Notes: Shareholder Liability For Corporate Torts: A Historical Perspective

NOTES
Shareholder Liability for Corporate Torts: A

Historical Perspective
DANIEL R. KAHAN*
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1086
I. CORPORATIONS AND LIMITED LIABILITY . . . . . . . . . . . . . . . . . . . . . 1088
II. A BRIEF HISTORY OF LIMITED LIABILITY . . . . . . . . . . . . . . . . . . . . 1091

A. LIMITED LIABILITY IN THE UNITED STATES: 1800–1849 ......... 1091
B. LIMITED LIABILITY IN ENGLAND: 1837–1858 ................ 1093
C. USING LEGISLATIVE EXCEPTIONS TO MITIGATE LIMITED LIABILITY’S
CONSEQUENCES ................................... 1095
1. “Watered” Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1096
2. Unpaid Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1097
3. Double Liability and the Beginnings of Limited Liability
for Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1098
D. CRITICS OF LIMITED LIABILITY AND PROPOSALS FOR REFORM ..... 1101
1. Walkovszky v. Carlton . . . . . . . . . . . . . . . . . . . . . . . . . . 1101
2. The Hansmann-Kraakman Proposal . . . . . . . . . . . . . . . . 1102
III. TOWARD A NEW HISTORICAL ACCOUNT . . . . . . . . . . . . . . . . . . . . . 1104

A. THE NON-ARBITRARINESS OF THE RULE ................... 1104
B. A POSSIBLE EXPLANATION: LIABILITY EQUILIBRIUM ........... 1105
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1107
* Georgetown Law, J.D. expected 2009; Georgetown University, A.B. 2006. © 2009, Daniel Kahan.
I would like to thank Professor Michael Diamond for encouraging me to explore this topic and then
guiding me through the writing process. I would also like to thank my wife, Heather, for her
inexhaustible support and endless patience.
1085
1086 THE GEORGETOWN LAW JOURNAL [Vol. 97:1085
INTRODUCTION
The rational study of law is still to a large extent the study of history. History must be a
part of the study, because without it we cannot know the precise scope of rules which it
is our business to know.1
From toxic torts to poison pills, no corporate undertaking is unaffected by the
workings of one of corporate law’s bedrock principles: limited liability.2 For
more than a century after limited liability became a general characteristic of the
American business corporation, the doctrine’s proponents offered a straightfor-
ward, economic justification for the doctrine. According to this rationale, lim-
ited liability provided for two important types of diversification. First, because
limited liability reduced the cost of monitoring investments in a particular firm,
the doctrine allowed individual investors to purchase stock in multiple firms,
building diverse stock portfolios. Second, the lower monitoring costs allowed a
greater number of investors to participate in the equity markets. These two
phenomena converged to “render[] practicable those vast aggregations of capital
which have revolutionized modern industry.”3
The progressive movement in corporate law4 has since challenged this concep-
tion of the doctrine. Grotesque accidents, mass torts, environmental abuses,
accounting frauds, and other instances of corporate wrongdoing sparked the
debate, and each new scandal breathes wind into its embers.5 In the past forty
years, critics of the doctrine’s application to corporate torts have argued force-
1. Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 469 (1897).
2. See ARTHUR TWINING HADLEY, RAILROAD TRANSPORTATION: ITS HISTORY AND ITS LAWS 43 (1909)
(“The distinctive feature of the modern trading corporation is the limited liability of its members.”);
Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV.
89, 89 (1985); see also 1 JAMES D. COX & THOMAS LEE HAZEN, COX & HAZEN ON CORPORATIONS § 1.05,
at 11 (2d ed. 2003).
3. William W. Cook, “Watered Stock”—Commissions—“Blue Sky Laws”—Stock Without Par Value,
19 MICH. L. REV. 583, 584 (1921). The quote is preceded by Cook’s explanation of the importance of
limited liability:
This exemption of stockholders from personal liability for corporate debts has worked
wonders in the industrial world. If such freedom from liability did not exist the public would
not dare to buy stocks, because they would be liable for corporate debts. With that exemption
from liability, however, the risk is reduced to the risk of the money actually paid for the stock.
Hence we find in some American corporations over 100,000 stockholders—total strangers to
each other, and scattered all over the world.
Id.
4. Progressive corporate law “refer[s] to twentieth-century corporate law scholarship that criticizes
the shareholder-centered vision of corporate law and views corporations as institutions with public
obligations.” Dalia Tsuk, Corporations Without Labor: The Politics of Progressive Corporate Law, 151
U. PA. L. REV. 1861, 1863 n.7 (2003).
5. See Ronald M. Green, Shareholders as Stakeholders: Changing Metaphors of Corporate Gover-
nance, 50 WASH. & LEE L. REV. 1409, 1414–20 (1993) (citing a series of corporate “disasters” as
reasons to question the traditional notions of agency and limited liability); see also Henry Hansmann &
Reinier Kraakman, Toward Unlimited Liability for Corporate Torts, 100 YALE L.J. 1879, 1880–81 (1991)
(citing environmental harms, products liability, and workplace carcinogens as potential sources of
massive liability that corporations have suboptimal incentives to avoid under a limited liability regime).
2009] SHAREHOLDER LIABILITY FOR CORPORATE TORTS 1087
fully that limited liability creates negative externalities, encouraging harmful

(and sometimes tortious) corporate behavior.6 Two of the most prominent critics
premise their criticism on the claim that, historically, the doctrine was meant to
protect shareholders from corporate contract liability and claims brought by
voluntary creditors, but not from tort liability and involuntary creditors.7 Believ-
ing that the doctrine has little normative or historical justification, several critics
have suggested reforms aimed at eliminating limited liability in the case of
corporate torts.8
This Note questions that historical premise and supplies its own historical
narrative to explain the origin of the rule. While the history of limited liability is
in general well documented,9 the history of the doctrine’s application to corpo-
6. For one of the first criticisms of limited liability’s application to corporate torts, see Note, Should
Shareholders Be Personally Liable for the Torts of Their Corporations?, 76 YALE L.J. 1190, 1191
(1967) (“Modern [corporation] statutes invite financial irresponsibility by granting immunity from tort
liability to the shareholders of all incorporated businesses.”). Many of today’s critics express similar
concerns. See, e.g., David Million, Piercing the Corporate Veil, Financial Responsibility, and the Limits
of Limited Liability, 56 EMORY L.J. 1305, 1307 (2007) (“[L]imited liability should not provide the
occasion for shareholders to behave opportunistically toward third parties.”).
7. See Hansmann & Kraakman, supra note 5, at 1925 (“[T]he law apparently failed to distinguish
clearly between tort and contract when it came to shareholder liability . . . . [T]he rule that was efficient
for contract creditors was, it appears, simply adopted for both, without much concern about the
possibility of distinguishing between the two.”); cf. Henry Hansmann & Reinier Kraakman, The End of
History for Corporate Law, 89 GEO. L.J. 439, 466–67 (2001) (citing the rule as an example of
inefficient convergence in corporate law). Others make a subtle, but salient, distinction, explaining that
the tort liability rule was informed by—but not copied from—the contract rule. See, e.g., David W.
Leebron, Limited Liability, Tort Victims, and Creditors, 91 COLUM. L. REV. 1565, 1566–67 (1991)
(“[T]he doctrine of limited liability has its origins in quite a different time and circumstance, when the
protection of contractual creditors, not tort victims, was the overwhelming countervailing concern.”).
8. See Paul Halpern et al., An Economic Analysis of Limited Liability in Corporation Law, 30 U.
TORONTO L.J. 117, 148–49 (1980) (recommending unlimited liability—both for tort and contract claims—
for small, closely held corporations); Hansmann & Kraakman, supra note 5, at 1892–94 (pressing for a
system of pro rata shareholder liability for corporate torts); Note, supra note 6, at 1198–1201
(proposing unlimited liability for closely held corporations). Each of these proposals relates to the
ability of tort victims (and, in some cases, counterparties) to recover from the corporation as a going
concern.
Other commentators have proposed giving tort victims elevated priority in bankruptcy proceedings.
See Christopher M.E. Painter, Note, Tort Creditor Priority in the Secured Credit System: Asbestos
Times, the Worst of Times, 36 STAN. L. REV. 1045, 1080–83 (1984) (arguing that placing tort victims on
the same level as voluntary, unsecured creditors in bankruptcy proceedings is unfair and encourages
corporations to adopt a less-than-efficient standard of care); Note, Switching Priorities: Elevating the
Status of Tort Claims in Bankruptcy in Pursuit of Optimal Deterrence, 116 HARV. L. REV. 2541,
2561–64 (2003) (same). Notwithstanding the merits of these proposals, empirical studies have failed to
establish conclusively the depth of the involuntary-creditor problem in the bankruptcy context. See
Elizabeth Warren & Jay Lawrence Westbrook, Contracting Out of Bankruptcy: An Empirical Interven-
tion, 118 HARV. L. REV. 1197, 1227–30 (2005) (estimating that “the paradigmatic nonadjusting creditor
is present in 1% to 25.5% of bankruptcy cases”). And a recent empirical study supports the claim that
firms do not use secured debt strategically, to avoid paying off tort claims in bankruptcy. See Yair
Listokin, Is Secured Debt Used To Redistribute Value from Tort Claimants in Bankruptcy? An Empirical
Analysis, 57 DUKE L.J. 1037, 1076 (2008).
9. See generally Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573,
577–611 (1986) (summarizing the history of limited liability in England and the United States); Robert
W. Hillman, Limited Liability in Historical Perspective, 54 WASH. & LEE L. REV. 615, 616–21 (1997)
rate torts remains somewhat of a mystery and, to date, no comprehensive

treatment of the subject exists. This Note explains how limited liability’s
application to corporate torts finds its origins not in the complacent or confound-
ing application of contract principles, but instead in attempts by judges to
distinguish contract and tort liability. In so doing, judges conferred benefits
upon contract claimants that were denied to tort claimants. The rule stems from
discrimination, not equivocation. In developing a new historical narrative, this
Note aims to challenge the orthodox assumptions underlying the consensus
position in the larger normative debate.
This Note proceeds in four parts. Part I provides a general overview of
limited liability, explaining how the doctrine works and discussing its inherent
limitations. Part II provides a brief overview of the development of the doctrine
in the United States and Britain. It also traces the doctrine’s application to
corporate torts to a particular New York case. Part III outlines a new historical
narrative of limited liability that emphasizes the non-arbitrariness of the doc-
trine’s application to corporate torts. This narrative suggests that shareholder
protection in tort suits came about as a response to reforms in the tort law—
reforms that, on balance, made it easier for plaintiffs to sue and recover from
corporations. Part IV draws on the new historical account to challenge some of
the conventional assumptions about limited liability’s history and suggest ways
in which the debate over the doctrine’s merits can be enriched by adjusting
some fundamental assumptions.
I. CORPORATIONS AND LIMITED LIABILITY

