Corporate Disregard and Successor Liability
By Christopher L. Thayer, Member (CThayer@L-H-S.com)
These materials are intended as an overview of the key Washington cases concerning corporate disregard, also often referred to as piercing the corporate veil, and the somewhat related concept of successor liability.
CORPORATE DISREGARD
1. Knowing participation
Johnson v. Harrigan Peach, 79 Wn. 2d 745, 489 P2d 923 (1971). Misrepresentations and breaches of warranties regarding a residential real estate development lead to personal liability for the owner/officer of company. An officer who takes no part in a tort committed by a corporation, is not liable, unless he “knowingly participated in, cooperated in the doing of, or directed that the acts be done.” Johnson, at 753. “Close control” over the direction and management of the company, can be a basis for inferring that the officer had knowledge of fraudulent conduct: “if they exercise such close control, direction and management of the corporation that the law as a matter of elemental justice ought to charge them with the knowledge of such fraud.” Johnson, at 754.
Grayson v. Nordic Construction, 92 Wn. 2d 548, 599 P.2d 1271 (1979). Residential contractor offered and advertised financing available for work to be performed, subsequently failed to complete work because unable to provide financing and left work only partially complete leaving house open to weather further damage. Owner of corporation held personally liable under the “knowing participation” standard: “[i]f a corporate officer participates in wrongful conduct or with knowledge approves of he conduct, then the officer, as well as the corporation, is liable for the penalties.” Grayson, at 554.
See also, State of Washington v. Ralph Williams NW Chrysler, 87 Wn. 2d 298, 553 P.2d 423 (1976). Unfair and deceptive acts and practices associated with car dealership which were implemented and/or approved by owner lead to personal liability.
2. Intentional use to violate or evade a duty
Morgan v. Burks, 93 Wn. 2d 580, 611 P.2d 751 (1980). Personal injury/tort action where plaintiff shot by president of corporation; where various fraudulent mortgages to family members were placed on corporate defendant’s property post-tort. Court ruled that post-tort activities may be considered. A corporation may be disregarded if the “corporation has been intentionally used to violate or evade a duty owed to another. . . .” Id., at 585 (citations omitted). Failure to disregard the entity “must aid the consummation of a fraud or wrong upon others.” Id., at 587. Here, the court found no “unjustified loss” and noted:
The tort-feasor and the tort victim take one another as they are. Plaintiff is not entitled to a solvent defendant, and cannot be allowed to create one by asserting disregard of the corporate entity when the activities, which admittedly otherwise might justify disregard, have had no effect on the plaintiff's ability to collect a judgment from the defendant corporation at the time the doctrine is asserted. Disregard assumes that unjustified loss would occur to the individual to whom the duty is owed if the entity were not disregarded.
Id., at 589-590
Norhawk Investments, Inc. v. Subway Sandwich Shops, Inc., 61 Wn. App. 395, 811 P.2d 221 (1991). Two-part analysis to determine whether to disregard corporate entity: (1) the corporate form was “intentionally used to violate or evade a duty,” and (2) disregard is “necessary and required to prevent unjustified loss to the injured party.” Id., at 398-399.
Meisel v. M&N Modern Hydraulic Press Company, 97 Wn. 2d 403, 410, 645 P.2d 689 (1982). The first step typically involves “fraud, misrepresentation, or some form of manipulation of the corporation to the stockholder’s benefit and creditor’s detriment.” Id., at 410. The second step requires the establishment of a causal link between the intentional misconduct and the harm which the disregard seeks to relieve. Id. In other words, the “wrongful corporate activities must actually harm the party seeking relief so that disregard [of the corporate form] is necessary.” Id., at 410.
3. Commingling assets
McCombs Constr. v. Barnes, 32 Wn. App. 70, 645 P.2d 1131 (1982). Corporate officer used company funds to pay for a personal residence, then defaulted on amounts owing to a contractor. Corporate officers must keep their personal dealings separate from corporate business. When there is such commingling between the principals and the corporation that separateness ceases to exist, courts have pierced the corporate veil and imposed personal liability on the commingling shareholder. Id., at 76. Not only can commingling of personal assets with business assets enable a court to assess personal liability, commingling of business assets between separate businesses can enable liability of one business being assessed against both of the commingled businesses.
Norhawk Investments v. Subway Sandwiches, 61 Wn. App. 395, 811 P.2d 221 (1991). Commingling of assets in and of itself does not form a basis for disregarding the corporate form unless:
T]here must be such a commingling of property rights or interests as to render it apparent that they are intended to function as one, and, further, to regard them as separate would aid the consummation of a fraud or wrong upon others.
