of this case, causing businesses to have to hold a higher level of liability insurance which costs them more.

7. Rule of Law

7.1. Employers are liable for employee's' mistakes under doctrine "respondeat superior," meaning "the superior must answer.”

7.1.1. Vehicle Code section 17150 - Was vehicle operated or with/without permission?

7.1.1.1. Operating without permission, the employer would most likely NOT be liable.

7.1.1.2. Operating with permission, Did the event occur while “within the scope” of their employment?

7.1.1.2.1. Yes, was act intentional?

7.1.1.2.2. No, Employer is most likely NOT liable

7.1.2. Was the Corporation a mere instrument or alter ego of the owner or did the owner abuse the form of the business in order to perpetrate a fraud or injustice.

7.1.2.1. Yes, then the Corporate Veil could be pierced and the Owner’s assets could be attached as part of the Plaintiff's remedy no matter if the corporation was organized as the type to protect the owner’s assets.

8. Analysis/Application

8.1. Carson argued that the plaintiff failed to demonstrate a correct cause of action to recover loss

8.1.1. The court stated that the business structure alone was not enough to justify that the defendant should be held liable

8.1.1.1. Why?

8.1.1.1.1. The law allows individuals to establish corporation to protect themselves from liabilities, as long as the business isn't being carried out in their personal capabilities for personal instead of corporate gain

8.1.1.1.2. It is common and acceptable practice for taxi cab owners to create several businesses to manage their overall operations.

8.1.2. It is not enough to go after the defendant's personal assets because the insurance did not cover the full cost of injuries. Rather, the matter is an issue of the state legislation.

8.1.2.1. The court suggested a change in public policy in that the state should consider increasing the minimum allowable amount of auto insurance liability coverage.

8.2. Plaintiff has the burden of proving

8.2.1. The defendant was conducting business in his individual capacity

8.2.1.1. Must provide statements that show the corporation was being used for the defendant's personal gain (e.g., moving finances throughout the corporations' accounts and into personal accounts)

8.2.2. The corporation committed acts of fraud, illegal acts, or to otherwise establish equity

8.2.2.1. Carson's corporation acquired the legally minimal amount of liability insurance coverage required