Zaist v. Olson
227 A.2d 552, 1967 Conn. LEXIS 711, 154 Conn. 563 (1967)
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Rule of Law:
A court will disregard the corporate form to impose liability on an individual shareholder or another corporation under the 'instrumentality rule' when a plaintiff proves three elements: (1) complete domination and control of the corporation, (2) the use of that control to commit fraud, wrong, or an unjust act, and (3) that the control and unjust act proximately caused the plaintiff's injury or loss.
Facts:
- In 1943, Martin Olson formed The East Haven Homes, Inc. (East Haven), owning 198 of 200 shares and serving as its president, treasurer, and director.
- In 1952-1953, Olson personally acquired land in Groton to develop a shopping center.
- In 1954, Olson engaged the plaintiffs to perform clearing and grading work on the Groton land, initially having them set up the account in his own name.
- Shortly after work began, Olson instructed the plaintiffs to send all future bills to East Haven, which had minimal assets and equipment.
- Olson then formed another corporation, Martin Olson, Inc. (Olson, Inc.), in which he was the controlling shareholder, president, and treasurer.
- Over the next several years, ownership of the land for the Groton and a new New London shopping center was shuffled between Olson, Olson, Inc., and other new corporations Olson created.
- East Haven was used as the contracting entity for all of the plaintiffs' work on these projects, even though the land and all resulting benefits inured to Olson and Olson, Inc.
- After five years of work for which they were paid over $169,000 by East Haven, the plaintiffs were left with an unpaid balance of $23,100 when East Haven, the ostensible debtor, ran out of funds.
Procedural Posture:
- The plaintiffs sued Martin Olson, The East Haven Homes, Inc., and Martin Olson, Inc. in a Connecticut trial court.
- By stipulation of the parties, the case was referred to a state referee to hear the facts.
- The referee filed a report recommending judgment for the plaintiffs against Martin Olson and Martin Olson, Inc.
- The defendants filed a motion to correct the report, which the referee partially granted.
- The defendants then filed exceptions to the corrected report with the trial court.
- The trial court overruled the defendants' exceptions, adopted the referee's report, and rendered judgment for the plaintiffs against Martin Olson and Martin Olson, Inc.
- The defendants, Martin Olson and Martin Olson, Inc., appealed the judgment to the Supreme Court of Connecticut.
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Issue:
Does the use of a corporate entity as a mere instrumentality, so completely dominated by an individual and another corporation that it has no separate will or existence, justify piercing the corporate veil to hold the individual and the other corporation liable for its debts when that control was used to commit an unjust act causing the plaintiff's loss?
Opinions:
Majority - Alcorn, J.
Yes. The corporate veil may be pierced to hold the controlling individual and corporation liable because East Haven was used as a mere instrumentality to perpetrate an unjust act. The court adopted the instrumentality rule, which requires: (1) complete domination by the defendant, not just of finances but of policy and business practice, so that the corporate entity had no separate mind, will, or existence of its own; (2) the use of such control to commit a fraud, wrong, or dishonest and unjust act; and (3) this control and breach of duty must have proximately caused the plaintiff's loss. Here, Olson completely dominated East Haven, using it as a conduit for projects that enriched himself and Olson, Inc. East Haven was undercapitalized for such large projects, had no proprietary interest in the land, and reaped no benefit. Using this underfunded corporate shell to obtain services for the benefit of himself and his other corporation, leaving the plaintiffs unpaid, constituted an unjust act justifying the imposition of liability on Olson and Olson, Inc., the real actors.
Dissenting - House, J.
No. The facts do not support a conclusion that the defendants' control was used to commit an unjust act. While control is undisputed, piercing the corporate veil requires proof that the control was used for fraudulent or illegal purposes. The referee who heard the evidence made no such finding. Without a finding of fraud, wrong, or a dishonest act, disregarding the corporate entity is contrary to the public policy of the state, which encourages corporate formation by providing for limited liability. The majority incorrectly applies the instrumentality rule without the necessary finding of wrongdoing.
Dissenting - Cotter, J.
No. The evidence does not reasonably support the conclusion that Olson used his control to perpetrate an unjust act. East Haven was a legitimate contractor for over a decade and paid the plaintiffs substantial sums before becoming insolvent, which could have been due to a general financial decline affecting all of Olson's businesses. Disregarding the corporate entity should be done with great caution and generally requires a finding of fraudulent or illegal purpose. The majority's broad application of the 'unjust act' standard casts a 'doubtful shadow' on the important principle of limited shareholder liability, which is essential to the free enterprise system. The plaintiffs chose to deal with the corporation and could have sought a personal guarantee from Olson.
Analysis:
This case is a foundational decision in corporate law, formally adopting the three-part 'instrumentality test' for piercing the corporate veil in Connecticut. Its significance lies in clarifying that outright fraud is not a prerequisite; a lesser 'unjust act' is sufficient to satisfy the second prong of the test. The decision expands the ability of creditors to hold dominant shareholders liable when the corporate form is abused, particularly in cases involving undercapitalization and the commingling of personal and corporate affairs. However, the strong dissents highlight the enduring tension between protecting creditors from injustice and upholding the principle of limited liability, which is central to corporate law.
