Consumer's Co-op of Walworth County v. Olsen

Supreme Court of Wisconsin · Corporations

CorporationsPiercing the corporate veilClose corporationsUndercapitalizationWaiverEquitable estoppellimited liabilitycorporate formalities

Facts

ECO was incorporated in 1980 with initial capitalization of $7,018.25, and Chris Olsen owned a majority of the issued stock; stock was issued, officers were elected, board meetings were frequently held though not regularly recorded, and business was conducted in ECO's name. Consumer's Co-op had originally extended credit on Chris Olsen's personal account, but after incorporation the account was changed to ECO's corporate account, and there was testimony that no personal charges were made on it. ECO later became financially distressed, but there was no evidence that corporate funds were used for personal expenses; instead, personal assets were used to subsidize the corporation through unprofitable leases and foregone salaries and rent. Even after ECO became delinquent in 1983 and despite its own policy and statements saying additional credit could not be extended until the account was current, Consumer's Co-op continued extending credit to ECO through March 21, 1984, without requesting a personal guarantee.

Issue

Whether the corporate veil could be pierced to hold Chris Olsen personally liable for ECO's debt to Consumer's Co-op based on control, failure to observe formalities, and undercapitalization in a contract case. Also, whether Consumer's Co-op could rely on subsequent undercapitalization after continuing to extend credit despite knowing ECO was financially failing.

Rule

Limited shareholder liability is the rule, and piercing the corporate veil is an equitable exception that requires more than undercapitalization alone. Under the instrumentality or alter ego doctrine, the plaintiff must show: (1) complete domination of finances, policy, and business practice so the corporation had no separate mind, will, or existence as to the challenged transaction; (2) that such control was used to commit fraud or wrong, violate a legal duty, or commit a dishonest or unjust act in contravention of the plaintiff's rights; and (3) that the control and breach of duty proximately caused the injury or unjust loss. Inadequate capitalization is a significant but not independently sufficient factor; in addition, there must be failure to follow corporate formalities or other evidence of pervasive control. Capital adequacy is measured at formation, except when the corporation distinctly changes the nature or magnitude of its business, and a contract creditor may waive or be estopped from asserting subsequent undercapitalization by continuing to extend credit with knowledge of financial distress.

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

In Madison, Avery Lott owns 90% of Driftline Repair, Inc., a small machine-service company. The corporation issued stock, elected officers, kept a separate bank account, and invoiced customers in its own name, but Avery made nearly every business decision himself. After the company defaulted on a supply contract, the supplier seeks to hold Avery personally liable based solely on his dominant control.

Under the majority rule, which is the strongest analysis?

Explanation. The majority treated limited liability as the rule and required all three instrumentality elements: complete domination as to the challenged transaction, use of that control to commit a fraud, wrong, or unjust act, and proximate causation of the loss. Mere majority ownership or managerial dominance, especially in a close corporation, is not enough by itself. (Derived from Consumer's Co-op of Walworth County v. Olsen (n.d.).)