Court of Appeals of the State of New York

Walkovszky v. Carlton
18 N.Y.2d 414 (N.Y. 1966) • 276 N.Y.S.2d 585 •
223 N.E.2d 6
Decided Nov 29, 1966

Argued September 26, 1966 damages sought because the multiple corporate
structure constitutes an unlawful attempt "to
415 Decided November 29, 1966 *415
defraud members of the general public" who
Appeal from the Appellate Division of the 417 might be injured by the cabs. *417
Supreme Court in the Second Judicial Department, 1 The corporate owner of a garage is also
EDWARD G. BAKER, J.
included as a defendant.

Norbert Ruttenberg and Stephen A. Cohen for

The defendant Carlton has moved, pursuant to
appellant.
CPLR 3211(a)7, to dismiss the complaint on the
Lawrence Lauer and John Winston for respondent. ground that as to him it "fails to state a cause of
416 *416 action". The court at Special Term granted the
motion but the Appellate Division, by a divided
FULD, J. vote, reversed, holding that a valid cause of action
was sufficiently stated. The defendant Carlton
This case involves what appears to be a rather appeals to us, from the nonfinal order, by leave of
common practice in the taxicab industry of vesting the Appellate Division on a certified question.
the ownership of a taxi fleet in many corporations,
each owning only one or two cabs. The law permits the incorporation of a business
for the very purpose of enabling its proprietors to
The complaint alleges that the plaintiff was escape personal liability (see, e.g., Bartle v. Home
severely injured four years ago in New York City Owners Co-op., 309 N.Y. 103, 106) but,
when he was run down by a taxicab owned by the manifestly, the privilege is not without its limits.
defendant Seon Cab Corporation and negligently Broadly speaking, the courts will disregard the
operated at the time by the defendant Marchese. corporate form, or, to use accepted terminology,
The individual defendant, Carlton, is claimed to be "pierce the corporate veil", whenever necessary
a stockholder of 10 corporations, including Seon, "to prevent fraud or to achieve equity". (
each of which has but two cabs registered in its International Aircraft Trading Co. v.
name, and it is implied that only the minimum Manufacturers Trust Co., 297 N.Y. 285, 292.) In
automobile liability insurance required by law (in determining whether liability should be extended
the amount of $10,000) is carried on any one cab. to reach assets beyond those belonging to the
Although seemingly independent of one another, corporation, we are guided, as Judge CARDOZO
these corporations are alleged to be "operated * * noted, by "general rules of agency". ( Berkey v.
* as a single entity, unit and enterprise" with Third Ave. Ry. Co., 244 N.Y. 84, 95.) In other
regard to financing, supplies, repairs, employees words, whenever anyone uses control of the
and garaging, and all are named as defendants.1 corporation to further his own rather than the
The plaintiff asserts that he is also entitled to hold corporation's business, he will be liable for the
their stockholders personally liable for the corporation's acts "upon the principle of

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 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

