Kirno Hill Corporation v. Thomas J. Holt, et al.

United States Court of Appeals, Second Circuit
618 F.2d 982 (1980)

ELI5:

Rule of Law:

A sole shareholder is not personally liable for the debts of their corporation unless they used the corporation to perpetrate a fraud or so dominated the corporate form that the corporation was merely transacting the shareholder's personal business rather than its own.

Facts:

In July 1975, Thomas Holt engaged Jon Pendleton, president of Waterside Ocean Navigation, Inc. (Waterside-New York), to find a vessel for charter.
On August 11, 1975, Holt incorporated Waterside Ocean Navigation, Inc. (Waterside-Pennsylvania) for the purpose of chartering vessels.
On August 22, 1975, Kirno Hill Corporation signed a charter party for its vessel, the M.S. Selene, with Waterside-New York.
Waterside-Pennsylvania, not Waterside-New York, made the initial charter-hire payments to Kirno Hill.
Waterside-Pennsylvania also received the payments made for the carriage of goods aboard the Selene.
The charter-hire payment due on December 9, 1975, was not made.
When payment was demanded, Pendleton of Waterside-New York stated that his company had only acted as an agent for Holt's corporation, Waterside-Pennsylvania, and that Kirno Hill should look to Holt for the money.
At the time of contracting, Kirno Hill did not know of the existence of Holt, Waterside-Pennsylvania, or Holt's other companies.

Procedural Posture:

Kirno Hill Corporation filed a complaint against Thomas Holt, Holt Hauling & Warehousing Systems, Inc., and Holt Marine Terminal, Inc. in the U.S. District Court for the Southern District of New York, invoking the court's admiralty jurisdiction.
After a trial, the district court entered a judgment holding Thomas Holt personally liable to Kirno Hill.
The district court also found that Holt Hauling and Holt Marine were not liable to Kirno Hill.
Holt appealed to the U.S. Court of Appeals for the Second Circuit, challenging the finding of his personal liability.
Kirno Hill cross-appealed, challenging the finding that Holt Hauling and Holt Marine were not liable.

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Issue:

Is the sole shareholder of a corporation personally liable for a charter party agreement entered into by an agent for the corporation, when the other party to the contract was unaware of the corporation or the shareholder's existence?

Opinions:

Majority - Per Curiam

No, the sole shareholder is not personally liable. Federal maritime law embraces agency principles, including that an undisclosed principal is bound by an agent's contracts, but the evidence shows that Waterside-Pennsylvania, not Thomas Holt personally, was the undisclosed principal. Waterside-Pennsylvania obtained financing for the charter, made the charter payments, and received the revenues. Furthermore, the corporate veil of Waterside-Pennsylvania cannot be pierced to hold Holt liable. To pierce the veil, a plaintiff must show the shareholder either used the corporation to perpetrate a fraud or so dominated it that it was merely transacting the shareholder's personal business. Kirno Hill presented no evidence of fraud, and since Holt formed Waterside-Pennsylvania for the specific purpose of chartering vessels before this transaction occurred, the corporation was conducting its own business, not Holt's personal business. The fact that an individual incorporates to avoid personal liability is a legitimate purpose of the corporate form.

Analysis:

This decision reinforces the strength of the corporate veil in federal maritime law, setting a high bar for holding a shareholder personally liable for corporate debts. It clarifies that sole ownership and the intent to limit personal liability are insufficient grounds for piercing the corporate veil. The case serves as a clear example of the distinction between a corporation acting as an undisclosed principal (for which the corporation is liable) and an individual shareholder acting as the principal. It solidifies the two-part test for piercing the veil—fraud or alter ego—requiring specific evidence beyond mere ownership and control.

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