Limited liability is the doctrine that, in general, “shareholders are immune
from personal liability for corporate debts and torts beyond the amount of their
agreed investments in the corporation’s stock.”10 Limited liability is, at its core,
a method of protecting the shareholder from claims against the corporation in
which she is invested. Though once unique to the corporate form, other forms of
business associations now feature some sort of limited liability for the associa-
tion’s partners, members, or other insiders.11 In theory, limited liability shields
(summarizing limited liability doctrines in Babylonian, Roman, Byzantine, and early Islamic law);
Gregory Mark, On Limited Liability: A Speculative Essay on Evolution and Justification, in TRANSFORMA-
TIONS IN AMERICAN LEGAL HISTORY: ESSAYS IN HONOR OF PROFESSOR MORTON J. HORWITZ 169, 169–84
(Daniel W. Hamilton & Alfred L. Brophy eds., 2009) (providing a historical explanation for the
continued existence of limited liability).
10. COX & HAZEN, supra note 2, § 1.05, at 11; see also FRANK H. EASTERBROOK & DANIEL R. FISCHEL,
THE ECONOMIC STRUCTURE OF CORPORATE LAW 40 (1991); I. MAURICE WORMSER, DISREGARD OF THE
CORPORATE FICTION AND ALLIED CORPORATION PROBLEMS 13–14 (1929).
11. See COX & HAZEN, supra note 2, § 1.05, at 11. This is not a particularly new innovation. Before
the business corporation achieved ubiquity, non-corporate entities were granted limited liability. See
JOSEPH S. DAVIS, 2 ESSAYS IN THE EARLIER HISTORY OF AMERICAN CORPORATIONS 260 (1917) (noting that
the Associated Manufacturing Iron Company of the City and County of New York was granted limited
liability by the New York legislature in 1786).
shareholders of both publicly traded and closely held firms.12

Limited liability represents only one of several possible liability configura-
tions. One can easily imagine a system in which shareholders have unlimited
liability for claims against the corporation, or a system where shareholders are
at least made partially liable. At some level, it makes sense to attribute liability
to an individual rather than a legal fiction, especially when we attribute notions
of fault and morality to the former and soullessness and boundless self-interest
to the latter.13 Beyond shareholders, there are also other corporate stakeholders
who might be held fully or partially liable: creditors,14 directors, and officers.15
Focusing solely on shareholders, there are multiple types of claims that might
be made against the corporation and for which shareholders may incur liability.
The corporation raises needed capital through debt financing by entering into
contractual relationships with lenders. The corporation commits to paying
salaries to employees.16 Agents of the corporation may be injured. Those same
agents may injure others. Each of these activities gives rise to potential liability
for the corporation, the shareholder, or both. A limited liability regime may limit
shareholder liability in some of these contexts, but not others. Generally,
lawmakers have chosen to create a presumption in favor of limited liability for
shareholders, though they have subjected that presumption to several important
12. In practice, however, shareholders of closely held corporations are unlikely to enjoy the
protections of limited liability. See 1 F. HODGE O’NEAL, CLOSE CORPORATIONS: LAW AND PRACTICE
40 n.11 (1958) (noting that “incorporation does not often provide limited liability” for the close
corporation’s shareholders because prospective lenders often require, as condition to allowing the
corporation to borrow, that shareholders assume personal liability for the debt); see also Douglas Baird
& Edward R. Morrison, Serial Entrepreneurs and Small Business Bankruptcies, 105 COLUM. L. REV.
2310, 2362 tbl.17 (2005) (noting that among small businesses filing Chapter 11 petitions in 1998,
55.8% of owners made personal guarantees to lenders).
13. See LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 171–72 (3d ed. 2005) (observing the
eighteenth-century use of the word “soulless” to describe business corporations).
14. Creditor liability is rare and typically arises in one of two situations. First, the lender might be
held liable for violating a duty of good faith to the borrower. See, e.g., K.M.C. Co. v. Irving Trust Co.,
757 F.2d 752, 758–63 (6th Cir. 1985). Second, and more relevant here, a creditor may be held liable for
corporate acts if the creditor effectively controls the corporation. See Margaret Hambrecht Douglas-
Hamilton, Creditor Liabilities Resulting from Improper Interference with the Management of a Finan-
cially Troubled Debtor, 31 BUS. LAW. 343, 343–46 (1975).
Creditors may be made liable for debtors’ acts through legislation. It used to be the case, for example,
that under one of the provisions of “Superfund,” 42 U.S.C. § 9607(a) (1994), a secured creditor could
be held liable for contamination caused by a debtor’s hazardous waste, even when the creditor was not
a “manager” or “operator” of the debtor’s facility. See United States v. Fleet Factors Corp., 901 F.2d
1550, 1554 (11th Cir. 1990). In the wake of Fleet Factors, Congress quickly amended Superfund to
require the creditor’s participation in the management of the facility in order to create liability. See 42
U.S.C. § 9601(20)(a) (2006). The legislative give-and-take nevertheless demonstrates Congress’s (or
state legislatures’) ability to impose lender liability even when the lender does not exercise control.
15. The liability of directors and officers for violations of their fiduciary duties is well established in
corporate and agency law. See, e.g., ROBERT C. CLARK, CORPORATE LAW 105–40 (1986). Moreover,
limited liability does not protect actors from the consequences of their own tortious conduct, only the
corporation’s. See infra note 19 and accompanying text.
16. In some jurisdictions, shareholders are liable for unpaid wages. See infra section II.C.2.
exceptions.17
Limited liability protects only shareholders’ assets. Limited liability does not
protect the assets of the corporation itself, which remain subject to claims
brought by the corporation’s creditors.18 In addition, if a shareholder commits a
tort or incurs a debt in her individual capacity, limited liability is simply
inapposite.19 In most cases, however, creditors may not reach the assets of the
corporation in satisfaction of the shareholder’s personal debts.20 There exist
complementary principles of corporate law that protect the assets of the corpora-
tion from the liabilities of its shareholders.21 These principles serve an entity-
shielding function, as opposed to limited liability’s owner-shielding function.22
Even when the doctrine does apply, its protections are not absolute. Limited
liability is the default rule, but it may be circumvented in a number of ways.
The first and most common method is for parties to contract around limited
liability.23 To accomplish this, the corporation and its shareholders stipulate in
their contracts with counterparties (for example, lenders) that, in the event of a
default by the corporation, the shareholders would be liable for the amounts
owed, either on a pro-rata or joint-and-several basis.
The contractual approach privileges some types of lenders over others. While
voluntary lenders have the capacity to negotiate with the corporation, involun-
tary creditors do not.24 Also, smaller lenders, such as trade creditors, might be
less able to negotiate around limited liability. The problem of small, voluntary
creditors is not nearly as pronounced as the problem of involuntary creditors.
Small lenders can protect themselves through the use of standard-form con-
17. These exceptions are discussed in detail in section II.C infra.

18. See EASTERBROOK & FISCHEL, supra note 10, at 40.
19. In such a case, limited liability protects neither the corporation nor the shareholder. See
Browning-Ferris Indus. of Ill., Inc. v. Ter Maat, 195 F.3d 953, 955–56 (7th Cir. 1999) (Posner, C.J.)
(“The principle of limited liability shields a shareholder from liability for the debts (including debts
arising from tortious conduct) of the corporation in which he owns shares . . . but not for his personal
debts, including debts arising from torts that he commits himself.”).
20. If, however, a controlling shareholder is forced to give up her shares to satisfy a personal debt,
the creditor may, once it takes title to the shares, cause the corporation to liquidate or declare a special
dividend. In so doing, the creditor indirectly reaches the assets of the corporation. This is most likely to
occur in the context of a small, close corporation.
21. See Henry Hansmann, Reinier Kraakman & Richard Squire, Law and the Rise of the Firm, 119
HARV. L. REV. 1333, 1337–43 (2006) (describing the differences between owner shielding and entity
shielding).
22. Id.
23. See supra note 12.
24. A voluntary creditor is one who contracts with the corporation, as in the case of a bank that
contracts to lend the corporation money. A voluntary creditor can control its risk by obtaining security,
and to the extent that risk cannot be reduced (or risk reduction is not desirable), it can lend at a higher
rate of interest. Involuntary creditors constitute a residual category: those to whom the corporation is
indebted on a non-contractual basis, as in the case of a victim of a corporate tort. The distinction
appears clear in the abstract, but is less so in practice. See Hansmann & Kraakman, supra note 5, at
1920–21 (discussing the problem and suggesting that the difficulty can be resolved by defining a
voluntary creditor as one who “can reasonably be understood to have contracted with the firm in
substantial awareness of the risks of injury involved”).
tracts, but the involuntary creditor has no ex ante protective measures at its
disposal.25
A second possibility for avoiding limited liability lies within the corporation
itself. The corporation can eliminate the limited liability of its shareholders
through provisions in the corporation’s charter, adopted at the time of the
corporation’s creation or by later amendment.26 Both this method and the
contractual approach allow the corporation to opt out of the default rule and
tailor shareholder liability rules to fit the needs of the corporation, its sharehold-
ers, and its creditors.
Besides the corporation’s ability to adopt an unlimited liability or bounded
liability regime, state legislatures can act to curtail the doctrine. Even if the
corporation’s charter does not contemplate any exceptions to limited liability,
the reserved powers doctrine allows states to adopt a new liability rule and, to
implement the rule, constructively amend the charters of existing corpora-
tions.27
II. A BRIEF HISTORY OF LIMITED LIABILITY