respondeat superior applicable even where the 226; cf. Black White v. Love, 236 Ark. 529;
agent is a natural person". ( Rapid Tr. Subway Economy Cabs v. Kirkland, 127 Fla. 867, adhered
Constr. Co. v. City of New York, 259 N.Y. 472, to on rearg. 129 Fla. 309.)
488.) Such liability, moreover, extends not only to
In the case before us, the plaintiff has explicitly
the corporation's commercial dealings (see, e.g.,
alleged that none of the corporations "had a
Natelson v. A.B.L. Holding Co., 260 N.Y. 233;
separate existence of their own" and, as indicated
Quaid v. Ratkowsky, 224 N.Y. 624; Luckenbach
above, all are named as defendants. However, it is
S.S. Co. v. Grace Co., 267 F. 676, 681, cert. den.
one thing to assert that a corporation is a fragment
254 U.S. 644; Weisser v. Mursam Shoe Corp., 127
of a larger corporate combine which actually
F.2d 344) but to its negligent acts as well. (See
conducts the business. (See Berle, The Theory of
Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, supra;
Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It
Gerard v. Simpson, 252 App. Div. 340, mot. for lv.
is quite another to claim that the corporation is a
to app. den. 276 N.Y. 687; Mangan v. Terminal
"dummy" for its individual stockholders who are
Transp. System, 247 App. Div. 853, mot. for lv. to
in reality carrying on the business in their personal
app. den. 272 N.Y. 676.)
capacities for purely personal rather than corporate
In the Mangan case ( 247 App. Div. 853, mot. for ends. (See African Metals Corp. v. Bullowa, 288
lv. to app. den. 272 N.Y. 676, supra), the plaintiff N.Y. 78, 85.) Either circumstance would justify
was injured as a result of the negligent operation treating the corporation as an agent and piercing
of a cab owned and operated by one of four the corporate veil to reach the principal but a
corporations affiliated with the defendant different result would follow in each case. In the
Terminal. Although the defendant was not a first, only a larger corporate entity would be held
418 stockholder of any of the operating *418 financially responsible (see, e.g., Mangan v.
companies, both the defendant and the operating Terminal Transp. System, 247 App. Div. 853, mot.
companies were owned, for the most part, by the for lv. to app. den. 272 N.Y. 676, supra;
same parties. The defendant's name (Terminal) Luckenbach S.S. Co. v. Grace Co., 267 F.2d 676,
was conspicuously displayed on the sides of all of 881, cert. den. 254 U.S. 644, supra; cf. Gerard v.
the taxis used in the enterprise and, in point of Simpson, 252 App. Div. 340, mot. for lv. to app.
fact, the defendant actually serviced, inspected, den. 276 N.Y. 687, supra) while, in the other, the
repaired and dispatched them. These facts were stockholder would be personally liable. (See, e.g.,
deemed to provide sufficient cause for piercing the Natelson v. A.B.L. Holding Co., 260 N.Y. 233,
corporate veil of the operating company — the 419 supra; Quaid v. Ratkowsky, *419 224 N.Y. 624,
nominal owner of the cab which injured the supra; Weisser v. Mursam Shoe Corp., 127 F.2d
plaintiff — and holding the defendant liable. The 344, supra.) Either the stockholder is conducting
operating companies were simply instrumentalities the business in his individual capacity or he is not.
for carrying on the business of the defendant If he is, he will be liable; if he is not, then, it does
without imposing upon it financial and other not matter — insofar as his personal liability is
liabilities incident to the actual ownership and concerned — that the enterprise is actually being
operation of the cabs. (See, also, Callas v. carried on by a larger "enterprise entity". (See
Independent Taxi Owners Assn., 66 F.2d 192 [D.C. Berle, The Theory of Enterprise Entity, 47 Col. L.
Ct. App.], cert. den. 290 U.S. 669; Association of Rev. 343.)
Independent Taxi Operators v. Kern, 178 Md. 252;
At this stage in the present litigation, we are
P. S. Taxi Baggage Co. v. Cameron, 183 Okla.
concerned only with the pleadings and, since
CPLR 3014 permits causes of action to be stated
"alternatively or hypothetically", it is possible for

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 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

the plaintiff to allege both theories as the basis for remedy lies not with the courts but with the
his demand for judgment. In ascertaining whether Legislature." It may very well be sound policy to
he has done so, we must consider the entire require that certain corporations must take out
pleading, educing therefrom "`whatever can be liability insurance which will afford adequate
implied from its statements by fair and reasonable compensation to their potential tort victims.
intendment.'" ( Condon v. Associated Hosp. Serv., However, the responsibility for imposing
287 N.Y. 411, 414; see, also, Kober v. Kober, 16 conditions on the privilege of incorporation has
N.Y.2d 191, 193-194; Dulberg v. Mock, 1 N.Y.2d been committed by the Constitution to the
54, 56.) Reading the complaint in this case most Legislature (N.Y. Const., art. X, § 1) and it may
favorably and liberally, we do not believe that not be fairly implied, from any statute, that the
there can be gathered from its averments the Legislature intended, without the slightest
allegations required to spell out a valid cause of discussion or debate, to require of taxi
action against the defendant Carlton. corporations that they carry automobile liability
insurance over and above that mandated by the
The individual defendant is charged with having
Vehicle and Traffic Law.2
"organized, managed, dominated and controlled" a
fragmented corporate entity but there are no 2 There is no merit to the contention that the

