Business Law #5 - Case Study Example

The Brief. Order No. 289959. Topic: Business Law # 5 FACTS: The plaintiff was severely injured when he was run down by a taxi cab in New York, due to the driver's negligence. The taxi was owned by the Seon Cab Corporation. The crux of the complaint is as follows: The corporation had only two cabs registered in its name. It had joined along with nine other similar corporations, each with two cabs only, to form a bigger combine. Carlton is a stock holder in all the ten corporations. Only the minimum insurance liability required by the law is carried by the cabs.

Though seemingly independent, these corporations are operated as a single entity. The plaintiff asserts that the multiple corporate structure is a ruse, and constitutes an unlawful attempt to defraud the members of the public sustaining injuries. Therefore he contends he is entitled to hold the corporations' shareholders, personally liable for the damages sought by him.Carlton wanted the case to be dismissed as the plaintiff had failed to state a cause of action. The court at Special Term granted the motion but the Appellate Division reversed that decision.

It held that cause of action had been sufficiently made out. Carlton then appealed against this to the Court of Appeals in New York by leave of the Appellate Division on a certified question.THE ISSUE:Can the liability of corporations for the payment of relief to accident victims, be extended to their shareholders under the Business Corporation LawHOLDING:The court held that the complaint fell short of adequately stating a cause of action against Carlton in his individual capacity. It also held that the order of the Appellate Division should be reversed, with costs both in the Court of Appeals and in the Appellate Division.

It further held that the certified question is answered in the negative, and that the order of the Supreme Court, Richmond County, be reinstated with leave to serve an amended complaint. [The case took a twist on the ground of inadequate cause of action. But as regards the liability of share holders, the Judge has stated that the liability will be there under certain circumstances, for example, if the corporation is a dummy. See paragraph 5 of the judgment in John Walkovszky v William Carlton, Court of Appeals of New York (11-29-1966) - 223 N.E.2d 6.

Also, Natelson v. A.B.L Holding Co., 260 N.Y. 233]REASONING:The reasoning of the court in arriving at its decision is on the following lines:The law permits the incorporation of a business for the very purpose of enabling the proprietors to escape personal liability. There is therefore nothing unusual or illegal in proprietors trying to avoid personal liability. Courts can always disregard the corporate form or 'pierce the corporate veil' as it is called, to prevent fraud or to achieve equity.

When anyone uses the corporation to feather his own nest, rather than in the interests of the corporation, he becomes liable for the corporation's acts, not only in its commercial dealings but also in its acts of negligence.The plaintiff has alleged that none of the corporations had a separate existence of its own. It is one thing to be the fragment of a bigger entity, but quite another to be a dummy. In both cases the corporate veil can be pierced. In the former, it is the larger corporate entity that will be held financially responsible, while in the other, even the stockholder will be personally liable.

The allegations against Carlton are that he organized, managed, dominated and controlled the fragmented unit, but significantly not that he was conducting business in his individual capacity. Had that been the case, things would have been different. But such an allegation has not been made. It is clear that if the fleet of taxis were owned by a single corporation, it would be difficult for the plaintiff to establish personal liability on the part of stockholders. That the corporation has been split up into fragments, does not help the plaintiff as that does not make it easier for him to establish the liability.

Taxi drivers are entitled to form corporations under the law. They can enjoy the benefits flowing from it. Simply because the minimum insurance coverage under the law and the other assets of the corporation are not enough to meet the relief payable to the injured, the corporate structure may not be dispensed with. It would be unfair to require the taxi drivers to take insurance cover for more than what is stipulated by the legislature. If the insurance coverage is inadequate, the remedy lies with the legislature which can increase it.

If Carlton is made individually liable on the face of the existing facts, the principle would apply equally, also to thousands of cabs which are owned by their individual drivers.The thrust of the complaint is not the agency but the fraud. It does not bear scrutiny. A minimum has been prescribed for insurance coverage. That has been taken. The law's requirement has been met. There is nothing fraudulent in not taking more.And as regards the fragmented ownership, the point is irrelevant because the plaintiff's injuries are the same, no matter who owns the cab that hit him.

The sum total of it all is that Carlton cannot be held personally liable to pay the relief amount in his individual capacity. List of works cited1) John Walkovszky v. William Carlton, Court of Appeals of New York. (11-29-1966) -- 223. N.E.2d 62) Natelson v. A.B.L. Holding Co., 260.N.Y. 233.