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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

John Walkovszky, Respondent, v. William Carlton, Appellant, et al., Defendants.

The default rule for the corporation is that stockholders face limited liability for the debts of the corporation. The liability of stockholders is limited to the capital contributed they to the corporation. For instance, if a stockholder contributes $100 in equity capital to the corporation (assume this represents all the equity capital available to the corporation), and if the corporation has $150 in debts, the corporation may be required to pay all of its equity capital (i.e. $100) to settle the corporation's debts. In most circumstances, stockholders will not be liable for the balance of the corporation's debt of $50. The liability of stockholders is thus limited to only their capital contributions.

Although limited liability as described above is the default rule, in extreme cases courts may look through the corporate form, or “pierce the corporate veil”, and assign liability for corporate debts to stockholders.

The following case is paradigmatic. The owner of the corporation has obviously established the corporations in question to limit their exposure to debts of each of the corporations the owner controls. In deciding whether the stockholder should receive the benefit of corporate limited liability, the court lays out a test to determine whether it should look through the veil of limited liability protection and find the shareholders liable for the debts of the corporation.

If the corporation is a mere “alter ego” of the stockholders (e.g. if the corporation is operated without formality and for mere convenience of its stockholders), it is more likely, though not certain, that a court will look through the corporate form and assign corporate liabilities to stockholders in order to prevent a fraud or inequitable result.