''Walkovszky v. Carlton'', 223
N.E.2d The ''North Eastern Reporter'','' North Eastern Reporter Second'' and ''North Eastern Reporter Third '' () are United States regional Reporter (law), case law reporters. It is part of the National Reporter System created by John B. West for West Pu ...
6 (
N.Y. 1966),
[''Walkovszky v. Carlton'']
18 N.Y.2d 414
223 N.E.2d 6, 276 N.Y.S.2d 585 (1966). is a
United States corporate law
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...
decision on the conditions under which Courts may
pierce the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is ...
. A cab company had shielded itself from
liability by incorporating each cab as its own corporation. The
New York Court of Appeals
The New York Court of Appeals is the highest court in the Unified Court System of the State of New York. The Court of Appeals consists of seven judges: the Chief Judge and six Associate Judges who are appointed by the Governor and confirmed by t ...
refused to pierce the veil on account of undercapitalization alone.
Facts
Carlton owned and ran a cab company in which he set up ten separate corporations, each holding the minimum amount of liability insurance of $10,000 per cab, in which he was the primary stockholder. Though the companies were separate legal entities, they were run by Carlton in unison. Each
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
owned one or two cabs. When one of his cabs negligently injured a pedestrian, Walkovszky, the pedestrian could only sue one of the subsidiary companies that contained a very limited amount of assets.
The issue before the Court was whether Carlton could be personally liable for the injury to a pedestrian on account of attempting to "defraud the members of the general public".
Judgment
Judge Fuld, for the majority, held that Carlton was not personally liable. 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
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
liable, however, this is not the case here. A corporation with a minimum amount of
assets is a valid one and cannot be ignored.
Dissent
Judge Keating, in dissent, said that Carlton should be liable. The corporation was intentionally undercapitalized in order to avoid liability, which is a clear abuse of the corporate entity. The interests of the state in protection of victims of
negligence
Negligence (Lat. ''negligentia'') is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as ''negligence'' involves harm caused by failing to act as a ...
is a sufficient basis to pierce the corporate veil. He held that "a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities." This "insufficient capitalization" rationale has not been widely persuasive with courts, perhaps due to a fear that it would chill entrepreneurial activity.
Significance
Not long after the decision, the state increased the minimum amount of liability
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
required by a corporation. Also, plaintiff Walkovszky
amended his suit claiming Carlton had done business as an individual.
[Ribstein & Letsou. ''Business Associations, 4th Edition''. Anderson Publishing, 2003.]
See also
*
US corporate law
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...
*
Piercing_the_corporate_veil#United_States
*''
Berkey v. Third Avenue Railway Co'' 244 N.Y. 602, 155 N.E. 914 (1927)
Notes
{{DEFAULTSORT:Walkovszky V. Carlton
United States corporate case law
New York (state) state case law
1966 in United States case law
1966 in New York (state)