Walkovszky v. Carlton, 223 N.E. 6 (N.Y. 1966)

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

1. Facts:

1.1. Parties: John Walkovszky, Respondent, v. William Carlton, Appellant, et al., Defendants

1.2. What Happened: Plaintiff sustained personal injuries after being hit by a Cab owned by the Seon Cab Corporation. Seon Cab Corporation was owned by William Carlton and several other individuals. The same shareholders of Seon Cab Corporation also owned 10 other corporations that also owned 2 cabs each, with each cab having its own insurance.

1.3. Procedural Hostory:

1.3.1. Plaintiff, Walkovszky sued Defendants, Seon Cab Corporation, and William Carlton, personally, for personal injuries sustained as a result of being hit by a taxicab owned by Seon Cab Corporation. Carlton was one of the individual shareholders of both Seon Cab Corporation and several other Cab Companies that each owned 2 cabs plus their respective insurance policies.

1.3.2. Defendant, Carlton moved to dismiss the complaint against him individually for failing to state a cause of action against him for imputed negligence based on the doctrine of piercing the corporate veil.

1.3.3. Trial Court granted the motion to dismiss on the grounds the complaint failed to state a cause of action for piercing the corporate veil.

2. Issue:

2.1. Whether the complaint stated a cause of action against the individual defendant shareholders of the Seon Cab Corporation on the basis of piercing the corporate veil when the corporation is alleged to be under-capitalized and holding only the Cabs that it owns and their respective insurance policies as its assets?

3. Rule of Law:

3.1. The corporate structure allows its shareholders to escape personal liability. However, courts will pierce the corporate veil and disregard the corporate form when necessary to prevent fraud or to achieve equity.

3.1.1. In deciding on whether the pierce the corporate veil, the courts will apply the general rules of agency to see if the company is merely carrying on personal business and operating it in his or her individual capacity.

4. Conclusion: The Appellate Court reversed the order of the intermediate appellate court and reinstated the trial court dismissing the complaint for failing to state a cause of action against the individual Defendant Carlton for piercing the corporate veil.

4.1. Rationale:

4.1.1. The complaint contained no allegations that Defendant, Carlton was conducting business in his individual capacity such as by shuttling his "...personal funds in and out of the corporations without regard to formality and (only) to suit (his) immediate convenience." Carlton, supra. at page 9.

5. Impact:

5.1. The Corporate form insulates its shareholders from personal liability for corporate debts unless the shareholders operate the business as a sole proprietorship, commingling personal funds with the business and treating the corporate assets as their own personal account.

5.1.1. Goldberg v. Lee Exp. Cab Corp., 634 N.Y.S.2d 337, 339 (Sup. Ct. 1995), aff'd, 227 A.D.2d 241, 642 N.Y.S.2d 292 (1996) Complaint stated a cause of action to pierce the corporate veil and hold the individual shareholder liable for the corporate debts. Plaintiff alleged that the individual Defendant commingled the receipts, disbursements, assets and properties of the said corporations and treated them as his own. Plaintiff concluded by further alleging that the corporate entity was a sham and that it served no other purpose other than to enable the defendant to defraud the public.

5.1.2. Van Dorn v. Future Chemical and Oil Corp., 753 F.2d 565 (7th Cir. 1985) Required a plaintiff to not only prove that there is a unity of interest between the individual and the corporation, but the plaintiff must also establish that the allowance of a limited liability would sanction a fraud or promote an injustice.

6. Importance:

6.1. To be insulated from personal liability, the shareholders must maintain autonomy from the company that they invested in by doing all the necessary corporate filings and maintenance of the corporate books and records; documenting that all the transactions are in the proper corporate form; preventing commingling of business assets with personal assets; and, maintaining adequate capitalization. See N.L.R.B. v. Bolivar-Tees, Inc., 551 F.3d 722 (8th Cir. 2008)

7. Analysis

7.1. Plaintiff sought to pierce the corporate veil of Seon Cab Corporation on the grounds that Carlton owned several of these companies which all owned 2 cabs with each having the required insurance and that he was fraudulently running them as if they were separate businesses even though those entities were alleged to be all one business.

7.2. Trial Court noted that the Complaint was devoid of any allegations that Carlton was carrying on these businesses for purely personal reasons and not as true corporate entities.

7.2.1. Plaintiff appealed the trial court decision to the N.Y. Supreme Court who reversed the decision of the trial court. (Note: In N.Y., unlike in other States, the Supreme Court is an intermediate appellate court, with the Court of Appeals being the highest court of last resort.) Defendant, Carlton then appealed the intermediate appellate decision to the Court of Appeals.

7.3. 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.

7.3.1. 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.

7.4. 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 by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law.

7.4.1. 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." The responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature [...] 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.

7.5. In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

8. References

8.1. Quinn, B. (2017) Walkovsky v. Carlton. Retrieved from https://h2o.law.harvard.edu/collages/7643

8.2. Sea-Land Services, Inc. v. Pepper Source (n.d) Case Briefs. Retrieved from: https://www.casebriefs.com/blog/law/corporations/corporations-keyed-to-klein/the-nature-of-the-corporation/sea-land-services-inc-v-pepper-source

9. Influence

9.1. Laya Test

9.1.1. Courts asks whether: 1) there’s unity of ownership and interest such that the entities of corporation and individual are no longer separate, and 2) piercing the veil would be an inequitable result. There can also be an optional third prong, whether the wronged party assumed the risk of any gross undercapitalization.

9.2. VanDorn Test

9.2.1. Courts require that: 1) unity of ownership and interest is such that the individual and the corporation are not separate, and 2) upholding the corporate fiction would result in fraud or promote injustice.