allegations that he was conducting business in his ownership and operation of the taxi fleet
individual capacity. Had the taxicab fleet been "constituted a breach of hack owners

owned by a single corporation, it would be readily regulations as promulgated by [the] Police

apparent that the plaintiff would face formidable Department of the City of New York".
Those regulations are clearly applicable to
barriers in attempting to establish personal
individual owner-operators and fleet
liability on the part of the corporation's
owners alike. They were not intended to
stockholders. The fact that the fleet ownership has
prevent either incorporation of a single-
been deliberately split up among many
vehicle taxi business or multiple
corporations does not ease the plaintiff's burden in incorporation of a taxi fleet.
that respect. The corporate form may not be
disregarded merely because the assets of the This is not to say that it is impossible for the
corporation, together with the mandatory plaintiff to state a valid cause of action against the
insurance coverage of the vehicle which struck the defendant Carlton. However, the simple fact is that
plaintiff, are insufficient to assure him the the plaintiff has just not done so here. While the
recovery sought. If Carlton were to be held complaint alleges that the separate corporations
individually liable on those facts alone, the were undercapitalized and that their assets have
decision would apply equally to the thousands of been intermingled, it is barren of any "sufficiently
cabs which are owned by their individual drivers particular[ized] statements" (CPLR 3013; see 3
who conduct their businesses through corporations Weinstein-Korn-Miller, N.Y. Civ. Prac., par.
organized pursuant to section 401 of the Business 3013.01 et seq., p. 30-142 et seq.) that the
Corporation Law and carry the minimum defendant Carlton and his associates are actually
insurance required by subdivision 1 (par. [a]) of doing business in their individual capacities,
section 370 of the Vehicle and Traffic Law. These shuttling their personal funds in and out of the
420 *420 taxi owner-operators are entitled to form such corporations "without regard to formality and to
corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. suit their immediate convenience." ( Weisser v.
254), and we agree with the court at Special Term Mursam Shoe Corp., 127 F.2d 344, 345, supra.)
that, if the insurance coverage required by statute Such a "perversion of the privilege to do business
"is inadequate for the protection of the public, the in a corporate form" ( Berkey v. Third Ave. Ry.
Co., 244 N.Y. 84, 95, supra) would justify

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 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