The concept that some participants in a commercial enterprise would not be
entirely liable for the enterprise’s debts or activities dates back thousands of
years.28 This Part examines limited liability’s origins in two jurisdictions where
the debates over the doctrine largely paralleled one another: the United States
and Britain. It then explores the origin of some of the more prominent excep-
tions to limited liability and discusses some modern criticisms of the doctrine.
A. LIMITED LIABILITY IN THE UNITED STATES: 1800–1849
Limited liability’s earliest American proponents justified the doctrine in

populist, Jacksonian terms.29 The doctrine’s proponents contended that without
25. The bankruptcy literature makes frequent use of the term “nonadjusting creditor” to refer to the
position of a tort victim with a claim against a bankrupt corporation. See, e.g., Lucien Ayre Bebchuk &
Jesse M. Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 YALE L.J. 857,
869 (1996). Such creditors “do not ‘adjust’ the size of their claims to take into account the effect of the
loan transaction that creates the security interest, including the fact that any security interest given to
the secured creditor subordinates their unsecured claims.” Id. at 864.
26. See, e.g., DEL. CODE ANN. tit. 8, § 242(a)–(b) (2008) (setting out the requirements for amending
the certificate of incorporation after receipt of payment for stock).
27. See generally Gustavus Ohlinger, Some Comments on the Reserved Power To Alter, Amend and
Repeal Corporate Charters, 29 MICH. L. REV. 432 (1931) (providing an overview of the reserved power
doctrine). But see Note, Equitable and Constitutional Limitations on the Reserved Power To Amend
Corporate Charters, 23 VA. L. REV. 579, 581–84 (1937) (discussing instances where courts upheld or
struck down uses of the doctrine).
28. See Hillman supra note 9, at 616–21.
29. See Peter Z. Grossman, The Market for Shares of Companies with Unlimited Liability: The Case
of American Express, 24 J. LEGAL STUD. 63, 67–68 (1995) (providing an overview of the populist
arguments); Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democ-
racy, and Economics, 87 NW. U. L. REV. 148, 155 (1992) (summarizing the democratic rhetoric on
limited liability); see also Note, Incorporating the Republic: The Corporation in Antebellum Political
the shareholder protection provided by limited liability, the possibility of enor-

mous judgments would make equity investment a privilege reserved exclusively
to the extraordinarily wealthy. Unlimited liability was thus construed as a
barrier to entry that prohibited the participation of the middle class in the capital
markets. The elimination of that barrier was intended to foster universal partici-
pation in the economic life of the nation,30 just as the elimination of another
barrier to entry, land ownership, was meant to foster universal political participa-
tion.31
Not everyone accepted the democratic narrative. Some critics argued that
limited liability would have exactly the opposite effect. An 1846 report prepared
by Thomas Barlow, a member of the New York State Senate and Chairman of
its Committee on Manufactures, espoused this view.32 Though the report is
ostensibly a response to three petitions for corporate charters, Barlow may as
well have been speaking to those who favored the extension of limited liability
to all companies created under (the soon-to-be-adopted) general incorporation
law.33 Barlow asserted,
Men cannot be allowed to escape their obligations . . . for if they could, an

aristocracy of wealth and means would spring into existence at once, bearing
omnipotent sway to the ruin, beggary and slavery of thousands of our
industrious mechanics and laborers.34
Barlow further argued that the general extension of limited liability “would be
directly hostile to every principle of justice and against the protective nature of
our government.”35 Because of these concerns, the report favored the granting
of the charters at issue, but recommended that they be issued “stripped and
naked of the favored feature of exemption from a just responsibility.”36 Eco-
nomic democracy was the end of both limited liability’s proponents and critics;
Culture, 102 HARV. L. REV. 1883, 1884–1902 (1989) (discussing the bitter debates over the rise of the
corporation and the use of republican language in the debates). For an overview of Jacksonian politics
generally, and particularly the Jacksonians’ effect on American economic institutions, see DANIEL
WALKER HOWE, WHAT HATH GOD WROUGHT: THE TRANSFORMATION OF AMERICA, 1815–1848, at 328–569
(2007).
30. See Presser, supra note 29, at 155.
31. See generally Robert J. Steinfeld, Property and Suffrage in the Early American Republic, 41
STAN. L. REV. 335 (1989) (describing the relationship between property ownership and voting rights in
the eighteenth and nineteenth centuries).
32. N.Y. STATE SENATE, REPORT OF THE COMMITTEE ON MANUFACTURES, ON PETITIONS FOR THE INCORPO-
RATION OF MANUFACTURING COMPANIES, S. 13, 69th Sess., at 3 (1846) [hereinafter N.Y. STATE SENATE
REPORT].
33. See FRIEDMAN, supra note 13, at 447 (charting the adoption of general incorporation laws in
several states, including New York).
34. N.Y. STATE SENATE REPORT, supra note 32, at 3.
35. Id.
36. Id. at 4.
the two groups disagreed about how well the doctrine served that objective.37
In retrospect, both positions seem extreme. Limited liability was not the sole
agent of the concentration of wealth that took place during the Gilded Age,38
but neither did it serve as the Great Equalizer that its proponents made it out to
be.39 Indeed, framing limited liability as dismantling barriers that held back the
common man from participating in the equity markets was no more accurate
than framing the abolition of the land ownership requirement, another Jackso-
nian innovation, as dismantling race- and gender-based barriers to voting.
In spite of these weaknesses, the populist arguments gained traction during
the Jacksonian era of American politics. Around 1835, however, plaintiffs began
to attempt to escape the rule’s reach with respect to corporate torts.40 Despite
these attempts, limited liability (for both contract and tort claims) survived
judicial scrutiny unscathed.
B. LIMITED LIABILITY IN ENGLAND: 1837–1858
For the most part, the British debate resembled its American counterpart.41
Less concerned with constitutional or federalism constraints than their counter-
parts in the United States Congress, the members of Parliament considered the
matter on several occasions before finally passing the Limited Liability Act in
1855.42 In 1837, for example, a report on the effects of limited liability,
commissioned by the House of Commons and prepared by Mr. Bellenden Ker,
observed:
In France, according to the opinions of some well-informed merchants,

[limited liability] is very useful, as affording the means of directing to
commercial enterprise much capital which otherwise would not be so em-
37. Historians have taken notice of this rhetorical overlap not just in this particular debate, but in
many of the era’s political battles. According to Howe, the appeals to democracy “help[] explain why
their debate [between Whigs and Democrats] was so bitter; if they had not had such terms in common,
they might not have understood each other’s accusations so well.” DANIEL WALKER HOWE, THE POLITICAL
CULTURE OF THE AMERICAN WHIGS 78 (1979).
38. The concentration of the Gilded Age cannot be explained so simply. See ALFRED D. CHANDLER,
JR., THE VISIBLE HAND: THE MANAGERIAL REVOLUTION IN AMERICAN BUSINESS 484–89 (1977) (outlining a
complex set of economic and regulatory developments as giving rise to “[c]oncentration and oli-
gopoly”).
39. See id.
40. See infra section II.C.3.
41. Consider the following excerpt from an 1824 Times of London editorial:
Nothing can be so unjust as for a few persons abounding in wealth to offer a portion of their
excess for the information of a company, to play with that excess—to lend the importance of
their whole name and credit to the society, and then should the funds prove insufficient to
answer all demands, to retire into the security of their unhazarded fortune, and leave the bait
to be devoured by the poor deceived fish.
Editorial, TIMES (LONDON), May 25, 1824, at 3, as reprinted in Halpern et al., supra note 8, at 117. Note
the similarity between these criticisms and those expressed in the Barlow Report. See N.Y. STATE
SENATE REPORT, supra note 32.
42. Limited Liability Act, 1855, 18 & 19 Vict., c. 133 (Eng.).
ployed [and] as affording the means of bringing forward intelligent and skilful
[sic] persons, who have not capital to enable them to enter into commercial
speculation . . . . In New York it is understood that the same effect is pro-
duced.43
Still, Parliament was hesitant to eschew its traditional partnership liability rules.
In 1843, a select committee of the House of Commons considered Mr. Ker’s
report and its suggestion for reforming partnership law to accommodate limited
liability.44 The committee declined not only to propose a statute that would have
made limited liability the default liability rule, but also to express any opinion
concerning the doctrine’s merits.45
Slowly, the locus of consideration shifted from the requirements of enterprise
to the working-class investor. In this respect, the trajectory of the British
debates is the reverse of the American debates. In 1850, the House of Commons
appointed a committee to “inquire into the subject of investments of the middle
and working classes.”46 The committee’s chairman, Robert Slaney, was “a
reformer of mild radical views whose philanthropic interest in the working
people had long been known.”47 The committee considered a good deal of
evidence and heard the testimony of seventeen witnesses, including Ker and
John Stuart Mill.48 The committee’s final report contained a qualified endorse-
ment of limited liability, recommending that “charters of limited liability, for
useful undertakings, should be granted by the Crown with due caution, at a
43. REPORT ON THE LAW OF PARTNERSHIP, Parl. Papers 1837, XLIV, 399, at 419. For a contemporary
and favorable analysis of the report, see Limited Liability, 23 L. MAG. 215, 215–17 (1855). The
reference to the success of limited liability in New York is not uncommon among discussions of limited
liability during the period. See, e.g., William Chambers & Robert Chambers, Partnerships ‘En
Commandite,’ 368 CHAMBERS’S EDINBURGH J. 33, 33 (1851) (on file with author) (“[Limited partner-
ships] exist to a large extent in France, and also in the state of New York—a state which has lately put
England to shame in the matter of law reform.”).
44. Limited Liability, supra note 43, at 217.
45. Id.
46. Id.
47. John Saville, Sleeping Partnership and Limited Liability, 1850–1856, 8 ECON. HIST. REV. 418,
419 (1956). Saville, a Marxist historian, described the movement to adopt limited liability as one
motivated by egalitarian principles:
The initial impetus in the early 1850’s to the Parliamentary debates and the public discussion
that led to the coming of general limited liability in 1856 came not from the side of the
investors, nor from that of the entrepreneurs, nor from those who argued in terms of freedom
of contract. The movers were a group of middle-class philanthropists, most of whom accepted
the title of Christian Socialist.
Id. (footnote omitted).
48. Id. at 420. That Mill was called to testify is not surprising, since the committee’s chairman
supported the general extension of limited liability and Mill had by this time written favorably of such
an extension. See JOHN STUART MILL, 2 PRINCIPLES OF POLITICAL ECONOMY 467–72 (Boston, Little &
Brown 1848); see also BISHOP CARLETON HUNT, THE DEVELOPMENT OF THE BUSINESS CORPORATION IN
ENGLAND, 1800–1867, at 121–22 (1936) (discussing Mill’s position).
moderate cost.”49 The following year, Slaney managed to convene another

