Bartle v. Home Owners Cooperative, Inc.
309 N.Y. 103, 127 N.E.2d 832 (1955)
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Rule of Law:
Courts will pierce the corporate veil to hold a parent corporation liable for the debts of its subsidiary only when the parent has used its control to commit fraud or a wrong that causes injury to creditors. Mere control and domination of a subsidiary by a parent corporation is not, by itself, sufficient to justify piercing the corporate veil.
Facts:
- A co-operative corporation (Defendant) was organized by veterans to provide low-cost housing for its members.
- Unable to secure a contractor, the Defendant formed Westerlea Builders, Inc. (Westerlea), a wholly-owned subsidiary, to construct the housing.
- Defendant provided Westerlea with initial capital of $25,000.
- As building costs exceeded expectations, Westerlea faced financial difficulties.
- Defendant contributed an additional $25,639.38 to Westerlea to cover costs.
- Throughout this period, the outward indicia of two separate corporations were maintained, and creditors were not misled about Westerlea's separate identity.
- On January 24, 1949, Westerlea's creditors entered into an extension agreement and took over construction responsibilities due to Westerlea's financial state.
Procedural Posture:
- The trustee in bankruptcy for Westerlea Builders, Inc. sued its parent corporation (Defendant) in a New York trial court, seeking to hold the defendant liable for Westerlea's debts.
- The trial court found in favor of the defendant and refused to pierce the corporate veil.
- The plaintiff appealed to the Appellate Division of the Supreme Court of New York, an intermediate appellate court.
- The Appellate Division unanimously affirmed the trial court's judgment.
- The plaintiff (appellant) appealed the decision to the Court of Appeals of New York, the state's highest court.
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Issue:
Does a parent corporation that exercises complete control over its wholly-owned subsidiary become liable for the subsidiary's debts when there is no evidence of fraud, misrepresentation, or that the parent used its control to cause injury to the subsidiary's creditors?
Opinions:
Majority - Froessel, J.
No. A parent corporation is not liable for the debts of its wholly-owned subsidiary simply because it controls the subsidiary's affairs. The doctrine of piercing the corporate veil is an equitable remedy invoked to prevent fraud or injustice, and absent such misconduct, the corporate form will be respected. The law expressly permits incorporation for the purpose of limiting liability. Here, the trial court found no fraud, misrepresentation, or any act by the defendant that caused injury to Westerlea's creditors, such as the depletion of assets. The creditors were not misled and were aware they were dealing with Westerlea as a distinct entity. Therefore, there is no basis to disregard the corporate form and hold the defendant liable.
Dissenting - Van Voorhis, J.
Yes. The parent corporation should be held liable because it operated the subsidiary as a mere agent for the parent's own purposes and structured it in a way that it could never be profitable, thereby shifting all business risk to the creditors. Westerlea was organized not to make a profit, but to build houses at cost for the defendant's members. This arrangement ensured that any financial success benefited the defendant's shareholders, while any financial difficulty or failure would inevitably lead to insolvency at the creditors' expense. Because Westerlea was completely dominated and systematically deprived of the ability to earn a profit for the sole benefit of its parent, it acted as a mere agent, and the parent, as the principal, should be liable for its debts.
Analysis:
This decision reinforces the strong presumption in favor of corporate separateness and sets a high bar for piercing the corporate veil in a parent-subsidiary context. It clarifies that complete ownership and control are, by themselves, insufficient grounds; a plaintiff must demonstrate that the parent corporation used that control to perpetrate a fraud or injustice. The ruling emphasizes that undercapitalization or a business model that proves unprofitable is not enough to disregard the corporate form, requiring instead an affirmative showing of wrongdoing or inequitable conduct directed at the creditors.
