Business Law

THE LAW OF BUSINESS ORGANIZATIONS CHAPTER 4 – Piercing the Corporate Veil Minne B Berkey v Third Avenue Railway Company Overview: This is a New York Court of Appeals decision in 1926 adjudicated by the legendary Justice Cardozo. In this seminal case on ‘piercing the corporate veil’, the Court of Appeals finds in favor of the Defendant, Third Avenue Railway Company. The Court holds that Third Avenue, the parent company of Forty-second Street Company, which operated a rail line upon which the Plaintiff was injured, was not liable for the torts of the subsidiary.

Even though the defendant owned all the stock of the subsidiary and controlled its Board of Directors, the degree of domination over the subsidiary was not considered sufficient enough for Forty-second to be deemed an ‘alter ego’ of the parent, Third Avenue. Factual History: Mrs. Bartle was injured while getting out of the railway car due to the negligence of the motorman. The franchise that operated a street railroad along this particular route was owned by Fort-second Street Company. All of the stock of this company was owned by Third Avenue Railway Company, which also had its own franchise along other streets and avenues.

The Forty-second St Co was a functioning corporation that had been organized and been in existence long before the Defendant became the owner of substantially all of its stock. While the members of the two boards of directors were nearly identical, they were not quite the same. The key fact is that Forty-second was operating as a company that demonstrated, ‘separate life and operation’ from its parent, Third Avenue. Issue: Does the relationship between Third Avenue Railway and Forty-second rise to the degree of agent and principal and not subsidiary and parent?

Can Third Ave be held liable for the torts of its subsidiary, Forty-second? Holding: The Court ruled in favor of the Defendant and found that even with complete stock ownership and similar boards, the relation of principal and agent does not exist. The Court found that the subsidiary had maintained with consistency a separate organization and had thus demonstrated a separate existence from its parent. If the Forty-second street Corporation had been operated as an ‘alias’ or a ‘dummy’ company, then liability for its torts would be the responsibility of Third Ave. However no such abuse, or any evidence of agency could be found.

Discussion: The dissent argued that the nature and extent of the control by the dominant company over the subsidiary was such that liability should lie with Third Avenue. The question for the dissent was one of degree of control and since the ownership was total, the liability should accompany such complete ownership. However, it is clear American law that ownership of shares in a corporation whether by an individual or corporation, does not make them liable for the debts of the corporation. Bartle v Home Owners Cooperative Inc. Overview: This is a matter brought before the Court of Appeals of New York in 1955.

The plaintiff, Bartle, is suing the defendant claiming that defendant should be liable for the debts of Westerlea, defendant’s wholly owned subsidiary. Bartle is attempting to pierce the corporate veil and hold defendant liable for the debts of Westerlea. Factual History: The plaintiff appealed the decision of the Appellate Division contending that the Court erred in refusing to ‘pierce the corporate veil’ of Westerlea’s corporate existence. The trial court and Appellate Division both found that even though the defendant was the owner of Westerlea’s stock and controlled their affairs; enough evidence of two separate corporations existed.

Defendant, a cooperative corporation, was organized to provide low income housing for its

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veteran members. Defendant formed Westerlea to undertake construction to build housing for Defendant’s members. Due to financial difficulty, creditors took over Westerlea’s construction responsibilities, pursuant to an extension agreement. In October 1952, Westerlea was adjudicated bankrupt.? Plaintiff claims Westerlea did not act as an independent corporation. The trial court affirmed the Appellate Division’s refusal to pierce the corporate veil finding that Westerlea and Defendant cted as two separate corporations at all times. Issue: Can a business be incorporated for the very purpose of escaping personal liability? Held: The Appellate and trial court decisions were affirmed and the Court found for the Defendant. The Court held that ‘piercing the corporate veil’ is invoked to ‘prevent fraud or to achieve equity’. In this case the Court found no evidence of fraud, misrepresentation nor illegality. Although the defendant controlled Westerlea’s affairs, Westerlea maintained an outward appearance of aDseparate corporate identity at all times.

Further, the creditors were not misled, there was no fraud, and Defendant performed no act to cause injury to the creditors of Westerlea by depletion of assets or otherwise. Discussion: The dissent argued that the corporate veil should be pierced in this case. ?The argument was that Westerlea was organized solely to benefit Defendant, not to operate as a separate entity. Westerlea did not have a separate corporate identity because it was Defendant’s wholly owned subsidiary that had the same directors and management as Defendant.

Westerlea was undercapitalized because Defendant provided Westerlea with small capital and Westerlea maintained insufficient funds to cover the cost of building the homes. Westerlea’s purpose was not to profit as a business, but to benefit Defendant’s stockholders by providing low cost housing to them. But even with all of that evidence the Court found that the creditors were not misled, there was no fraud, and Defendant performed no act to cause injury to the creditors of Westerlea by depletion of assets or otherwise. The key takeaway is that the law permits the incorporation of a business for the very purpose of escaping personal liability.

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