committee, this time on the law of partnership.50 He was again appointed
chairman and the committee again endorsed the extension of limited liability,
albeit more strongly this time.51
Between 1851 and 1854, editorialists and pamphleteers frequently took up
the issue of limited liability.52 The apex of the movement to secure general
limited liability was reached in 1855, when Parliament acted to allow partner-
ships to include partners whose liability was limited and to confer limited
liability on most joint-stock companies.53 Certain types of businesses, including
banks and insurance firms, were initially excluded. Laws passed over the next
few years expanded the reach of the doctrine by allowing banks to operate with
limited liability.54
C. USING LEGISLATIVE EXCEPTIONS TO MITIGATE LIMITED LIABILITY’S CONSEQUENCES
Though the story told in the preceding sections ends with the triumph of
limited over unlimited liability, that victory did not come without compromise.
Once limited liability became the norm, state legislatures created exceptions to
the general rule of limited liability by making shareholders liable for certain
types of claims against the corporation brought by certain types of creditors. In
addition, courts have allowed claimants to get around limited liability by
“piercing the corporate veil,” or declaring that the corporation’s failure to
comply with legal strictures warrants the disregard of the corporate form.55 By
disregarding the corporate form, the courts take limited liability—a feature of
49. Limited Liability, supra note 43, at 217. Saville notes that most of the socialist members of the
committee, including Slaney, were in favor of adopting a stronger position, but that one member of the
committee, a banker, was skeptical of limited liability. Saville, supra note 47, at 420.
50. Limited Liability, supra note 43, at 217–18.
51. Id. at 218–19.
52. Saville, supra note 47, at 428 (documenting the popular discourse concerning limited liability
during the period).
53. See Limited Liability Act, 1855, 18 & 19 Vict., c. 133 (Eng.); see also Saville, supra note 47, at
428–31 (describing in detail the process leading up to the adoption of the 1855 Act).
54. See An Act To Enable Joint Stock Banking Companies To Be Formed on the Principle of
Limited Liability, 1858, 21 & 22 Vict., c. 91 (Eng.).
55. See generally STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL (1991 & Supp. 2008). Since the
early twentieth century, commentators have criticized veil-piercing doctrine and practice as incoherent
and inconsistent. Wormser, writing in 1912, considered discussions about veil-piercing doctrine to be
“tempting but profitless.” I. Maurice Wormser, Piercing the Veil of Corporate Entity, 12 COLUM. L. REV.
496, 498 (1912). A more recent commentator observed: “The tragedy is that we have created a mess of
the common law in the name of justice, and it does not have to be so.” Douglas C. Michael, To Know a
Veil, 26 J. CORP. L. 41, 42 (2000). And recent empirical work has shown the disconnect between the
factors that judges purport to use in piercing determinations and those actually used. See Robert B.
Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1070–74
(1991). Aside from these highlights, veil-piercing problems, both real and theoretical, have been
examined at greater length and in greater detail than this Note can hope to summarize. See, e.g.,
Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. CORP. L. 479, 506–28 (2001) (characterizing
veil-piercing doctrine as “dysfunctional” and suggesting its abolition).
juridical persons, not natural ones—completely out of the picture.56

The choice to create an exception represents a decision by state legislatures
or state constitutional conventions57 to eliminate in certain classes of cases the
discretionary power of judges to either recognize or disregard the corporate
form. Though the states created many exceptions, three of the exceptions—for
watered stock, unpaid wages, and corporate debts—stand apart from the rest in
that the processes leading to the creation of these exceptions help us better
understand the rationale for the rule itself.
1. “Watered” Stock
Both special charters and general incorporation laws made shareholders liable
for watered stock. Stock is considered “watered” when it is issued in exchange
for consideration not in the form of “cash paid to the corporation equal to the
par value of the stock, nor [of] property equal in value to the par value of the
stock, but [in the form of] property transferred to the corporation at an over-
valuation in exchange for the stock.”58
Watered stock posed a serious threat to the interests of both stockholders and
creditors. The mere fact that the corporation made a bad deal (by exchanging its
valuable stock for nominal consideration) would hardly seem to inspire the
legislative imagination, but commentators and courts came to recognize that
watered stock could be instrumental in the execution of fraudulent schemes that
impacted wide swaths of equity holders and creditors. The party providing the
nominal consideration could simply turn around and resell the valuable stock at
a significant profit.59 When the market learned of the “true” value of the assets
now belonging to the company, the company’s stock price would plunge,
leaving shareholders holding worthless stock and the company itself unable to
repay its creditors.60
The origins of the exception itself are somewhat unclear. According to
Professor Hovenkamp, the exception was a consequence of the “trust fund”
doctrine, the prevailing philosophical view of the corporation in the first part of
56. In the strictest sense, any exception to limited liability must be statutory. As Chief Justice Waite
observed, “The individual liability of stockholders in a corporation is always a creature of statute. It
does not exist at common law. The first thing to be determined in all such cases is, therefore, what
liability has been created.” Terry v. Little, 101 U.S. 216, 217 (1879). Judicial decisions imposing
liability by, for example, “piercing the corporate veil” are not exceptions to limited liability as much as
they constitute an avoidance of limited liability achieved by disregarding the corporate form.
57. This was the case in New York, where a state constitutional convention considered whether to
include an exception to limited liability in the case of unpaid wages. See Eric Tucker, Shareholder and
Director Liability for Unpaid Workers’ Wages in Canada: From Condition of Granting Limited
Liability to Exceptional Remedy, 26 LAW & HIST. REV. 57, 65 (2008).
58. Cook, supra note 3, at 584–85.
59. Id.
60. Id. The harm described here is neither hypothetical nor necessarily caused by outside promoters.
See, e.g., Scott v. Deweese, 181 U.S. 202, 207–10 (1901) (finding officers of corporation made false
entries in company’s books to make it appear as if officers had paid in full for their shares when in fact
they had not paid at all).
the nineteenth century.61 Under this view of the corporation, “the paid-in capital
of the corporation was a ‘fund’ upon which creditors were entitled to rely.”62 If
stock had been issued in excess of the corporation’s paid-in capital, then the
corporation’s creditors were entitled to recover from its shareholders, the “trust-
ees” of the fund.63 By the beginning of the twentieth century, the view was
considered outmoded, but the exception nonetheless remained on the books in
many jurisdictions.
According to Cook, however, the exception grew out of frustration with the
common law, which did not provide adequate deterrent or remedial measures
for watered stock schemes.64 Legislatures, cognizant of the harm that could be
done if such schemes became widespread, took preventative action, first through
special charters and then through provisions in general incorporation statutes.
Indeed, the first known attempt to secure a charter with a watered stock
exception dates back to the late eighteenth century. In 1789, a group of
entrepreneurs sought to obtain a charter for the Baltimore Manufacturing Com-
pany.65 The proposed articles of incorporation would provide the company’s
shareholders with limited liability, but only when the shares were fully paid.66
The company was unsuccessful in its attempt to obtain a charter,67 but with the
emergence of the general incorporation laws, every corporation created pursu-
ant to the general statute would be subject to the exception.68
2. Unpaid Wages
In New York, shareholders were made jointly and severally liable for work-
ers’ wages.69 The movement to abolish the special charter system, combined
with concerns about the pending banking crisis, provided the impetus for the
calling of a state constitutional convention.70 The convention, which met in
1846, was thrust into a debate over the merits of a doctrine that had not yet
reached adolescence. The principal point of disagreement concerned which
liability regime was more democratic. On one hand, proponents of limited
liability claimed the doctrine would encourage investment by the working class.
61. Herbert Hovenkamp, The Classical Corporation in American Legal Thought, 76 GEO. L.J. 1593,
1655 (1988). Justice Story propounded the trust fund doctrine in an oft-cited 1824 opinion. See Wood v.
Dummer, 30 F. Cas. 435, 436 (C.D. Me. 1824) (No. 17,944) (“It appears to me very clear upon general
principles, as well as the legislative intention, that the capital stock of banks is to be deemed a pledge or
trust fund for the payment of the debts contracted by the bank.”).
62. Hovenkamp, supra note 61, at 1655.
63. Id. at 1655–56; see also FRIEDMAN, supra note 13, at 176.
64. Cook, supra note 3, at 585–88.
65. DAVIS, supra note 11, at 267–68.
66. Id. at 268.
67. Id.
68. See FRIEDMAN, supra note 13, at 449 (noting the exception’s codification in the corporation laws
of New York and Illinois).
69. For a thorough overview of the process leading to the creation of New York’s labor exception,
see Tucker, supra note 57, at 64–68.
70. Id. at 65.
Under any other rule, proponents argued, the cost of monitoring investments
would be prohibitive and equity investment would be available only to the
wealthy.71 Critics took the opposite view, arguing that limited liability would
merely allow the capitalist class to consolidate its wealth, to the detriment of
workers.72
Despite the sharp disagreement, the two sides arrived at a compromise
position. Limited liability became the general rule for all corporations formed
pursuant to the new general incorporation statute, but would not apply to wages
owed to workers.73 The exception remains in place today, though it only applies
to the ten largest shareholders of a corporation that is not publicly traded.74
3. Double Liability and the Beginnings of Limited Liability for Torts