imposing personal liability on the individual In sum, then, the complaint falls short of
stockholders. (See African Metals Corp. v. adequately stating a cause of action against the
Bullowa, 288 N.Y. 78, supra.) Nothing of the sort defendant Carlton in his individual capacity.
has in fact been charged, and it cannot reasonably
The order of the Appellate Division should be
or logically be inferred from the happenstance that
reversed, with costs in this court and in the
421 the business of Seon *421 Cab Corporation may
Appellate Division, the certified question
actually be carried on by a larger corporate entity
answered in the negative and the order of the
composed of many corporations which, under
Supreme Court, Richmond County, reinstated,
general principles of agency, would be liable to
with leave to serve an amended complaint.
each other's creditors in contract and in tort.3
3 In his affidavit in opposition to the motion
KEATING, J. (dissenting).
to dismiss, the plaintiff's counsel claimed
that corporate assets had been "milked out" The defendant Carlton, the shareholder here
of, and "siphoned off" from the enterprise. sought to be held for the negligence of the driver
Quite apart from the fact that these of a taxicab, was a principal shareholder and
allegations are far too vague and organizer of the defendant corporation which
conclusory, the charge is premature. If the owned the taxicab. The corporation was one of 10
plaintiff succeeds in his action and 422 organized by the defendant, each containing *422
becomes a judgment creditor of the two cabs and each cab having the "minimum
corporation, he may then sue and attempt liability" insurance coverage mandated by section
to hold the individual defendants
370 of the Vehicle and Traffic Law. The sole
accountable for any dividends and property
assets of these operating corporations are the
that were wrongfully distributed (Business
vehicles themselves and they are apparently
Corporation Law, §§ 510, 719, 720).
subject to mortgages._
In point of fact, the principle relied upon in the _ It appears that the medallions, which are of
complaint to sustain the imposition of personal
considerable value, are judgment proof.
liability is not agency but fraud. Such a cause of (Administrative Code of City of New York,
action cannot withstand analysis. If it is not § 436-2.0.)
fraudulent for the owner-operator of a single cab
corporation to take out only the minimum required From their inception these corporations were
liability insurance, the enterprise does not become intentionally undercapitalized for the purpose of
either illicit or fraudulent merely because it avoiding responsibility for acts which were bound
consists of many such corporations. The plaintiff's to arise as a result of the operation of a large taxi
injuries are the same regardless of whether the cab fleet having cars out on the street 24 hours a day
which strikes him is owned by a single and engaged in public transportation. And during
corporation or part of a fleet with ownership the course of the corporations' existence all
fragmented among many corporations. Whatever income was continually drained out of the
rights he may be able to assert against parties corporations for the same purpose.
other than the registered owner of the vehicle
The issue presented by this action is whether the
come into being not because he has been
policy of this State, which affords those desiring
defrauded but because, under the principle of
to engage in a business enterprise the privilege of
respondeat superior, he is entitled to hold the
limited liability through the use of the corporate
whole enterprise responsible for the acts of its
device, is so strong that it will permit that
agents.
privilege to continue no matter how much it is

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 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

abused, no matter how irresponsibly the that are an abuse of the corporate privilege * * *
corporation is operated, no matter what the cost to The equitable owners of a corporation, for
the public. I do not believe that it is. example, are personally liable when they treat the
assets of the corporation as their own and add or
Under the circumstances of this case the
withdraw capital from the corporation at will * *
shareholders should all be held individually liable
*; when they hold themselves out as being
to this plaintiff for the injuries he suffered. (See
personally liable for the debts of the corporation *
Mull v. Colt Co., 31 F.R.D. 154, 156; Teller v.
* *; or when they provide inadequate
Clear Serv. Co., 9 Misc.2d 495.) At least, the
capitalization and actively participate in the
matter should not be disposed of on the pleadings
conduct of corporate affairs". ( 56 Cal.2d, p. 579;
by a dismissal of the complaint. "If a corporation
italics supplied.)
is organized and carries on business without
substantial capital in such a way that the Examining the facts of the case in light of the legal
corporation is likely to have no sufficient assets principles just enumerated, he found that "[it was]
available to meet its debts, it is inequitable that undisputed that there was no attempt to provide
shareholders should set up such a flimsy adequate capitalization. [The corporation] never
organization to escape personal liability. The had any substantial assets. It leased the pool that it
attempt to do corporate business without operated, and the lease was forfeited for failure to
providing any sufficient basis of financial pay the rent. Its capital was `trifling compared
responsibility to creditors is an abuse of the with the business to be done and the risks of loss'".
separate entity and will be ineffectual to exempt ( 56 Cal.2d, p. 580.)
the shareholders from corporate debts. It is coming
It seems obvious that one of "the risks of loss"
to be recognized as the policy of law that
referred to was the possibility of drownings due to
shareholders should in good faith put at the risk of
the negligence of the corporation. And the
the business unincumbered capital reasonably
defendant's failure to provide such assets or any
adequate for its prospective liabilities. If capital is
fund for recovery resulted in his being held
illusory or trifling compared with the business to
personally liable.
423 be done and the risks *423 of loss, this is a ground
for denying the separate entity privilege." In Anderson v. Abbott ( 321 U.S. 349) the
(Ballantine, Corporations [rev. ed., 1946], § 129, defendant shareholders had organized a holding
pp. 302-303.) company and transferred to that company shares
which they held in various national banks in return
In Minton v. Cavaney ( 56 Cal.2d 576) the
for shares in the holding company. The holding
Supreme Court of California had occasion to
company did not have sufficient assets to meet the
discuss this problem in a negligence case. The
double liability requirements of the governing
corporation of which the defendant was an
Federal statutes which provided that the owners of
organizer, director and officer operated a public
424 shares in national *424 banks were personally
swimming pool. One afternoon the plaintiffs'
liable for corporate obligations "to the extent of
daughter drowned in the pool as a result of the
the amount of their stock therein, at the par value
alleged negligence of the corporation.
thereof, in addition to the amount invested in such
Justice ROGER TRAYNOR, speaking for the shares" (U.S. Code, tit. 12, former § 63).
court, outlined the applicable law in this area.
The court had found that these transfers were
"The figurative terminology `alter ego' and
made in good faith, that other defendant
`disregard of the corporate entity'", he wrote, "is
shareholders who had purchased shares in the
generally used to refer to the various situations
holding company had done so in good faith and

