Brunswick Corp. v. Waxman
599 F.2d 34 (1979)
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Rule of Law:
A court will generally not pierce the corporate veil to hold individuals personally liable for corporate debt when the plaintiff knowingly contracted with a no-asset corporation created explicitly to limit personal liability, and the plaintiff essentially received the benefit of its bargain.
Facts:
- In August 1960, Harry Waxman and Sydney Waxman formed the Waxman Construction Corporation (Construction Corp.) as a no-asset New York corporation.
- Construction Corp. was created solely to act as signatory and obligor on conditional sales agreements for Brunswick Corporation's bowling equipment for five new bowling alleys.
- The Waxmans operated the five bowling alleys through five separate partnerships, which owned the non-Brunswick equipment and fixtures.
- The Waxmans owned or leased the real property for the alleys but charged Construction Corp. no rent, and Construction Corp. charged no rent to the Waxmans for the use of the bowling equipment.
- Construction Corp.'s sole corporate activity involved transferring funds for installment payments to Brunswick; it held no stockholders' or directors' meetings, adopted no bylaws, issued no stock, and filed tax returns showing no income or assets.
- Brunswick investigated the potential revenues of the bowling alleys and knew or should have known that Construction Corp. was a dummy corporation created for limited purchase purposes, that the Waxmans owned the property, and that the Waxmans would personally conduct the bowling alley business.
- Due to a general decline in the bowling industry, Construction Corp. was unable to meet its payment obligations under the sales contracts with Brunswick.
- Brunswick repossessed and sold equipment from two defaulting successor corporations (Bruckner Lanes, Inc. and Pike Lanes, Inc.), resulting in substantial deficiencies.
Procedural Posture:
- Brunswick Corporation (Brunswick) brought a diversity action against Harry Waxman and Sydney Waxman in the United States District Court for the Eastern District of New York, seeking damages for a deficiency under conditional sales contracts.
- The case proceeded to a trial without a jury in the District Court.
- The District Court dismissed Brunswick's complaint and entered judgment in favor of the defendants.
- Brunswick Corporation appealed the District Court's order and judgment to the United States Court of Appeals for the Second Circuit.
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Issue:
Can a corporate veil be pierced to hold individuals personally liable for corporate debt when the plaintiff knowingly entered into contracts with a no-asset corporation, understanding that it was created solely to limit the individuals' personal liability, and the plaintiff effectively received what it bargained for?
Opinions:
Majority - Mulligan, Circuit Judge
No, the corporate veil cannot be pierced to hold Harry Waxman and Sydney Waxman personally liable for the deficiency. While acknowledging the complexity of New York law on piercing the corporate veil and disagreeing with the district court's strict requirement of fraud, the Court affirmed the dismissal based on the factual findings. Brunswick knowingly entered into contracts with a no-asset corporation created specifically to limit the Waxmans' personal liability. Brunswick was aware, or should have been aware, that the Construction Corp. was a 'corporate dummy' for purchase, that the Waxmans owned the property, and that they would personally operate the business. The court reasoned that Brunswick obtained precisely what it bargained for and did not contemplate the individual liability it now sought. Piercing the corporate veil in this instance would not achieve justice or equity but would instead thwart that end, thus respecting the creation of the dummy corporation to eliminate personal responsibility.
Analysis:
This case significantly contributes to the jurisprudence of corporate veil piercing by emphasizing an equitable approach over a rigid application of rules, particularly in New York. It clarifies that sophisticated creditors who knowingly contract with thinly capitalized or 'dummy' corporations established for liability limitation may be precluded from later piercing the corporate veil to hold individuals personally liable. The decision underscores the importance of a plaintiff's knowledge and expectations at the time of contracting, suggesting that a party cannot seek to undo the agreed-upon corporate structure simply because a business venture fails. This impacts future cases by compelling creditors to conduct thorough due diligence and to bargain explicitly for personal guarantees if individual liability is desired.
