Hanewald v. Bryan's Inc.
429 N.W. 2d 414, 1988 WL 96428, 1988 N.D. LEXIS 250 (1988)
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Rule of Law:
Shareholders are personally liable to corporate creditors for the corporation's debts up to the full consideration for which their shares were issued if that consideration has not been paid to the corporation.
Facts:
- On July 19, 1984, Keith and Joan Bryan incorporated Bryan's, Inc. to operate a retail clothing store.
- The corporation's articles authorized 100 shares of stock with a par value of $1,000 per share.
- Bryan's, Inc. issued 50 shares to Keith Bryan and 50 shares to Joan Bryan.
- Neither Keith nor Joan Bryan paid any money, property, labor, or services to Bryan's, Inc. in exchange for their stock.
- On August 30, 1984, Bryan's, Inc. purchased a store from Harold E. Hanewald, paying in part with a $5,000 promissory note.
- Keith and Joan Bryan loaned the corporation $10,000 for operating costs.
- After four months, the business failed, and the Bryans decided to close the store.
- Bryan's, Inc. repaid the $10,000 loan to the Bryans but failed to pay the $5,000 promissory note owed to Hanewald.
Procedural Posture:
- Harold E. Hanewald sued Bryan's, Inc. and the individual Bryans in a state trial court for breach of a lease and a promissory note.
- The trial court, after a non-jury trial, entered a judgment of $38,600 against the corporation, Bryan's, Inc.
- The trial court ruled that the individual defendants, Keith, Joan, and George Bryan, were not personally liable for the corporation's judgment.
- Hanewald (appellant) appealed the trial court's decision refusing to impose personal liability to the Supreme Court of North Dakota.
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Issue:
Are shareholders who fail to pay any consideration to the corporation for their issued stock personally liable for the corporation's debts up to the unpaid value of their shares?
Opinions:
Majority - Meschke, Justice
Yes. Shareholders who fail to pay consideration to the corporation for their stock are personally liable for corporate debts up to the amount of that unpaid consideration. The limited liability protection afforded by the corporate form is not absolute; it is conditioned upon shareholders making their initial capital investments. A North Dakota statute explicitly obligates shareholders to pay the corporation the full consideration for their shares. The trial court found that the Bryans paid nothing for their stock, which had a total par value of $100,000. Their failure to pay for these shares constitutes a breach of their statutory obligation, making them directly liable to corporate creditors like Hanewald for debts up to the unpaid amount. The $10,000 loan the Bryans made to the corporation does not count as a capital contribution because it was a debt owed by the corporation to the shareholders, which was in fact repaid, rather than an asset contributed to the corporation.
Analysis:
This case solidifies the principle that limited shareholder liability is a privilege contingent upon proper capitalization, not an automatic right upon incorporation. It provides creditors with a direct statutory basis for piercing the corporate veil when shareholders have not paid for their stock, which is often a more straightforward claim than common law alter ego or fraud theories. The decision serves as a crucial reminder for founders of closely-held corporations that observing fundamental corporate formalities, particularly paying for shares, is essential to maintain the corporate shield. It distinguishes between a loan to the corporation and a capital contribution, clarifying that repaid shareholder loans cannot be retroactively characterized as the required payment for shares.