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 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

that the organization of such a holding company The policy of this State has always been to
was entirely legal. Despite this finding, the provide and facilitate recovery for those injured
Supreme Court, speaking through Mr. Justice through the negligence of others. The automobile,
DOUGLAS, pierced the corporate veil of the by its very nature, is capable of causing severe and
holding company and held all the shareholders, costly injuries when not operated in a proper
even those who had no part in the organization of manner. The great increase in the number of
the corporation, individually responsible for the automobile accidents combined with the frequent
corporate obligations as mandated by the statute. financial irresponsibility of the individual driving
the car led to the adoption of section 388 of the
"Limited liability", he wrote, "is the rule, not the
Vehicle and Traffic Law which had the effect of
exception; and on that assumption large
imposing upon the owner of the vehicle the
undertakings are rested, vast enterprises are
responsibility for its negligent operation. It is upon
launched, and huge sums of capital attracted. But
this very statute that the cause of action against
there are occasions when the limited liability
both the corporation and the individual defendant
sought to be obtained through the corporation will
is predicated.
be qualified or denied. Mr. Justice CARDOZO
stated that a surrender of that principle of limited In addition the Legislature, still concerned with
liability would be made `when the sacrifice is the financial irresponsibility of those who owned
essential to the end that some accepted public and operated motor vehicles, enacted a statute
policy may be defended or upheld.' * * * The requiring minimum liability coverage for all
cases of fraud make up part of that exception * * * owners of automobiles. The important public
But they do not exhaust it. An obvious inadequacy policy represented by both these statutes is
of capital, measured by the nature and magnitude outlined in section 310 of the Vehicle and Traffic
of the corporate undertaking, has frequently been Law. That section provides that: "The legislature
an important factor in cases denying stockholders is concerned over the rising toll of motor vehicle
their defense of limited liability * * * That rule accidents and the suffering and loss thereby
has been invoked even in absence of a legislative inflicted. The legislature determines that it is a
policy which undercapitalization would defeat. It matter of grave concern that motorists shall be
becomes more important in a case such as the financially able to respond in damages for their
present one where the statutory policy of double negligent acts, so that innocent victims of motor
liability will be defeated if impecunious bank- vehicle accidents may be recompensed for the
stock holding companies are allowed to be injury and financial loss inflicted upon them."
interposed as non-conductors of liability. It has
The defendant Carlton claims that, because the
often been held that the interposition of a
minimum amount of insurance required by the
corporation will not be allowed to defeat a
statute was obtained, the corporate veil cannot and
legislative policy, whether that was the aim or
should not be pierced despite the fact that the
only the result of the arrangement * * * `the courts
assets of the corporation which owned the cab
will not permit themselves to be blinded or
were "trifling compared with the business to be
deceived by mere forms of law' but will deal `with
done and the risks of loss" which were certain to
the substance of the transaction involved as if the
be encountered. I do not agree.
corporate agency did not exist and as the justice of
the case may require.'" ( 321 U.S., pp. 362-363; The Legislature in requiring minimum liability
425 emphasis added.) *425 insurance of $10,000, no doubt, intended to
provide at least some small fund for recovery
against those individuals and corporations who

