Minton v. Cavaney
56 Cal. 2d 576, 15 Cal. Rptr. 641, 364 P.2d 473 (1961)
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Rule of Law:
An individual may be held personally liable for the obligations of a corporation under the alter ego doctrine when the corporation is severely undercapitalized and the individual, as an equitable owner and director, actively participates in the conduct of its affairs.
Facts:
- On March 8, 1954, the Seminole Hot Springs Corporation (Seminole) was incorporated in California.
- Cavaney, an attorney, formed the corporation for clients Kraft and Wettrick and served as a director, secretary, and treasurer.
- Seminole leased and operated a public swimming pool but never had any substantial assets and was never adequately capitalized; no shares of stock were ever issued.
- Cavaney was slated to receive one-third of the corporation's shares, and for a time, Seminole used his office to keep records and receive mail.
- On June 24, 1954, the plaintiffs' daughter drowned in the swimming pool operated by Seminole.
- The lease for the pool was eventually forfeited because Seminole failed to pay the rent.
Procedural Posture:
- Plaintiffs sued Seminole Hot Springs Corporation in a California trial court for the wrongful death of their daughter.
- The trial court entered a judgment for $10,000 in favor of the plaintiffs against Seminole.
- The judgment against Seminole remained unsatisfied.
- Plaintiffs brought a new action in the trial court against Cavaney personally to hold him liable for the judgment against Seminole.
- The trial court entered a judgment for $10,000 in favor of the plaintiffs against Cavaney's estate.
- The defendant, the executrix of Cavaney's estate, appealed the judgment to the Supreme Court of California.
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Issue:
Can an individual officer, director, and prospective shareholder be held personally liable for a corporation's tort debt under the alter ego doctrine if the corporation was inadequately capitalized and he actively participated in the conduct of its business?
Opinions:
Majority - Traynor, J.
Yes, an individual can be held personally liable under these circumstances. The corporate entity may be disregarded when there is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and an inequitable result will follow if the acts are treated as those of the corporation alone. Here, the evidence established that Seminole was severely undercapitalized, with capital that was 'trifling compared with the business to be done and the risks of loss.' Cavaney was not merely a passive attorney; he was a director and officer who was an equitable owner and actively participated in the business. A person cannot accept the office of director and then attempt to divorce themselves from the statutory duties and responsibilities of that office. However, the judgment must be reversed because Cavaney was not a party to the original action against the corporation and is not bound by that judgment; he must be given the opportunity to relitigate the issues of Seminole's negligence and the amount of damages.
Concurring-in-part-and-dissenting-in-part - Schauer, J.
No, Cavaney's actions do not justify holding him personally liable. While concurring that the judgment must be reversed because Cavaney is entitled to relitigate the underlying issues, the majority's reasoning is flawed. Mere professional activity by an attorney in organizing a corporation, including holding a temporary office or a qualifying share of stock as part of that process, cannot be the basis for finding that the corporation is the attorney's alter ego. Such organizational activities do not constitute the carrying on of business by the corporation, and the lawyer performing them is merely practicing law, not acting as the corporation's alter ego.
Analysis:
This case is a foundational decision in corporate law regarding the doctrine of piercing the corporate veil, particularly in a tort context. It establishes that inadequate capitalization is a critical factor in determining whether to disregard the corporate entity, especially when combined with active participation by an individual shareholder or director. The decision signals that courts will not permit individuals to use the corporate form as a shield against liability for foreseeable risks when they have failed to provide the business with a reasonable financial basis. It also reinforces that the duties of a corporate director are substantial and cannot be shirked by claiming to serve merely as an 'accommodation.'
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