Zaist v. Olson

Cotter, J.

(dissenting). I eannot agree with the conclusion of the majority that the “only reasonable meaning to attach to the transactions spread upon this record is that East Haven undertook no obligation of its own to the plaintiffs, [and] was financially unable to cope with the actual transaction.” The East Haven Homes, Inc., was organized as a general contractor in 1943. Thereafter, *581 and over a period of several years, it bnilt a large number of individual homes, a fifty-seven unit apartment house, a bank building, and several other commercial structures. In 1954, eleven years after it had been formed, East Haven Homes engaged the plaintiffs to do certain clearing work. From then until June of 1959, it paid them $169,652.66 for services rendered. East Haven Homes then apparently became insolvent, with an unpaid balance of $23,100 on this account. These facts, together with others recited in the majority opinion, support a conclusion that Martin Olson used his corporations to engage in speculative business undertakings, that these corporations borrowed funds, exchanged properties and undertook obligations in a free and easy fashion, and even that Olson structured a corporate network with a weak capital foundation, but they do not reasonably support the conclusion, made for the first time in this court, that “control [by Olson] was used to perpetrate an unjust act in contravention of the plaintiffs’ rights.” Indeed, it appears equally possible that Olson’s entire corporate empire went into eclipse in 1960 and that East Haven Homes was merely a victim of this general financial decline. In my opinion, the record does not justify overriding the principle of a shareholder’s limited liability.

The practice of disregarding the corporate entity should be undertaken with great caution. This principle is fully applicable in situations where the corporation is dominated by a single individual. 1 Hoffman Wall Paper Co. v. Hartford, 114 Conn. *582 531, 535 , 159 A. 346 ; Miller Lumber Corporation v. Miller, 225 Ore. 427, 436 , 357 P.2d 503 ; see note, 100 A.L.R.2d 385 . Persons dealing with snch corporations may refuse to contract without a personal guarantee of payment from the principal. See Wagner v. Manufacturers’ Trust Co., 237 App. Div. 175, 178 , 261 N.Y.S. 136 , aff’d, 261 N.Y. 699 , 185 N.E. 799 . The plaintiffs in the present case, however, elected to deal with the corporation and in fact were paid substantial sums by the corporation over a long period of time.

The underlying rationale behind the statutory granting of stockholder immunity from corporate debts has been stated as follows: “Obviously the useful and beneficial role of the corporate concept in the economic and business affairs of the modern day world would be destroyed if the rule of freedom from individual liability for corporate obligations did not obtain. The protection of limited liability for venture or investment capital is essential to the efficient operation of a system of free enterprise. Such protection from individual liability encourages and promotes business, commerce, manufacturing and industry which provides employment, creates sales of goods and commodities and adds to the nation’s economic and financial growth, stability and prosperity.” Johnson v. Kinchen, 160 So. 2d 296, 299 (La.). The majority opinion in the present case, although not directly undermining this principle, casts a doubtful shadow in its direction.

The new rule which the majority has adopted as the test of the personal liability of a corporation’s dominant shareholder is a broad one, will be difficult to apply realistically and is not warranted by the record in the present case. Close corporations, although individual entities from a legal stand *583 point, are normally no more than vehicles for the goals and motives of their principals. The law is not necessarily advanced by adopting a rule which includes a presumption that this kind of corporation may have a “separate mind, will, or existence of its own.” Under the circumstances of this case, I would reaffirm the “fraudulent or illegal purposes” test enunciated in such cases as Humphrey v. Argraves, 145 Conn. 350, 354 , 143 A.2d 432 ; Kulukundis v. Dean Stores Holding Co., 132 Conn. 685, 689 , 47 A.2d 183 ; and Hoffman Wall Paper Co. v. Hartford, 114 Conn. 531, 534 , 159 A. 346 .

“That a ‘one man’ corporation is a valid jural person was decided by the House of Lords in 1897, and has not been doubted ever since.” United States v. Weissman, 219 F.2d 837, 838 (2d Cir.) (L. Hand, J.).