holding that, to pierce the corporate veil under California law, the plaintiff must show “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist”; and (2) “that, if the acts are treated as those of the corporation alone, an inequitable result will follow.”
How later courts described this case
- holding that, to pierce the corporate veil under California law, the plaintiff must show “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist”; and (2) “that, if the acts are treated as those of the corporation alone, an inequitable result will follow.”
- finding that to pierce the corporate veil under California law a court must find “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.”
- stating that “conditions under which a corporate entity may be disregarded vary according to the circumstances in each case”
- finding unity of interest based on failure to issue stock and 6 undercapitalization
Written by the judges who cited it.
The opinion
CARTER, J.
I dissent.
As I read the majority opinion, it holds that the corporate entity may be disregarded where the corporation has not issued any stock and is undercapitalized.
As to the first point, it is difficult to see how there can be a liability imposed upon the stockholders for an obligation of the corporation when there are no stockholders to hold liable. The theory of piercing the corporate veil is based on the concept that the shareholders of the corporation are liable although the obligation was ostensibly incurred by the corporation because on one basis or another the shareholders and corporation will not be distinguished; the separation of the corporate entity from its stockholders will not be observed. This is to be distinguished from the case such as may exist here where the individuals interested in the corporation are, rather than the corporation, the ones who incurred the obligation or the obligation was incurred by both. In the instant case it is true that no stock was issued nor was a permit for issuance obtained from the Corporation Commissioner, yet the evidence is undisputed that it was agreed that defendant Resnick would own half the corporation and the Cowans the other half and the business was just getting started. With such facts present it is difficult to see why the mere failure to issue stock could he a factor in determining whether the corporate entity should be disregarded. In Geisenhoff v. Mabrey, 58 Cal.App.2d 481 [ 137 P.2d 36 ], relied upon by the majority, the trial court had found that the persons who *799 formed the corporation were doing business as joint venturers and as such incurred the obligation in the name of the corporation. That case seems to hold that individual liability may not be escaped by the formation of a corporation unless and until stock is issued. No authority is cited for that proposition and I find none which supports it. It would indeed be a novel theory in corporation law. As said on the subject by the District Court of Appeal in this case: “While the Corporations Code authorizes corporate directors to organize by the election of officers, yet, they may in the name of and in behalf of the corporation apply for a permit to issue its shares. Corporation Code, sections 25154, 25153. However, these sections do not prohibit the transaction of corporate business or the performance of any act by the corporation other than the issue or sale of securities. Prior to the enactment of the last cited sections, the courts had held that a partnership is not necessarily the result of an abortive attempt to organize a corporation or of a mere failure to issue corporate shares. Blanchard v. Kaull, 44 Cal. 440, 451 ; I. W. Williams Co. v. Leong Sue Ah Quin, 44 Cal.App. 296, 298 [ 186 P. 401 ], The idea that the organizers of a corporation would be penalized in any way for the transaction of corporate business prior to the issuance of its stock does not appear to have occurred to the authors of section 25154. The only penalties to accrue against directors with reference to the issuance of shares are those which result from the enforcement of the statutes for violations of the Corporate Securities Act. Corporation Code, section 25000 et seq. It makes felonious many acts of corporate officers in attempting to issue their company’s securities without first having obtained a permit so to do. But nowhere is it there suggested that a corporation is emasculated by virtue of its failure to procure a permit to issue its shares. Nor is there any authority for holding that the failure of directors to obtain a permit makes of them a copartnership or a joint adventure except the Geisenhoff decision, supra, which imposed a sanction without legislative authorization. On the contrary, the point was before this court in Vogel v. Bankers Bldg. Corp., 112 Cal.App.2d 160, 168 [ 245 P.2d 1069 ]. It was there held in effect that non-issuance of stock does not as a matter of law fasten upon promoters the status of joint adventurers; that the creation of that relationship depends upon the intent of the parties.” (Automotriz del Golfo de California v. Resnick (Cal.App.), 297 P.2d 109 ,114.)
The other factor relied upon by the majority is no more *800 persuasive either alone or in conjunction with the first factor. It is said that undercapitalization of a corporation is an indication that the corporate entity should be disregarded. Precisely what is meant by undercapitalization is not explained. The mere structure of the capital stock is not important. For the idea to be meaningful it must refer to the assets of the corporation—its financial standing. But the majority opinion mentions the “capital stock” authorization of $5,000 and compares that with a business of $100,000 to $150,000 per month. However, as stated in the majority opinion, the Cowans were advancing money to operate the business and as far as appears that was advanced to the corporation as its asset. The monthly business was gross sales and thus there was sufficient income to handle the business; that monthly income did not result in an expense or incurrence of obligations by the corporation. In fact, there is no evidence which reflects the financial status of the corporation other than its authorized capital stock which is no criterion of its financial health. Hence it follows that it was not shown that the assets were so inadequate that the corporate entity must be disregarded even if we assume that its financial worth is a factor in determining whether the entity is to be disregarded. Moreover, that assumption is of very doubtful validity because otherwise only well financed corporations may maintain their entity. In fact it may be said that every corporation which fails because it is unable to pay its obligations is underfinanced, but certainly that should not be a test of whether the entity should be disregarded. In a rapidly changing economy what might seem to be adequate financing today would be inadequate tomorrow, and it should be obvious that risky business ventures could not be undertaken by use of the corporate device without subjecting the participants to personal liability. I know of no such rule. What may appear hazardous by hindsight may not seem so at the outset. If the corporate entity may be disregarded in a ease such as this it will not be safe for anyone to use the corporate device for the promotion of a business enterprise even though he acts in the utmost good faith and pursues a course of unquestionable fair dealing.
In my opinion there is no factual basis here to justify piercing the corporate veil and disregarding the corporate entity. To justify such holding it should be made to appear that the corporate entity was employed as a mere shield for the purpose of evading obligations incurred for the benefit of *801 those who created the corporate entity. No such showing is made here.
For the foregoing reasons, I would reverse the judgment.
Appellants’ petition for a rehearing was denied February 27, 1957. Carter, J., was of the opinion that the petition should be granted.