Legislatures commonly issued charters making shareholders liable to the full
extent of their investments for corporate debts, at least to the extent the debts
were accrued while the shareholder had owned her shares.75 The key difference
between this exception and the watered stock exception is that, in the case of the
former, even shareholders who had paid in full for their shares could be liable
for corporate debts. From the plaintiff’s perspective, however, both exceptions
served the same function: growing the pool from which recovery could be
sought.
With these exceptions in place, plaintiffs of all sorts, including tort victims,
tried to recover from individual shareholders for “debts” incurred by the
corporation. The courts, however, were unwilling to stretch either the watered
stock or the broader, creditor-protecting exceptions to the point where they
permitted tort victims to recover from individual shareholders for corporate
torts. This, it seems, is where limited liability for corporate torts began—not as
an extension of limited liability, but as a constraint upon unlimited liability.76
In Heacock & Lockwood v. Sherman,77 the plaintiff’s horse fell while cross-
ing a bridge built by the Buffalo Hydraulic Association, allegedly due to
improper maintenance of the bridge.78 The plaintiff brought an action for
trespass on the case against two shareholders of the Buffalo Hydraulic Associa-
71. See supra section II.A.

72. See id.
73. See Tucker, supra note 57, at 68.
74. N.Y. BUS. CORP. LAW § 630(a) (McKinney 2003). But see Romney v. Lin, 105 F.3d 806, 811 (2d
Cir. 1997) (recognizing that portions of § 630 are preempted by 29 U.S.C. § 1132(a)).
75. This was known as “double liability” because the shareholder could lose both her equity
investment and, in satisfaction of a debt, an amount equal to her investment. See Tucker, supra note 57,
at 67.
76. An ancient maxim, exceptio probat regulam, regards the existence of an exception as tending to
prove the existence of the rule itself. Here, where the rule’s existence is known, the exception helps
illuminate the contours of the rule.
77. 14 Wend. 58 (N.Y. Sup. Ct. 1835).
78. Id.
tion79 rather than the Association itself.80 At a bench trial in the justice court,
the judge held for the plaintiff, awarding him $50 in damages. The defendants,
seeking a jury trial, appealed to the Court of Common Pleas of Erie. The
defendants were granted their request, but the jury returned a verdict for the
plaintiff, awarding him $85 in damages. Unhappy with this outcome, the
defendants sued upon a writ of error, removing the matter from the civil courts
to the Supreme Court of Judicature, then the highest court in New York. The
Supreme Court granted the writ, reversing the lower court.
The court, in an opinion by Justice Samuel Nelson,81 held that, notwithstand-
ing an exception to limited liability in the corporation’s charter, shareholders
could not be held liable for corporate torts.82 The eighth paragraph of the
Buffalo Hydraulic Association’s charter provided:
That the stockholders of the said corporation shall be holden jointly and
severally to the nominal amount of their stock, for the payment of all debts
contracted by the said corporation . . . and any person or persons having any
demand against the said corporation, may sue any stockholder or stockhold-
ers, in any court having cognizance thereof, and recover the same with costs:
Provided, That no stockholder shall be obliged to pay more in the whole, than
the amount of the stock he may hold in the said company at the time the debt
accrued.83
The plaintiff argued that, when he had become the victim of a tort committed by
the corporation, a corporate “debt” had been created. As such, he stood in the
same place as contractual creditors.
79. At least one of the petitioners made for an unsympathetic defendant. Though the defendants are
identified only by their surnames in the record, Heacock is most likely Reuben B. Heacock, a “wealthy
man” who co-founded the Hydraulic Association. See Henry A.S. Dearborn, Memorandum of a Journey
to the Niagara Frontier, for the Purpose of Negotiating Treaties with the Seneca and Tuscarora Tribes
of Indians, in 7 PUBLICATIONS OF THE BUFFALO HISTORICAL SOCIETY 39, 78, 113, 120, 123 (1904). Despite
his affluence, Heacock was not exactly an exemplar of polite society. He was, according to Dearborn,
an “infamous character,” a man “who had the effrontery to openly put at defiance all decency of
conduct, all regard to truth, every principle of honor & all the decencies of society.” Id. at 116. There is
at least some suggestion that Dearborn’s contempt for Heacock stems from the latter’s nouveau-riche
status. Id. at 117 (“Vulgarity, when wealth has been partially accumulated, becomes rapacious-
ness . . . .”). Heacock is described slightly—but only slightly—more generously elsewhere as a “plucky”
man “who did not hesitate to speak [his] mind.” E. Carlton Sprague, Address Before the Buffalo
Historical Society (July 3, 1882), in SEMI-CENTENNIAL CELEBRATION OF THE CITY OF BUFFALO 29 (1882).
Heacock was, from a plaintiff’s perspective, the perfect defendant: an obstreperous, unlikable man with
deep pockets.
80. The plaintiff may have also brought an action against the corporation, but no record of any such
suit exists.
81. Nelson had been appointed associate justice of New York’s Supreme Court of Judicature in 1831
and became its chief justice in 1837. In 1845, he was appointed associate justice of the United States
Supreme Court by President Tyler. See HENRY J. ABRAHAM, JUSTICES, PRESIDENTS, AND SENATORS: A
HISTORY OF THE U.S. SUPREME COURT APPOINTMENTS FROM WASHINGTON TO BUSH II 86 (5th ed. 2008).
82. See Heacock & Lockwood, 14 Wend. at 60.
83. 1827 N.Y. Laws 43, 45.
The court found that the term “demand” was broad enough to encompass an
action of the sort brought by the plaintiff and noted that, “[i]f the suit had been
against the corporation, we would have held them responsible.”84 Parsing the
charter, however, the court found that the phrase “all debts contracted by the
said corporation” had to be read to cover only claims ex contractu, and not
claims ex delicto.85 The court concluded that the plaintiff could not make out a
claim against the individual shareholders because “the statute has not given a
remedy in this or the like cases against the stockholders individually.”86
The decision had a measurable impact on other courts. New York was then
(as now) a leader in the development of corporate law. Professor Hovenkamp
cites numerous other jurisdictions that chose to model their general incorpora-
tion statutes on New York’s statute.87 Aside from the widespread influence of
the statute, the near-universal agreement by other states’ courts that an action in
tort could not be brought against individual shareholders of a solvent corpora-
tion further evidences the decision’s importance.88 Indeed, it appears that only
two jurisdictions read “debts” or “debts contracted” to include corporate torts,89
and one of those jurisdictions later reversed its view.90 Even the United States
Supreme Court cited the case.91
Something remarkable happened in the fifty years following Heacock. In
84. Heacock & Lockwood, 14 Wend. at 61. Note the use of the plural, third-person pronoun “them”
to refer to the Association. This was not uncommon prior to 1850.
85. Id. at 59–60.
86. Id. at 61.
87. See Hovenkamp, supra note 61, at 1655 & n.426 (noting that Pennsylvania, Indiana, and
Michigan modeled their general incorporation laws after the New York statute).
88. See Bohn v. Brown, 33 Mich. 257 (1876); B.F. Avery & Sons v. McClure, 47 So. 901, 902–06
(Miss. 1909) (citing Heacock); Cable v. McCune, 26 Mo. 371 (1858) (citing Heacock); Capital Nat’l
Bank of St. Paul v. Bartley, 56 P.2d 728, 730–32 (Mont. 1936); Doolittle v. Marsh, 9 N.W. 54, 54–55
(Neb. 1881); see also Clinton Mining & Mfg. Co. v. Beacom, 266 F. 621, 621–24 (3d Cir. 1920). The
decision also had lasting impact in New York, albeit for different points of law. See, e.g., Kaufman v.
Silver, 681 N.E.2d 417, 419 (N.Y. 1997) (citing Heacock to support the proposition that there exists a
duty to repair under the special use doctrine).
89. See Carver v. Braintee Mfg. Co., 5 F. Cas. 235 (C.C. Mass. 1843) (No. 2485) (Story, J.)
(concluding that the term “debts contracted” should be read to “cover cases of unliquidated damages
arising from torts”); Lininger v. Botsford, 163 P. 63, 64 (Cal. Dist. Ct. App. 1916) (shareholders liable
for corporate tort). The outcome in Lininger was a result of the broad language in California’s
constitutional and statutory provisions concerning shareholder liability, which included the term
“liabilities” in addition to “debts.” 163 P. at 64. The outcome in Carver is congruent with, if not
explained by, Massachusetts’s peculiar reluctance to adopt limited liability. See generally E. Merrick
Dodd, The Evolution of Limited Liability in American Industry: Massachusetts, 61 HARV. L. REV. 1351
(1948).
90. Justice Story’s logic and holding in Carver were rejected in a later Massachusetts case. Child v.
Boston & Fairhaven Iron Works, 137 Mass. 516, 520 (1884) (“There are no cases decided by the courts
of the Commonwealth in which a stockholder has been held liable for a tort of the corporation, and the
decision of Mr. Justice Story stands unsupported by any direct authority, either before or since.”).
91. In Chase v. Curtis, 113 U.S. 452 (1885), the Court was faced with a question that, on its surface,
appeared very similar to the one addressed several decades earlier by Justice Nelson. The Chase Court
noted that Heacock “virtually decided” the thorny issue as to whether the commission of a corporate
tort created a “debt” within the scope of a different New York statute. Id. at 462. The Court held that
because the relevant statutory provision was penal in nature, the term “debt” had to be construed
1835, Justice Nelson filled a gap in the law by reading one company’s charter as
an opportunity to expound a principle—that shareholders were not liable for
corporate torts—not yet a part of the law of New York or, it appears, any other
State. The rule was not self-evident at first. Nevertheless, in the five decades
that followed, that rule spread across the nation with great dispatch. By the time
the Supreme Court cited Heacock, there was no doubt that a tort was not a
“debt” for which shareholders could be liable absent other legislation.92
D. CRITICS OF LIMITED LIABILITY AND PROPOSALS FOR REFORM
Once limited liability became the general rule, the controversy over its
adoption abated somewhat until the middle of the twentieth century. The
resurrection of the debate was somewhat unexpected, and it appears that the
revival occurred shortly after the decision in Walkovszky v. Carlton93 was
handed down by the Court of Appeals of New York.
1. Walkovszky v. Carlton
John Walkovszky had the misfortune of being struck by a taxicab owned by
the Seon Cab Corporation.94 William Carlton was the sole shareholder of ten
taxicab corporations, including Seon.95 Seon carried only the state-mandated
minimum amount of automobile liability insurance, and Carlton regularly paid
himself dividends out of Seon’s profits. Because Seon was thinly capitalized,
Walkovszky sought to recover from Carlton and the nine other corporations
whose stock he owned on a theory of “enterprise liability.”96 In an opinion by
Judge Fuld, the majority rejected the theory, and held that Walkovszky had not
stated a cause of action against Carlton in his individual capacity.97
To many, the result in Walkovszky seemed inequitable. Had Carlton formed
only one corporation, and did not regularly take out the corporation’s profits in
the form of dividends, then Walkovszky could have recovered a great deal more
than the state-mandated insurance minimum. This unfairness did not escape the
majority, but Judge Fuld agreed with the court below that any inequity was best
addressed by the legislature, not the courts.98 After all, the legislature could
strictly. Id. at 463–64. Tort judgments fell outside the strict construction of the term and, as a result, the
plaintiff could not recover from the defendant-shareholders. Id. at 464.
92. California, an exceptional case, only allowed tort plaintiffs to recover from shareholders because
California’s statutes and constitution employed an alternate, more comprehensive construction that
included both “liabilities” and “debts.” See supra note 89 and accompanying text.
93. 223 N.E.2d 6 (N.Y. 1966).
94. Id. at 7. Curiously, both the majority and dissenting opinions omit any description of Walkovsz-
ky’s injuries. A contemporary critique of the decision did provide such a description: “As a result of the
accident [Walkovszky] suffered a double fracture of the pelvis and a possible skull fracture; he may be
partially disabled for life.” Note, supra note 6, at 1190 (citing a telephone interview with Laurence
Lauer, Walkovszky’s attorney).
95. 223 N.E.2d at 7.
96. Id. at 8.
97. Id. at 10.
98. Id. at 9.
simply increase the insurance minimums and the unfairness would disappear.
Judge Keating, writing in dissent, argued that Carlton’s use of the corporate
form was “designed solely to abuse the corporate privilege at the expense of the
public interest,” and should not allow him to avoid liability.99
The Walkovszky opinion was released on November 29, 1966. The following
year, Arthur Doss, Jr., published a note in the Yale Law Journal criticizing the
decision.100 Twenty years later, the case became a common point of discussion
in scholarly treatments of limited liability.101 With greater attention in the
literature, the fairness concerns began to extend beyond the limited context of
Walkovszky. Commentators began to ask whether limited liability was the
problem, not whether enterprise liability was the answer.
Limited liability does privilege some creditors over others. The voluntary
creditor may adopt protections ex ante. Such protections assure that, in the
event that the counterparty (here, the corporate borrower) defaults, the creditor
is compensated. The simplest of these protections is for the counterparties to
contract around limited liability, making one or more of the corporation’s
shareholders personally liable for the payment of the debt.102 Other methods
exist as well. In contrast, many tort victims cannot foresee their injuries, a
condition that assures prohibitive transaction costs. Tort victims cannot bargain
with the corporation to either (1) create incentives for the corporation to avoid
the tort in the first place or (2) provide for sufficient compensation for the
victim. In short, contract creditors can demand premiums for limited liability,
but tort creditors cannot. The recognition of this obvious inequality by the
academy gave rise to critical reappraisals of limited liability’s efficiency.
2. The Hansmann-Kraakman Proposal

