WALKOVSZKY v.

CARLTON
(continued)
Courts will disregard the corporate
form or pierce the corporate veil
whenever necessary to prevent fraud
or to achieve equity.
Incorporation of a business is
permitted for the purpose of enabling
its proprietors to escape personal
liability, although the privilege is not
without limits.

WALKOVSZKY v. CARLTON
In determining whether liability should be extended to
reach assets beyond those belonging to the
corporation, courts will be guided by general rules of
agency.
Whenever anyone uses control of a corporation to
further his own rather than the corporation's business,
he will be responsible for the corporation's acts upon
principle of respondeat superior applicable even where
the agent is a natural person, and such liability extends
not only to the corporation's commercial dealings, but
to its negligent acts.
Although either the circumstance that a corporation is a
fragment of a larger corporate combine which actually
conducts a business, or that a corporation is a dummy
for its individual stockholders who in reality are carrying
on a business in their own personal capacities for
purely personal rather than corporate ends would
justify treating the corporation as an agent and piercing

WALKOVSZKY v. CARLTON
In ascertaining whether a complaint states a cause
of action, the entire pleading must be considered.
Complaint containing allegations that an individual
defendant organized, managed, dominated and
controlled a fragmented corporate entity and that
fleet ownership of taxicabs had been deliberately
split among many corporations was insufficient to
state a cause of action in tort against individual
defendant as a stockholder in such corporations,
where there was no allegation that individual
defendant was conducting business in his individual
capacity.
The corporation form could not be disregarded
merely because the assets of corporate owner of a
taxicab together with mandatory insurance coverage
on the taxicab which struck plaintiff were insufficient
to assure plaintiff recovery sought.

Morris v. New York State Dept.

of Taxation and Finance
Board member of corporation brought
action for judicial review of
determination of Tax Appeals Tribunal
regarding compensating use tax
assessment. The Supreme Court,
Appellate Division confirmed. Board
member appealed. The Court of
Appeals held that corporate veil
could not be pierced so as to hold
board member personally liable for
compensating use taxes allegedly

Morris v. New York State Dept.

of Taxation and Finance (contd)
Concept of "piercing the corporate veil" is limitation
on accepted principles that corporation exists
independently of its owners as separate legal entity,
that owners are normally not liable for debts of
corporation, and that it is perfectly legal to
incorporate for express purpose of limiting liability of
corporate owners.
Attempt of third party to pierce the corporate veil
does not constitute cause of action independent of
that against corporation; rather it is assertion of
facts and circumstances which will persuade court to
impose corporate obligations on its owners.
Although there are no definitive rules governing
circumstances when corporate veil may be pierced,
generally showing is required that: (1) owners
exercised complete domination of corporation in
respect to transaction attacked; and (2) such

Morris v. New York State Dept. of

Taxation and Finance (contd)
While complete domination of corporation is
key to piercing corporate veil, especially when
owners use corporation as mere device to
further personal rather than corporate
business, such domination, standing alone, is
not enough; some showing of wrongful or
unjust act toward plaintiff is required.
Party seeking to pierce corporate veil must
establish that owners, through their
domination, abused privilege of doing business
in corporate form to perpetrate wrong or
injustice against that party such that court in
equity will intervene.

Morris v. New York State Dept.

of Taxation and Finance (contd)
Even assuming that sole board member of closely held corporation
owned by board member's brother and nephew dominated
corporation, corporate veil could not be pierced so as to hold board
member personally liable for compensating use taxes allegedly
incurred by corporation; there was no evidence of intent to defraud
and thus board member did not misuse corporate form for personal
ends so as to commit wrong or injustice on taxing authorities, and
there was no corporate obligation to be imposed on board member
since corporation was entitled to nonresident exemption and thus
owed nothing.
Even if federal rule, recognizing that corporation may have separate
taxable identity, were to be applied to question of whether
corporate veil should be pierced so that sole board member of
closely held corporation could be held personally liable for
compensating use tax allegedly incurred by corporation, board
member would not be liable since corporation had legitimate
business purpose of owning and chartering boats, and there was no
evidence that corporation was set up as sham or for purpose of tax
avoidance.

