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Corporate Veil

Why did Carlton win? Are you satisfied with the result of the case? The State of New York, like every other state, could have rejected Carlton's application to incorporate. Should it have done so? Why or why not?

Perhaps the safest ground transportation in the world is the London taxicab. The drivers are honest and courteous. Their knowledge of the city is flawless. Whether the passenger names a street address or a particular building as his destination, the London cab driver will take him there quickly, safely and by the shortest possible route. And you'll never see a London taxicab with a "ding" in the fender. If the driver is involved in an accident, however slight and whether or not his fault, the driver is grounded until an investigation has been completed. Accident-prone drivers must find some other way to earn a living.

Riding in a taxi in New York City is another matter entirely. Just finding an English speaking cab driver is an achievement. Often you must give the driver detailed directions to your destination. And the taxis' crumpled fenders suggest that a ride through the streets of the city is not for the faint of heart. Perhaps for that reason, the taxicab industry in New York City has developed an unusual business practice. Ownership of the taxi fleets is vested in many corporations, each owning only one or two taxicabs.

In 1962, Mr. Walkovszky was run down by a taxicab negligently driven by Mr. Marchese. The owner of the taxicab was Seon Cab Corporation, which owned and operated two cabs. Seon carried $10,000 of liability insurance for each cab, the minimum required by law. Mr. Walkovszky's injuries were severe; his damages far exceeded both the amount of Seon's liability coverage and the value of the corporation's total assets - its two cabs.

The sole shareholder of Seon Cab Corporation was Mr. Carlton, who owned nine other corporations just like Seon. Walkovszky sued Marchese, Seon, its nine sister corporations and Carlton. Walkovszky claimed that Carlton had created the ten small, undercapitalized, judgment proof corporations just so he could fraudulently avoid liability for the negligence of his employees. Therefore, the plaintiff asked that he be allowed to "pierce the corporate veil" and collect his damages from Carlton, who earned substantial profits from his taxicabs, or at least from Carlton's nine other cab companies. Walkovszky reminded the court that New York had a strong public policy to provide and facilitate recovery for those injured through negligence. He also argued that allowing Carlton to avoid liability would actually encourage drivers like Marchese to be negligent.

Carlton argued that he had always observed the corporate formalities - board meetings and minutes and the like - just as the law requires. He had never commingled his assets with his corporations or charged his personal expenses to them and had always treated his corporations as distinct from himself and from one another, just as the law requires. He had purchased liability insurance for his cabs, in just the amounts that the law requires. And though he didn't say it in so many words, Carlton thought if New York wanted the Marcheses of this world off the streets it shouldn't give them drivers' licenses.

Limited liability for its investors enables the corporation to raise vast amounts of capital, achieve economies of scale and invest in expensive technologies no single entrepreneur could afford. Perhaps from a desire to protect this engine of economic growth and prosperity, the court decided that Seon, not Carlton, was responsible for Walkovsky's injuries and dismissed the complaint against Carlton. The corporate veil remained intact.

Walkovszky v. Carlton, 18 N.Y.2d 414.

Solution Preview

This issue deals with corporate veil.

The corporation is said to be like a veil that shields its shareholders from corporate debts and other similar obligations. One of the biggest advantages to incorporating a business is that it enjoy broad protection from being held personally responsible for the debts and liabilities of the corporation. That is, creditors can reach the corporation's assets, but once those assets are exhausted they cannot ordinarily also reach the personal assets of the owners or shareholders of the corporation. Under some circumstances, those to whom the corporation is liable will attempt to "pierce the corporate veil", the legal term used to describe an action to have the corporation set aside for purposes of the litigation such that personal liability attaches, and personal assets can be reached. The general rule is that the corporate entity protects the shareholders from liability beyond their investments.

For instance, if a judgment is entered against a ...

Solution Summary

This explains the concept of corporate veil with the help of a case study.