In 1991, Professors Henry Hansmann and Reinier Kraakman published an
article in the Yale Law Journal calling for pro rata unlimited liability for
corporate torts.103 The authors’ argument is straightforward: given advances in
both industrial and legal technology and the inefficiency of the current liability
rule for corporate torts, efficiency and fairness would be better served under a
new, unlimited liability regime.104 Seeing no similar problems in the contract
context, the authors supported the retention of limited liability for contract
claims.105
99. Id. at 14 (Keating, J., dissenting).

100. See Note, supra note 6.
101. See, e.g., Phillip Areeda, Comment, Intraenterprise Conspiracy in Decline, 97 HARV. L. REV.
451, 469 n.64 (1983); Blumberg, supra note 9, at 625 n.335; Harvey Gelb, Piercing the Corporate
Veil—The Undercapitalization Factor, 59 CHI.-KENT L. REV. 1, 5 (1982); Mark J. Roe, Corporate
Strategic Reaction to Mass Tort, 72 VA. L. REV. 1, 42 n.118 (1986).
102. See supra Part I.
103. Hansmann & Kraakman, supra note 5.
104. Id. at 1916–19.
105. Id. at 1919–20.
The Hansmann-Kraakman proposal has attracted a good deal of attention,

both from the academy106 and the judiciary.107 This attention produced critical
appraisals of the proposal that drew out two classes of problems. The first class
of problems concerns the implementation of the proposal and the difficulties
that might arise as a result of implementation,108 while the second class
concerns whether, if implemented, the proposal would actually accomplish what
it aims to do.109
For present purposes, though, the proposal’s efficacy is less important than
the historical premise on which the proposal relies. Professors Hansmann and
Kraakman claim, without citing any sources, that limited liability was adopted
first as a contract rule.110 Later, and apparently for no particular reason, limited
106. A Westlaw search indicates that, as of this writing, Toward Unlimited Liability has been cited in
more than 200 articles published in legal periodicals.
107. See, e.g., Territory of U.S. Virgin Islands v. Goldman, Sachs & Co., 937 A.2d 760, 794 & n.152
(Del. Ch. 2007) (Strine, V.C.) (citing Toward Unlimited Liability to explain “the externalities that are
often generated by profit-making entities or the opportunities the dissolution process presents for
abuse”).
108. One of the most interesting features of the proposal is that it advocates changes to states’
liability rules. Hansmann & Kraakman, supra note 5, at 1916. In so doing, the proposal avoids
federalizing an important aspect of corporate law. Moreover, because the liability created by the
proposal attaches to shareholders and not corporations, the proposal does not make incorporation in any
particular state less attractive. The proposal thus avoids inciting a “race to the bottom” driven by
liability rules. See generally William L. Cary, Federalism and Corporate Law: Reflections upon
Delaware, 83 YALE L.J. 663, 664–65 (1974) (criticizing the competition among the states over the
“lucrative business of incorporating”).
Precisely because of this feature, however, Professor Alexander has suggested that the proposal
suffers from insurmountable constitutional problems. See Janet Cooper Alexander, Unlimited Share-
holder Liability Through a Procedural Lens, 106 HARV. L. REV. 387, 396–401 (1992). If a plaintiff files
suit against a shareholder-defendant in a court in any jurisdiction other than the one in which the
defendant resides, the court would not have personal jurisdiction over the defendant unless the plaintiff
can otherwise establish the defendant’s minimum contacts with that jurisdiction. Id. (citing Shaffer v.
Heitner, 433 U.S. 186 (1977), and World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980), for
the proposition that the exercise of personal jurisdiction would, in these circumstances, violate due
process). A plaintiff could avoid this difficulty if the jurisdiction in which the shareholder-defendant
resides has changed its liability rules and the plaintiff sues there.
109. In 1992, shortly after the publication of Professor Alexander’s article, Professor Grundfest
suggested that unlimited liability is unrealistic in light of the equity demands of modern capital
markets. Joseph A. Grundfest, The Limited Future of Unlimited Liability: A Capital Markets Perspec-
tive, 102 YALE L.J. 387, 394 (1992). Because of the burden that would be imposed on shareholders of
public companies, shareholders would be driven to create offshore holding corporations, entities over
which the courts of the United States would not have jurisdiction. Id. at 393–99. Through such a device,
shareholders could retain their investments while avoiding liability. Id. The Hansmann-Kraakman
proposal would, according to Grundfest, simply increase transaction costs without realizing the goal of
shareholder internalization. Though Professor Grundfest’s criticism casts some doubt on the efficacy of
the Hansmann-Kraakman proposal, it should be noted that at least one commentator has called into
question one of Grundfest’s principal assumptions: that unlimited liability depresses the price of a
firm’s shares. See Grossman, supra note 29, at 75–83 (examining the relationship between unlimited
liability and the price of American Express common stock and concluding that the effect of unlimited
liability was negligible).
110. Hansmann & Kraakman, supra note 5, at 1925.
liability was adopted as the rule for torts.111 The authors contend that this
adoption took place “without much concern about the possibility of distinguish-
ing between” tort and contract.112 The history of the rule is far more complex
than this description allows, and if nothing else, evidences great concern about
the possibility of distinguishing between tort and contract.
III. TOWARD A NEW HISTORICAL ACCOUNT