6
 Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)

just did not have and were not able to raise or power is helpless to protect a legislative program
accumulate assets sufficient to satisfy the claims from schemes for easy avoidance, then indeed it
of those who were injured as a result of their has become a handy implement of high finance.
negligence. It certainly could not have intended to Judicial interference to cripple or defeat a
shield those individuals who organized legislative policy is one thing; judicial
corporations, with the specific intent of avoiding interference with the plans of those whose
responsibility to the public, where the operation of corporate or other devices would circumvent that
the corporate enterprise yielded profits sufficient policy is quite another. Once the purpose or effect
to purchase additional insurance. Moreover, it is of the scheme is clear, once the legislative policy
426 reasonable *426 to assume that the Legislature is plain, we would indeed forsake a great tradition
believed that those individuals and corporations to say we were helpless to fashion the instruments
having substantial assets would take out insurance for appropriate relief." (Emphasis added.)
far in excess of the minimum in order to protect
The defendant contends that a decision holding
those assets from depletion. Given the costs of
him personally liable would discourage people
hospital care and treatment and the nature of
427 from engaging in corporate enterprise. *427
injuries sustained in auto collisions, it would be
unreasonable to assume that the Legislature What I would merely hold is that a participating
believed that the minimum provided in the statute shareholder of a corporation vested with a public
would in and of itself be sufficient to recompense interest, organized with capital insufficient to meet
"innocent victims of motor vehicle accidents * * * liabilities which are certain to arise in the ordinary
for the injury and financial loss inflicted upon course of the corporation's business, may be held
them". personally responsible for such liabilities. Where
corporate income is not sufficient to cover the cost
The defendant, however, argues that the failure of
of insurance premiums above the statutory
the Legislature to increase the minimum insurance
minimum or where initially adequate finances
requirements indicates legislative acquiescence in
dwindle under the pressure of competition, bad
this scheme to avoid liability and responsibility to
times or extraordinary and unexpected liability,
the public. In the absence of a clear legislative
obviously the shareholder will not be held liable
statement, approval of a scheme having such
(Henn, Corporations, p. 208, n. 7).
serious consequences is not to be so lightly
inferred. The only types of corporate enterprises that will be
discouraged as a result of a decision allowing the
The defendant contends that the court will be
individual shareholder to be sued will be those
encroaching upon the legislative domain by
such as the one in question, designed solely to
ignoring the corporate veil and holding the
abuse the corporate privilege at the expense of the
individual shareholder. This argument was
public interest.
answered by Mr. Justice DOUGLAS in Anderson
v. Abbot ( supra, pp. 366-367) where he wrote For these reasons I would vote to affirm the order
that: "In the field in which we are presently of the Appellate Division.
concerned, judicial power hardly oversteps the
Chief Judge DESMOND and Judges VAN
bounds when it refuses to lend its aid to a
VOORHIS, BURKE and SCILEPPI concur with
promotional project which would circumvent or
Judge FULD; Judge KEATING dissents and votes
undermine a legislative policy. To deny it that
to affirm in an opinion in which Judge BERGAN
function would be to make it impotent in
concurs.
situations where historically it has made some of
its most notable contributions. If the judicial Order reversed, etc.

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Walkovszky v. Carlton 18 N.Y.2d 414 (N.Y. 1966)