Id., at 401 (citations omitted).
4. Alter ego
Burns v. Norwesco Marine, Inc., 13 Wn. App. 414, 535 P 2d (1975). Owners of company (father – son, where father was an attorney) held assets of corporation in their own name and “conducted the affairs as a personal enterprise.” Where corporate entity has been disregarded by principals “so that there is such unity of ownership and interest that the separateness of the corporation has ceased to exist.” Id., at 418 (citations omitted).
Truckweld-Equipment Co., Inc. v. Olson, 26 Wn. App. 638, 618 P.2d 1017 (1980). Despite lack of corporate minutes, resolutions, tax returns, stock certificates and other corporate formalities, court declined to find personal liability noting that there was not causal relationship between the lack of documentation and the harm: “we cannot see how [plaintiff’s] position would be any different had [defendant corporation] meticulously documented its corporate actions.” Id., at 644.
5. Inadequate capitalization
Truckweld-Equipment Co., Inc. v. Olson, 26 Wn. App. 638, 618 P.2d 1017 (1980). In and of itself, inadequate capitalization is not generally sufficient cause to pierce the corporate veil: “we know of no rule of law requiring a corporate stockholder to commit additional private funds to an already faltering corporation.” Id., at 645 (citation omitted).
See also, Meisel - “Separate corporate entities should not be disregarded solely because one cannot meet its obligations.” Id., at 411.
SUCCESSOR LIABILITY
Hall v. Armstrong, et al., 103 Wn.2d 258, 261-262, 692 P.2d 787 (1984). There are four bases for finding successor liability for a successor company (where one business purchases the assets of another). Those four exceptions are generally described as follows: “(1) the purchaser expressly or impliedly agrees to assume liability; (2) the purchaser is a de facto merger or consolidation, (3) the purchaser is a mere continuation of the seller or (4) the transfer of assets is for the fraudulent purpose of escaping liability.” Id., at 262.
(a) de facto merger or consolidation theory
Fox et al. v. Sunmaster Products, Inc., et al., 63 Wn. App. 561, 570, 821 P.2d 502 (1991). A de facto mergers can be found “where a seller corporation continues its business existence as an absorbed part of the buyer and the seller’s shareholders or officers continue their interest in the business after the dissolution of the selling corporate entity.”
Uni-Com Northwest, Ltd. V. Argus Publishing Co., 47 Wn. App. 787, 737 P.2d 304, review denied, 108 Wn. 2d 1032 (1987). A de facto merger “only occurs when the consideration flowing to the selling corporation is shares of the purchasing corporation’s stock, as opposed to cash.” Id., at 802.
(b) “mere continuation” theory
Gall Landau Young Construction Co., Inc., v. Hedreen, et al., 63 Wn. App. 91, 97, 816 P.2d 762 (1991). Mere continuation is comprised of two required elements and a third implied element, “[1] A common identity of the officers, directors, and stockholders in the selling and purchasing companies…[2] sufficiency of the consideration running to the seller corporation in light of the assets being sold…[and 3] a transfer of all or substantially all of the predecessor corporation’s assets.”
The purpose of mere continuation theory is to render ineffective a transfer of the debtor corporation’s assets when those assets could have been used to satisfy the corporation’s debt. In the case at bar, it is difficult to conceive of how the management contracts could have satisfied [plainiff’s] debts when the profits would be gleaned only in the future…
Id. at 98 (Emphasis added).
(c) “fraudulent purpose”theory
Eagle Pacific Ins. Co. v. Christensen Motion Yacht Corp., et. al., 135 Wn.2d 896, 959 P.2d 1052 (1998). “Transferring assets to another corporation to hinder or delay creditors is by definition a fraudulent transfer.” Id., at 909.
Product Liability – product line rule
One final case that deals with successor liability relates only to product liability cases where a special exception has been developed. In Martin v. Abbott Laboratories, 102 Wn. 2d 581, 689 P.2d 368 (1983), the Washington Supreme Court specifically recognized the “product line” criteria for successor liability, based upon an evaluation of 3 considerations:
(1) to determine whether the transferee has acquired substantially all the transferor's assets, leaving no more than a mere corporate shell; (2) to determine whether the transferee is holding itself out to the general public as a continuation of the transferor by producing the same product line under a similar name; and (3) to determine whether the transferee is benefiting from the goodwill of the transferor.
Id., 614. The court noted that “imposition of liability is properly based on the successor’s receipt of a benefit from the predecessor’s product line.” Id.