By no stretch of the imagination may it be said that the prospect of liability
(or avoidance of liability) for corporate torts motivated the creation of limited
liability. Indeed, the seminal treatise on business corporations produced by
Ames and Angell at the beginning of the nineteenth century did not so much as
mention shareholder liability for corporate torts.113 Shareholder liability for
corporate torts is similarly omitted from other early treatises.114 But the law was
not being made in treatises; it was being made in capitols and courts. The latter
established the rule that shareholders would not be liable for corporate torts. An
examination of the case law on the subject illustrates the non-arbitrary character
of the rule’s adoption and suggests some of the reasons behind it.
A. THE NON-ARBITRARINESS OF THE RULE
As tort suits came to the fore, the courts had to decide how to square a
relatively new device, limited liability, with relatively new causes of action and
plaintiffs’ attempts to recover from individual shareholders. There was an
inherent tension between the two, and a majority of jurisdictions resolved that
tension against tort victims. This is not to say, however, that they resolved the
tension in favor of shareholders, for legislatures and courts made shareholders
personally liable for contractual liabilities.115 In the battle to sort out these
varied interests, lenders carried the day.
This sorting out was not haphazard. It took decades and produced dissent.116
Judges in the several states looked to each other and to other sources, such as
Blackstone,117 for authority. Legislatures adopted language and then kept or
changed it based on how the courts interpreted the language. In small, awkward
steps, courts and legislatures simultaneously constructed the modern law of
corporations and the law of torts.
111. Id.
112. Id.
113. JOSEPH K. ANGELL & SAMUEL AMES, A TREATISE ON THE LAW OF PRIVATE CORPORATIONS AGGRE-
GATE 349–75 (1832).
114. At the time, there were not yet any treatises on the law of torts. FRIEDMAN, supra note 13, at 261
(“Not a single treatise on the law of torts was published before 1850, on either side of the Atlantic.”).
115. See supra section II.C.
116. Justice Story was the most notable dissenter. See supra note 90.
117. See, e.g., Latimer v. Veader, 46 N.Y.S. 823, 829 (Sup. Ct. App. Div. 1897); Cable v. McCune,
26 Mo. 371 (1858).
B. A POSSIBLE EXPLANATION: LIABILITY EQUILIBRIUM
The reasons behind these steps are less clear, but there are some clues.
Professor Friedman suggests that “[t]he logic of economic growth, invisible to
most contemporaries, was drawing up law for itself” in the field of business
corporations.118 Consistent with this thesis, Friedman contends that “[t]he law
[of torts] developed in a way in which the power-holders of the day considered
socially desirable. This way, in brief, was to frame rules friendly to the growth
of young businesses . . . .”119 Judicially crafted doctrines like the fellow-servant
rule, assumption of risk, and contributory negligence served the needs of
enterprise to the detriment of tort victims.120 Moreover, the negligence rule
itself protected corporations since plaintiffs could only recover when a defendant-
corporation was at fault, not when it had caused harm by accident.121
By the middle of the nineteenth century, however, courts were beginning to
relax these rules and make it easier for individual plaintiffs to recover from
corporations. Courts did this by introducing doctrines like last clear chance122
and res ipsa loquitur,123 which lowered pleading standards for plaintiffs. At the
same time, state legislatures began to impose strict liability on large corpora-
tions, and railroads in particular, for violating newly prescribed safety regula-
tions.124
All of this reform took place between 1855 and 1875. Professor Friedman
does not discuss what happened to limited liability rules at this time, but if one
superimposes the case law eschewing unlimited liability for corporate torts on
top of Professor Friedman’s narrative, the result hints at an altogether new
theory. Under this theory, jurisdictions adopted limited liability for corporate
torts to establish an equilibrium level of liability. That is, where courts and
legislatures were slowly starting to relax restrictive tort doctrines, making it
more likely that the corporation itself would be held liable, the courts in turn
interpreted statutes and charters narrowly to protect shareholders. The size of
the pie from which plaintiffs could recover had increased, but the courts did not
want it to grow indefinitely.
118. FRIEDMAN, supra note 13, at 176. Friedman’s explanation is more or less consistent with the
“subsidy thesis” of tort law. According to this thesis, the pro-business slant of tort rules during the
period resulted from efforts by lawmakers to subsidize industry. The classic articulation of the thesis is
found in MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW, 1780–1860, at 99–101 (1977).
For a similar view, see Gary T. Schwartz, The Character of Early American Tort Law, 36 UCLA L.
REV. 641, 641 (1989).
119. FRIEDMAN, supra note 13, at 262.
120. See id. at 262–64.
121. See id. at 410.
122. See id. at 418–19.
123. Literally, “the thing speaks for itself.” See id. There is no one accepted definition of res ipsa
loquitur, but one way to characterize the doctrine is that it “creates a permissible inference of
negligence for a jury in situations where a plaintiff can only show that an injurious event occurred.” G.
Gregg Webb, Note, The Law of Falling Objects: Byrne v. Boadle and the Birth of Res Ipsa Loquitur, 59
STAN. L. REV. 1065, 1066 (2007).
124. See FRIEDMAN, supra note 13, at 419–21.
This explanation is attractive for several reasons. For one, it rejects the too
frequently used mode of analysis wherein one area of law is treated as unaf-
fected by other areas. The line between tort and contract law is thin and
blurry,125 and in some instances, so too is the line between tort and corporate
law. And certainly, economic conditions affect the development of all areas of
the law.126 Causation can flow easily from one area to the next, and only by
considering all possible contexts do we avoid the inevitable oversimplification
that results from considering legal developments in isolation from the rest of the
universe.
The idea that limited liability came about as a response to the manipulation of
other liability rules is not completely new. Professor Stone, for example,
describes limited liability “as a sort of historical quid pro quo.”127 As business
corporations grew larger and more complex, his narrative goes, it became
necessary to think in terms of the corporation’s wrongdoing rather than the
wrongdoing of the persons conducting its business.128 Shareholders had reason
to be unhappy with this development since costs borne previously by officers
and employees were now shifted to the corporation, making investment a riskier
endeavor. The consolation offered to shareholders was that they would not be
liable for corporate acts beyond the capital they had contributed.129
Stone’s quid pro quo theory presents a strong case for rejecting the Hansmann-
Kraakman proposal. According to Stone, courts devised corporate personality as
a way to avoid the difficult problem of determining which specific actor in the
commercial enterprise had committed a wrong.130 So long as some agent had
wronged the plaintiff, it made no difference which one actually did it. And so
long as the corporation is solvent to the extent of its tort liabilities, plaintiffs
benefit from this rule since it requires less specificity in pleading. Pro rata
shareholder liability frustrates this device because it returns to the fact-finder the
question of which shareholders are to blame for the plaintiff’s injuries. The
expanded scope of the fault inquiry would also require greater specificity in
plaintiffs’ pleadings.
The historical bargain to which Stone refers is different from the one de-
scribed above. Both explanations view limited liability as a backstop measure to
prevent the impairment of investment by establishing some sort of liability
equilibrium. Stone’s quid pro quo theory designates the recognition of corporate
personality as the catalyst responsible for limited liability. Corporate personality
125. See generally GRANT GILMORE, THE DEATH OF CONTRACT (1974) (arguing that tort law has
subsumed contract law).
126. This underscores the importance of studying economic history in conjunction with legal history.
See generally Ron Harris, The Encounters of Economic History and Legal History, 21 LAW & HIST.
REV. 297 (2003).
127. CHRISTOPHER D. STONE, CORPORATE RESPONSIBILITY: LAW AND ETHICS 23 (1975).
128. See id.
129. See id.
130. See id.
necessarily precedes limited liability, for if the corporation is not recognized as

a legal actor, then there would be no corporate liability from which the
shareholders would need protection. On the other hand, the gap between
corporations being considered legal persons and the general adoption of limited
liability is large. Every state issued charters to business corporations in the first
two decades of the nineteenth century, but some jurisdictions did not adopt
limited liability until after 1850. Even New York, a frontrunner in terms of
limited liability, spent the first few decades of the century oscillating between
limited and double liability.131 If limited liability was the benefit shareholders
received in exchange for liabilities being shifted to the corporation, then the
benefit was deferred, not contemporaneous.
No similar gap exists between the changes in tort law and the adoption of
limited liability for corporate torts. Though Heacock predated the relaxation of
the anti-plaintiff doctrines, courts in other states did not begin to follow
Heacock until after 1850. For example, res ipsa loquitur was introduced into the
common-law vocabulary in 1863.132 Only one of the cases explicitly following
Heacock was decided before then.133
Stone’s quid pro quo theory also fails to account for the proliferation of
exceptions to limited liability. If, for example, shareholders are made doubly
liable—that is, liable to lose their actual investments in the corporation plus an
amount equal to those investments134—do they really benefit from the adoption
of limited liability? Probably not. When such an exception applies, shareholders
are worse off under limited liability than under a regime where only sharehold-
ers are liable. These exceptions call into question the ability of limited liability
(the quid) to mitigate the costs of corporate liability (the quo). Stone’s quid pro
quo theory does not quite conform to the development of limited liability, but a
slightly modified version of the theory—suggesting instead that limited liability
was given to shareholders in exchange for their assumption of greater tort
liability—avoids this incongruity.
CONCLUSION
This Note presents a narrative that runs counter to the one presumed by the
critics of limited liability. Those critics contend that, with respect to limited
liability, the law never bothered to differentiate between contract and tort claims
and the distinction was arrived at by accident.135 The law did distinguish, and it
did so in such a way that privileged contract claims over tort claims. At best,
critics have mischaracterized the law’s development. At worst, they have set up
a straw man.
131. See Tucker, supra note 57, at 67–68.

