Opinion ID: 1120112
Heading Depth: 1
Heading Rank: 3

Heading: necessity for disregard

Text: The Court of Appeals was correct in holding that post-tort acts are relevant in determining whether to assess personal liability against shareholders for a judgment originally entered against the corporation. We do not disagree with the test set out by the Court of Appeals. However, the Court of Appeals should have taken into account the fact that the test will be applied only when, at the time the doctrine is invoked, it is necessary to prevent violation of a duty owed. Defendants argue that the corporate entity should not be disregarded when the corporation's assets remain subject to judgment. Defendants correctly contend that the bankruptcy trustee's avoidance of the fraudulent conveyances was sufficient to protect plaintiff because the avoidance left the liable corporation with the same assets subject to judgment if the wrongful transfers had not taken place. Because the trial court had already determined that the parties' actions before the tortious conduct, i.e., the manner of capitalizing and conducting the business of the corporation, were not sufficient to justify disregard of the corporate entity, the fact that the corporation was left intact through the bankruptcy proceedings eliminates the need to disregard the corporate entity. The Court of Appeals erroneously construed J.I. Case Credit Corp. v. Stark, supra ; Soderberg Adv., Inc. v. Kent-Moore Corp., 11 Wn. App. 721, 524 P.2d 1355 (1974) and Harrison v. Puga, supra , in directing the trial court to consider post-tort behavior of defendants in determining whether they should be held personally liable on the judgment against the corporation. Those cases set out the standard used by the court in making the factual determination of the parties' intent with regard to the corporate entity. The Court of Appeals properly stated that test. Nothing in these cases prevents the court from considering postactivity transfers. In fact, in each of these cases transfers of corporate assets to an individual after the execution of contracts which created obligations to the plaintiff were indeed considered in making the decision to disregard the corporate entity. However, in this case no gutting of corporate assets such as gave rise to individual liability in the cited cases justifies disregard of the corporate entity. [2] The doctrine of disregard of the corporate entity will not apply, even though the intent necessary to disregard the corporate entity may exist, unless it is necessary and required to prevent unjustified loss to the injured party. The corporate entity will be disregarded only to prevent violation of a duty: There are exceptional situations when it is nevertheless proper to disregard the separate entity of the corporation and fasten liability directly on the corporation's stockholder... By so doing, the court in effect extends the scope of the duty initially owed by the corporation... The court must do so, however, for an adequate reason. Often the reason given is public advantage, requirements of justice, alter ego, fraud, bad faith, or other wrong. Such cases often mean nothing more than that the violation of duty will result if the entity is not disregarded. (Italics ours.) Harrison v. Puga, 4 Wn. App. 52, 62-63, 480 P.2d 247 (1971). Failure to disregard must aid the consummation of a fraud or wrong upon others. J.I. Case Credit Corp. v. Stark, supra at 475. Consideration of behavioral justifications for disregard arise only when necessary because enforcement of the duty owed requires it: While the facts of each case, in which the doctrine of disregarding the corporate entity is applied, vary, there is one situation common to all: a right owned and its corresponding duty owed to the person demanding recognition of his right and the performance of its corresponding duty. For example, the obligee of a contract has a right to receive performance of its obligations. The obligor, on the other hand, is under a corresponding duty to perform those obligations. When the doctrine of disregard is applied, it is applied because of the necessity of enforcing this right-duty.... When expressed it has usually been expressed in a restricted form, namely, by a holding that before a corporate entity is disregarded, some species of fraud, bad faith or other wrong must exist to be obviated... But such cases often mean nothing more than that violation of duty (denoted as fraud) will result if the entity be not disregarded.... The enforcement of the duty owed requiring it, the courts disregarded the corporate entity by refusing to give effect to the claimed incident of corporate status. J.I. Case Credit Corp. v. Stark, 64 Wn.2d 470, 475-76, 392 P.2d 215 (1964). In the case at bar, the bankruptcy trustee's avoidance of the post-tort fraudulent conveyances left the liable corporation intact. Any disregard of the corporate entity now would subject to judgment no funds intended to be corporate, but only those purely individual assets of defendants which, under the trial court's findings regarding the actions of the defendants prior to the tort, are not otherwise subject to satisfaction of the judgment. Any intent to avoid payment of the judgment was never consummated and does not provide a justification for disregarding the corporate entity. The sufficiency of avoidance of fraudulent conveyances as an alternative to disregard of the corporate entity in cases such as this was acknowledged by the federal courts in a case quoted by the plaintiff: The payment of these [illegal] dividends should be avoided and set aside, as to appellee, as a fraud upon his rights. Equity has full power to grant relief. Ignoring the corporate entity, the court below went to the heart of the matter and did justice by granting a decree against the [otherwise not-liable defendant]... Preserving the fiction of separate legal entities, it might have accomplished the same thing by setting aside the fraudulent transfer of assets ... As the same result and the right result was reached in the direct method followed by the court below, no one may complain ... (Italics ours.) Texas Co. v. Roos, 93 F.2d 380, 383 (5th Cir.1937). Thus the result sought by the plaintiff in this case was already accomplished by the bankruptcy trustee's avoidance of the post-tort transfers. The plaintiff contends, however, that the corporation's very act of declaring bankruptcy impaired his right to recover his judgment. He cites the payment of $57,000 in costs and attorney's fees incurred in the bankruptcy. The plaintiff's contention is not well taken. [1] There is nothing improper about filing for bankruptcy; in this case, the plaintiff's judgment against the corporation alone, had it had no other liabilities, would have made the corporation insolvent and a candidate for bankruptcy. The expenses of bankruptcy objected to by plaintiff are not directly attributable to avoidance of the fraudulent transfers but are determined by the services to the entire estate undergoing bankruptcy. Finally, the bankruptcy was not in the nature of a consummation of an illegal act in violation of the plaintiff's recovery. Indeed, it was through the bankruptcy that injury to the plaintiff was avoided because of the trustee's actions in setting aside the transfers. The tort-feasor and the tort victim take one another as they are. Plaintiff is not entitled to a solvent defendant, and cannot be allowed to create one by asserting disregard of the corporate entity when the activities, which admittedly otherwise might justify disregard, have had no effect on the plaintiff's ability to collect a judgment from the defendant corporation at the time the doctrine is asserted. Disregard assumes that unjustified loss would occur to the individual to whom the duty is owed if the entity were not disregarded. No loss of corporate assets has been suffered by the plaintiff here as a result of the defendant's actions. The Court of Appeals erred in failing to rule that the corporate entity could not be disregarded when the corporation's assets are intact and thus available for satisfaction of the judgment against it. We therefore reverse the Court of Appeals and reinstate the trial court's judgment that Bessie Burks and Henry Harlow cannot be held individually liable for plaintiff's judgment against the corporation. It is so ordered. UTTER, C.J., ROSELLINI, STAFFORD, BRACHTENBACH, DOLLIVER, HICKS, and WILLIAMS, JJ., and HANSON, J. Pro Tem., concur. Reconsideration denied July 21, 1980.