Consumer Co-op of Walworth County v. Olsen

Supreme Court of Wisconsin · Corporations

CorporationsPiercing the corporate veilClose corporationsShareholder liabilityUndercapitalizationWaiverEquitable estoppellimited liability

Facts

ECO was incorporated in 1980 with initial capitalization of $7,018.25, issued stock, elected officers, and conducted business in the corporate name; there was no evidence that corporate funds were used to pay personal expenses. Although formal records existed for only two board meetings, Chris and Jack Olsen testified that the board met informally four or five times each week, and personal assets were used to subsidize ECO through unprofitable leases and foregone salary and rent. Consumer’s Co-op extended ECO open-account credit for bulk fuel, and beginning in mid-1983 ECO became delinquent, yet Consumer’s Co-op continued extending credit through March 1984 despite its own policy to terminate credit after sixty days and statements saying no additional credit would be extended until the account was current. Consumer’s Co-op sought to hold Chris and Jack Olsen personally liable on the theory that ECO was undercapitalized and controlled by Chris Olsen.

Issue

Whether the corporate veil of ECO could be pierced to hold its shareholders personally liable for ECO’s debt to Consumer’s Co-op. More specifically, the court considered whether undercapitalization can support veil piercing in a contract case without fraud, whether undercapitalization alone is sufficient, how capitalization is measured, and whether Consumer’s Co-op waived or was estopped from asserting subsequent undercapitalization.

Rule

Limited shareholder liability is the rule, and the corporate veil may be pierced only when the corporation is so organized, controlled, and conducted that it has no separate existence of its own and the corporate form is used to evade an obligation, gain an unjust advantage, or commit an injustice. Under the instrumentality doctrine, the plaintiff must show: (1) complete domination of finances, policy, and business practice as to the transaction so the corporation had no separate mind, will, or existence; (2) use of that control to commit fraud, wrong, or a dishonest and unjust act in contravention of the plaintiff’s rights; and (3) proximate causation of the injury or unjust loss. Undercapitalization is relevant in both tort and contract cases and may help establish the injustice element, but it is not independently sufficient; there must also be evidence of failure to follow corporate formalities or other pervasive control. Adequacy of capital is measured at formation, unless the corporation later distinctly changes the nature or magnitude of its business, and a creditor may waive or be estopped from asserting subsequent undercapitalization by knowingly continuing to extend credit without demanding investigation or a personal guarantee.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Ag Supply, Inc., a closely held corporation in Cheyenne, Wyoming, was formed with modest but facially reasonable capital for a one-truck seed-delivery business. Its president, Aaron Pike, later made all major decisions himself, but the company issued stock, kept a separate bank account, billed customers only in the corporate name, and there is no evidence he used corporate money for personal expenses. A supplier seeks to hold Aaron personally liable after the corporation defaults on a fuel contract, arguing that Aaron controlled everything and the result is unfair.

Which is the strongest argument against piercing the corporate veil?

Explanation. The majority adopted the instrumentality test requiring complete domination, use of that control to commit a wrong or unjust act, and proximate causation. Limited liability remains the rule. Mere managerial control, especially in a close corporation that still issues stock, keeps separate accounts, and operates in the corporate name, does not alone justify piercing. (Derived from Consumer Co-op of Walworth County v. Olsen (n.d.).)