132. See Byrne v. Boadle, (1863) 159 Eng. Rep. 299 (Exch.).
133. See Cable v. McCune, 26 Mo. 371 (1858) (citing Heacock).
134. For more on double liability, see supra section II.C.3.
135. See Hansmann & Kraakman, supra note 5, at 1925.
One is tempted to dismiss the significance of the historical development of

the rule. But if we are to take the normative debate seriously, we must also take
seriously its empirical136 and historical underpinnings. Normative arguments
about the wisdom of a particular rule are clearly distinct from empirical claims
about the origins or efficacy of that rule. Yet an argument of one type rarely
exists in a vacuum—facts are called in to marshal support for a normative
conclusion, and vice versa. The reformer argues that if a rule “simply persists
from blind imitation of the past,”137 it ought to be replaced with a less arbitrary
rule, assuming the latter is normatively preferable to the former.138
Arguments for reforming limited liability fit within this general pattern. The
reform arguments make normative claims, but they also attach themselves to a
historical narrative. That narrative suggests that it is not by intelligent design,
but by a series of random mutations, that the doctrine of limited liability
evolved to cover corporate torts.139
Narrative, historical or otherwise, is an indispensible part of legal discourse.
As Professor Cover observed, “No set of legal institutions or prescriptions
exists apart from the narratives that locate it and give it meaning.”140 Limited
liability is no exception. The dominant narrative, constructed by the critics of
limited liability, emphasizes the arbitrariness of the doctrine’s application to
corporate torts while acknowledging, at least implicitly, the teleological charac-
ter of the movement to provide shareholders with limited liability in contract
claims. The central theme of this narrative is that there may have been some
wisdom in providing limited liability in the case of contract claims, but not tort
claims.
Narrative can be used to attack the status quo or to preserve it. Though the
critics of limited liability would argue that their narrative suggests the need for a
new rule, narratives are just as often used to entrench current institutions. No
one understands the entrenching effects of narrative better than the legal histo-
rian of the civil rights movement. Civil rights advocates, both in print and in
136. There has also been empirical work on the subject. See, e.g., Thompson, supra note 55, at
1068–70 (explaining that courts pierce the corporate veil less often in tort cases than in contract cases).
137. Holmes, supra note 1, at 469.
138. But see Richard A. Posner, Past-Dependency, Pragmatism, and Critique of History in Adjudica-
tion and Legal Scholarship, 67 U. CHI. L. REV. 573, 583–88 (2000) (presenting a critical perspective on
the value of historical argumentation in legal scholarship).
139. For a more general critique of evolutionary narrative in legal scholarship, particularly in law
and economics scholarship, see Mark J. Roe, Chaos and Evolution in Law and Economics, 109 HARV.
L. REV. 641, 643–58 (1996) (suggesting new paradigms to explain the development of rules).
140. Robert M. Cover, Nomos and Narrative, 97 HARV. L. REV. 4, 4 (1983); see Robin West,
Jurisprudence as Narrative: An Aesthetic Analysis of Modern Legal History, 60 N.Y.U. L. REV. 145,
158–83 (1985) (arguing that legal theories generally correspond to four literary traditions); see also
Richard Delgado, Storytelling for Oppositionists and Others: A Plea for Narrative, 87 MICH. L. REV.
2411, 2415–16 (1989).
court, have long run up against dominant, entrenching narratives.141 To under-

mine both the dominant status and jurisprudential effects of such narratives,
critical theorists began to tell their own stories. Some narratives (or counter-
narratives) are general, providing overarching accounts about the development
of a particular rule or institution,142 while others are more focused, chronicling
the inequitable effects of rules and institutions in specific cases.143 This particu-
lar narrative’s purpose is not to change the current rule, but to provide another
story for those who wish to preserve it.
Beyond supporting the preservation of the current rule, the new narrative can
enrich the present debate on limited liability. On one side, legal economists
might find it helpful to attempt to correlate this account of the development of
the doctrine with positive economic theories of limited liability.144 On the other
side, critics and reformers should try to discern whether state legislatures
attempted to provide the ability to get around limited liability to both tort and
contract plaintiffs or, as the majority of courts have held, only to the latter. Even
if this line of inquiry does not contradict the early judicial interpretations of the
statutes, uncovering the history of the doctrine may reveal inequities in its
application. These historical inequities, combined with the current problems
perceived by critics, could be used to make a more forceful argument against
the doctrine’s application to corporate torts.145 The preliminary examination
presented here has yielded interesting results. Surely, further examination can
yield more.
The historical theory proposed here is not without its limits. As Justice
Holmes suggests, neither the common law nor common sense compel the
conclusion that a particular doctrine should remain in place simply because of
its historical roots, however deep those roots may be.146 But exposing those
roots does create an additional burden for those seeking to reform or eliminate
the doctrine. Recall Justice Holmes’s colorful metaphor:
141. Catharine A. MacKinnon, Law’s Stories as Reality and Politics, in LAW’S STORIES: NARRATIVE
AND RHETORIC IN THE LAW 232, 235 (Peter Brooks & Paul Gewirtz eds., 1996) (“Dominant narratives are
not called stories. They are called reality.”).
142. See, e.g., Robert Cover, The Origins of Judicial Activism in the Protection of Minorities, 91
YALE L.J. 1287, 1297–1315 (1982) (judicial review).
143. See, e.g., Susan Estrich, Rape, 95 YALE L.J. 1087, 1087–90 (1986) (chronicling the author’s
own experience as a rape victim); Mumia Abu-Jamal, Teetering on the Brink: Between Death and Life,
100 YALE L.J. 993, 994–98 (1991) (describing life on death row).
144. See generally WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT
LAW 1–28 (1987) (articulating the differences between positive and normative economic theories of
law).
145. Such an argument would not be unprecedented. At least one legal historian has argued that the
early justifications for limited liability are no longer persuasive. See Mark, supra note 9, at 184
(“Limited liability . . . remains in place even if the rationales for its creation have long since been
superseded by other legal and market protections. Rationales for its continued existence can be, and are,
therefore markedly different from explanations for the existence of the doctrine.”).
146. See Holmes, supra note 1, at 469.
When you get the dragon out of his cave on to the plain and in the daylight,
you can count his teeth and claws, and see just what is his strength. But to get
him out is only the first step. The next is either to kill him, or to tame him and
make him a useful animal.147
My aim has been to take that first step. I leave it to the dragon-slayers and
dragon-tamers to take the next.
147. Id.

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NOTES

Shareholder Liability for Corporate Torts: A

I. CORPORATIONS AND LIMITED LIABILITY . . . . . . . . . . . . . . . . . . . . . 1088

II. A BRIEF HISTORY OF LIMITED LIABILITY . . . . . . . . . . . . . . . . . . . . 1091

III. TOWARD A NEW HISTORICAL ACCOUNT . . . . . . . . . . . . . . . . . . . . . 1104

fully that limited liability creates negative externalities, encouraging harmful

rate torts remains somewhat of a mystery and, to date, no comprehensive

I. CORPORATIONS AND LIMITED LIABILITY

shareholders of both publicly traded and closely held firms.12

17. These exceptions are discussed in detail in section II.C infra.

II. A BRIEF HISTORY OF LIMITED LIABILITY

A. LIMITED LIABILITY IN THE UNITED STATES: 1800–1849

Limited liability’s earliest American proponents justified the doctrine in

the shareholder protection provided by limited liability, the possibility of enor-

Men cannot be allowed to escape their obligations . . . for if they could, an

B. LIMITED LIABILITY IN ENGLAND: 1837–1858

In France, according to the opinions of some well-informed merchants,

moderate cost.”49 The following year, Slaney managed to convene another

C. USING LEGISLATIVE EXCEPTIONS TO MITIGATE LIMITED LIABILITY’S CONSEQUENCES

juridical persons, not natural ones—completely out of the picture.56

3. Double Liability and the Beginnings of Limited Liability for Torts

71. See supra section II.A.

D. CRITICS OF LIMITED LIABILITY AND PROPOSALS FOR REFORM

2. The Hansmann-Kraakman Proposal

99. Id. at 14 (Keating, J., dissenting).

The Hansmann-Kraakman proposal has attracted a good deal of attention,

III. TOWARD A NEW HISTORICAL ACCOUNT

A. THE NON-ARBITRARINESS OF THE RULE

B. A POSSIBLE EXPLANATION: LIABILITY EQUILIBRIUM

necessarily precedes limited liability, for if the corporation is not recognized as

131. See Tucker, supra note 57, at 67–68.

One is tempted to dismiss the significance of the historical development of

court, have long run up against dominant, entrenching narratives.141 To under-

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