UNITED STATES v. BESTFOODS

Compensation and Liability Act (CERCLA) against parent corporations
of chemical manufacturers for costs of cleaning up industrial waste
generated by chemical plant. The United States District Court for
the Western District of Michigan imposed operator liability on
parent corporations.
On appeal, the Court of Appeals for the Sixth Circuit reversed in part.
After grant of certiorari, the Supreme Court held that:
(1) when the corporate veil may be pierced, a parent
corporation may be charged with derivative CERCLA liability for its
subsidiary's actions;
(2) a participation-and-control test looking to the parent
corporation's supervision over subsidiary cannot be used to
identify operation of a facility resulting in direct parental liability
under CERCLA; and
(3) direct parental liability under CERCLA's operator provision is
not limited to a corporate parent's sole or joint venture operation
with subsidiary.
Judgment of Court of Appeals vacated and case remanded with

UNITED STATES v. BESTFOODS (contd)

It is a general principle of corporate law deeply
ingrained in our economic and legal systems that
a "parent corporation," so-called because of
control through ownership of another
corporation's stock, is not liable for the acts of its
subsidiaries.
The exercise of the control which stock ownership
gives to the stockholders will not create liability
on the part of parent corporation for acts of
subsidiary beyond the assets of the subsidiary,
with "control" including the election of directors,
the making of by-laws, and the doing of all other
acts incident to the legal status of stockholders.
Duplication of some or all of the directors or
executive officers will not create liability on part
of parent corporation for acts of subsidiary,
beyond the assets of the subsidiary.

UNITED STATES v. BESTFOODS (contd)

Corporate veil may be pierced and the shareholder
held liable for the corporation's conduct when, inter
alia, the corporate form would otherwise be misused
to accomplish certain wrongful purposes, most notably
fraud, on the shareholder's behalf.
CERCLA gives no indication that the entire corpus of
state corporation law is to be replaced simply because
a plaintiff's cause of action is based upon a federal
statute, and the failure of the statute to speak to a
matter as fundamental as the liability implications of
corporate ownership demands application of the rule
that in order to abrogate a common-law principle, the
statute must speak directly to the question addressed
by the common law.
When, but only when, the corporate veil may be
pierced, a parent corporation may be charged with
derivative CERCLA liability for its subsidiary's actions.

UNITED STATES v. BESTFOODS

(contd)
If a subsidiary that operates, but does not own, a
facility is so pervasively controlled by its parent for a
sufficiently improper purpose to warrant veil piercing,
the parent may be held derivatively liable under
CERCLA for the subsidiary's acts as an operator.
District court's focus on the relationship between
parent corporation which disputed direct CERCLA
operator liability and its subsidiary, rather than on the
parent and the subsidiary's polluting facility,
combined with the court's automatic attribution of the
actions of dual officers and directors to the corporate
parent, erroneously, even if unintentionally, treated
CERCLA as though it displaced or fundamentally
altered common law standards of limited liability.

UNITED STATES v. BESTFOODS (contd)

Although Bestfoods does not dramatically alter the course of
CERCLA liability, the decision does provide useful guidance both
for parent corporations as to the rule for piercing the corporate
veil wishing to retain oversight over their subsidiaries without
incurring the risk of CERCLA liability for operation of their
subsidiaries' separate facilities, and for those seeking to sue
parent corporations as "operators" of subsidiary facilities.
First, the decision focuses "operator" liability on separate tracks
for derivative and direct liability. For the most part, elements for
establishing derivative liability are no longer relevant in
evaluating a corporate parent's direct liability. Parent corporations
must still retain corporate formalities to avoid the risk of veil
piercing, but the elements for this analysis are no longer
inextricably intertwined with the elements for establishing direct
liability. Direct "operator liability cannot arise merely from a
corporate parent's stock ownership in its subsidiary or
representation on its subsidiary's board of directors.

UNITED STATES v. BESTFOODS

(contd)
Second, by implicitly adopting the "actual control" test for direct
"operator" liability, the Supreme Court dealt a blow to the less
stringent "authority to control" test used by a minority of courts. Thus,
from a practical standpoint, Bestfoods provides a greater modicum of
safety where a parent corporation has significant authority over its
subsidiary but chooses not to exert control over operation of the
subsidiary's facility. Conversely, for those seeking to hold parent
corporations liable for pollution at their subsidiaries' facilities,
Bestfoods appears to require evidence of actual involvement, rather
than merely evidence of the potential to exert control over the facility.
Third, by defining direct "operator" liability in terms of involvement in
"operations having to do with leakage or disposal or hazardous waste,
or decisions about compliance with environmental regulations,"
Bestfoods focuses on the parent corporation's involvement in actions
or decisions that lead to pollution at the facility.