Walkovszky v. Carlton
CASEBRIEF:www.casebriefs/blog/law/corporations/corporations-keyed-to-klein/the-nature-of-the-corporation/walkovszky-v-carlton/
Fuld, J.

This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs.

The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Altho
ugh seemingly independent of one another, these corporations are alleged to be “operated ... as a single entity, unit and enterprise” with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.FN1 The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt “to defraud members of the general public” who might be injured by the cabs. *417

The defendant Carlton has moved, pursuant to CPLR 3211(a) 7, to dismiss the complaint on the ground that as to him it “fails to state a cause of action”. The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question.

The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N. Y.
103, 106) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, “pierce the corporate veil”, whenever necessary “to prevent fraud or to achieve equity”. (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N. Y. 285, 292.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge Cardozo noted, by “general rules of agency”. (Berkey v. Third Ave. Ry. Co., 244 N. Y. 84, 95.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts “upon the principle of respondeat superior applicable even where the agent is a natural person”. (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N. Y. 472, 488.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Natelson v. A. B. L. Holding Co., 260 N. Y. 233; Quaid v. Ratkowsky, 224 N. Y. 624; Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, 681, cert. den. 254 U. S. 644; Weisser v. Mursam Shoe Corp., 127 F. 2d 344) but to its negligent acts as well. In the case before us, the plaintiff has explicitly alleged that none of the corporations “had a separate existence of
their own” and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It is quite another to claim that the corporation is a “dummy” for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N. Y. 78, 85.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible (see, e.g., Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N. Y. 676, supra; Luckenbach S. S. Co. v. Grace & Co., 267 F. 2d 676, 881, cert. den. 254 U. S. 644, supra.; cf. Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N. Y. 687, supra.) while, in the other, the stockholder would be personally liable. (See, e.g., Natelson v. A. B. L. Holding Co., 260 N. Y. 233, supra; *419 Quaid v. Ratkowsky, 224 N. Y. 624, supra; Weisser v. Mursam Shoe Corp., 127 F. 2d 344, supra.;.) Either the stockholder i
s conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter -- insofar as his personal liability is concerned -- that the enterprise is actually being carried on by a larger “enterprise entity”. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343.)

At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated “alternatively or hypothetically”, it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom “ 'whatever can be implied from its statements by fair and reasonable intendment.' ” (Condon v. Associated Hosp. Serv., 287 N. Y. 411, 414; see, also, Kober v. Kober, 16 N Y 2d 191, 193-194; Dulberg v. Mock, 1 N Y 2d 54, 56.) Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton.


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. 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. 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. 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.” It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, §1) 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. This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any “sufficiently particular[ized] statements” (CPLR 3013; see 3 Weinstein-Korn- Miller, N. Y. Ci
v. Prac., par. 3013.01 et. seq., p. 30-142 et. seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations “without regard to formality and to suit their immediate convenience.” (Weisser v. Mursam Shoe Corp., 127 F. 2d 344, 345, supra..) Such a “perversion of the privilege to do business in a corporate form” (Berkey v. Third Ave. Ry. Co., 244 N. Y. 84, 95, supra.;) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N. Y. 78, supra.;.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon *421 Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.

In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the
minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

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

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.


Keating, J. (Dissenting).

The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing *422 two cabs and each cab having the “minimum liability” insurance coverage mandated by section 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages. From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose.

The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is.

Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered.

The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing severe and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law which had the effect of imposing upon the owner of the vehicle the responsibility for its negl
igent operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated.
defendant
In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: “The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them.”

The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the f
act that the assets of the corporation which owned the cab were “trifling compared with the business to be done and the risks of loss” which were certain to be encountered. I do not agree.

The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable *426 to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasona
ble to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense “innocent victims of motor vehicle accidents ... for the injury and financial loss inflicted upon them”. The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred.

The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise.

What I would merely hold is 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. Where corporate income is not sufficient to cover the cost of insurance pre
miums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable.

The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest.

For these reasons I would vote to affirm the order of the Appellate Division.
Brief Fact Summary. Plaintiff, John Walkovszky, was injured by a taxi owned by a corporation owned by Defendant, William Carlton. Plaintiff sought to hold Defendant personally liable for his injuries.
Synopsis of Rule of Law. An individual can be held liable for the acts of a corporation through the doctrine of respondeat superior if it can be shown that the individual used his control of the corporation for personal gain.
   
Facts. Defendant was a shareholder in ten separate corporations wherein each corporation has two cabs registered in its name. A single shareholder for multiple corporations is a common practice for the cab industry. A cab from one of Defendant’s corporations hit Plaintiff, and Plaintiff brought this cause of action to recover. Each cab has only $10,000 worth of insurance coverage, which is the statutory minimum. Plaintiff contends that Defendant was fraudulently holding out the corporations as separate entities when they actually work as one large corporation.
Issue. The issue is whether Defendant can be held personally liable for the injuries suffered by Plaintiff.
Held. The Plaintiff did not state a correct cause of action to recover from Defendant. Defendant would be held liable under the respondeat superior doctrine if he controlled the corporation for his personal benefit at the expense of the corporations benefit. Plaintiff did not offer proof to make that claim, and instead offered proof that the ten corporations opera
ted as one large corporation. The fact that the corporations may have been one large corporation, however, does not prove that Defendant was controlling the corporations for his own behalf.
Dissent. The dissent argued that the corporations were undercapitalized and the corporate entity was clearly used to simply escape liability. Although Defendant carried the statutory minimum amount of insurance, the intent of the legislature was not to use the insurance coverage as a means for justifying Defendant’s use of corporate entities.

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