CASE PROBLEM: Three brothers inherited a small paper-supply business from their father, who had operated the business as a sole proprietorship. The brothers decided to incorporate under the name Miwa Corp. and retained an attorney to draw up the necessary documents. The attorney drew up the papers and had the brothers sign them but neglected to send the application for a corporate charter to the secretary of state's office. The brothers assumed that all necessary legal work had been taken care of, and they proceeded to do business as Miwa Corp. One day, a Miwa Corp. employee was delivering a carton of paper supplies to one of Miwa's customers. On the way to the customer's office, the employee negligently ran a red light and caused a car accident. Harman, the driver of the other vehicle, was injured as a result and sued Miwa Corp. for damages. When Harman learned that no state charter had ever been issued to Miwa Corp., he sued each of the brothers personally for damages. Can the brothers avoid personal liability for the tort of their employee? Explain.
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this is what i think
In this case Miwa Corp. probably has de facto status which would mean that the existence of the corporation can only be challenged by the state, not by Harman because he is a third party. There are three elements required for de facto status (this is all coming from page 778). There must be a state statute under which the corporation can be validly incorporated, and although the case does not specifically say which state Miwa Corp. is in there are state statutes in every state that will allow them to be validly incorporated. The second is that the parties must have made a good faith attempt to comply with the statute. By hiring the attorney to take care of all the details and signing the state charter, the brothers have made a good faith attempt to comply. They did not know that the attorney had not sent the papers. Lastly, the enterprise must already have undertaken to do business as a corporation, and clearly they have been operating as Miwa Corp. not knowing that their corporate charter was not sent in.
In order to determine whether the brothers can avoid personal liability for the tort of their employee, we need to analyze the concept of limited liability in the context of a corporation.
When a business incorporates, it becomes a separate legal entity from its owners, known as shareholders or stockholders. This separation creates a concept called limited liability. Limited liability means that the owners' liability for the business's debts and obligations is generally limited to the amount they have invested in the company.
However, limited liability is not absolute. In certain situations, called "piercing the corporate veil," the courts may hold individual shareholders or directors personally liable for the actions of the corporation. Piercing the corporate veil is a legal concept that allows the courts to disregard the limited liability protection and hold individuals responsible for the business's debts or actions.
In this case, the attorney's negligence in failing to file the application for a corporate charter does not automatically mean that the brothers will be personally liable for the employee's tort. The fact that the corporation was not properly chartered does not in itself expose the brothers to personal liability. Generally, the limited liability protection is still in effect unless the court determines that the corporate veil should be pierced.
To determine whether the corporate veil should be pierced in this specific case, the court will typically consider various factors such as:
1. Failure to observe corporate formalities: If the brothers failed to comply with corporate formalities such as holding regular meetings, maintaining separate business records, or keeping personal and corporate finances separate, this may weaken the limited liability protection.
2. Alter ego: If the corporation was merely an alter ego or extension of the brothers' personal affairs, and they failed to treat it as a separate legal entity, the court may disregard the corporate structure and hold them personally liable.
3. Fraud or wrongdoing: If there is evidence of fraud, illegal activities, or intentional wrongdoing by the brothers, the court may disregard the limited liability protection and hold them personally responsible.
Based on the information provided, we cannot conclusively determine whether the brothers can avoid personal liability without further analysis of these factors by a court. The court would need to evaluate the specific circumstances surrounding the operation of Miwa Corp to determine if the corporate veil should be pierced and hold the brothers personally liable for the employee's tort.