Walkovszky v. Carlton
Encyclopedia
Walkovszky v. Carlton, 223 N.E.2d 6
(NY 1966), is a leading decision on the conditions under which Courts may pierce the corporate veil. A cab company had shielded themselves from liability
by incorporating each cab as its own corporation. The New York Court of Appeals
refused to pierce the veil on account of undercapitalization alone.
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".
, 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
liable, however, this is not the case here. A corporation with a minimum amount of assets is a valid one and cannot be ignored.
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
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.
required by a corporation. Also, plaintiff Walkovszky amended his suit claiming Carlton had done business as an individual.
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
(NY 1966), is a leading decision on the conditions under which Courts may pierce the corporate veil. A cab company had shielded themselves from liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
by incorporating each cab as its own corporation. The New York Court of Appeals
New York Court of Appeals
The New York Court of Appeals is the highest court in the U.S. 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 to 14-year terms...
refused to pierce the veil on account of undercapitalization alone.
Background
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, in which he was the primary stockholder. Though the companies were separate legal entities, they were run by Carlton in unison. Each corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
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".
Court opinion
Judge FuldStanley Fuld
Stanley Howells Fuld was an American lawyer and politician from New York. He was Chief Judge of the New York Court of Appeals from 1967 to 1973.-Life:...
, 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
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
liable, however, this is not the case here. A corporation with a minimum amount of assets is a valid one and cannot be ignored.
Judge Keating
Kenneth Keating
Kenneth Barnard Keating , was a United States Representative and a U.S. Senator from New York, and in later life, an appellate judge and a diplomat representing the United States as ambassador to India and later to Israel.-Life:...
, 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
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
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.
Aftermath
Not long after the decision, the state increased the minimum amount of liability insuranceInsurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
required by a corporation. Also, plaintiff Walkovszky amended his suit claiming Carlton had done business as an individual.
See also
- US corporate law
- Berkey v. Third Avenue Railway Co 244 N.Y. 602, 155 N.E. 914 (1927)