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Chapter 26 Case #1 Facts * Dr. Steven A. Pottschmidt was employed by Dr. Thomas J. Klosterman. * Dr. Thomas J. Klosterman was doing business as a corporation named Thomas J. Klosterman, M. D. * Once Pottschmidt’s original employment agreement ended, he decided to bring a breach of contract suit against Klosterman. * Pottschmidt was alleging that Klosterman had not paid him the actual amount he owed him under the agreement. Within two months of the lawsuit, Klosterman created a new corporation called Klosterman Family Practice, Inc. * Klosterman Family Practice, Inc. did not employ anyone other than the staff of the first corporation Thomas J. Klosterman, M. D. * Also the new corporation Klosterman Family Practice, Inc. was in the same building as the first corporation was established. * The second corporation had not changed its phone number, had not purchased new equipment or furniture, and had not taken on any new patients. For a while, the companies had two separate bank accounts until the first companies bank accounts were terminated, and income bills were placed in the second companies account. * Potterschmidt wants the court to permit him to pierce the veil of both Thomas J. Klosterman, M. D. and Klosterman Family Practice, Inc. , to hold Dr. Klosterman directly liable for the money? Issue: Potterschmidt wants the court to permit him to pierce the veil of both Thomas J. Klosterman, M. D. and Klosterman Family Practice, Inc. to hold Dr. Klosterman directly liable for the money? Is there enough evidence here to permit the veil piercing request by the plaintiff? Analysis: Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold his principle of separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil. Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the plaintiff. The ruling is based on common law precedents.
In the US, different theories, most important “alter ego” or “instrumentality rule”, attempted to create a piercing standard. Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders.
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It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation. Conclusion: Yes Potterschmidt has enough evidence to permit a veil piercing. He can prove intermingling of assets of the corporation and manipulation of assets or liabilities to concentrate the assets or liabilities. Case #6 Facts- * Spence was a promoter in the incorporation of a new business. The new corporation had not yet been formed when he bought Huffman’s employment agency to serve as the nucleus of that corporation. * Eventually the corporation was formed but it never generated enough cash to pay Huffman for the employment agency. * Huffman sued Spence, attempting to hold him personally liable for the amount due. * Spence claimed the corporation was liable and that his personal assets were not a proper target of the suit. Issue: Is Spence Correct? Is the corporation liable? Are his assets not a proper arget of this suit? Analysis: Promoters are people who want to begin a new corporation or incorporate an existing business into a new business they do the actual day-to-day work involved in the incorporation process. Incorporators are the people who do the actually sign the articles of incorporation and submit them to the appropriate state officials. Often, promoters will enter contracts for the unborn corporation. A corporation is not bound by any promoters contracts unless it adapts those contracts.
The general rule is that where a corporation is contemplated but has not been organized at the time when a promoter makes a contract for the benefit of the corporation, he is personally liable on it, or incurs a personal liability with respect to the transaction in the absence of contrary agreement with the other contracting party. The promoter is likewise personally liable on or with respect to such transaction, in the absence of an express agreement otherwise, when he executes a contract in the name of the proposed corporation. Conclusion; In this case Spence is not correct. He is personally liable for the corporation.