Opinion ID: 380837
Heading Depth: 1
Heading Rank: 4

Heading: Inadequate Capitalization

Text: 26 Nebraska case law follows the general rule that 27 a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of a legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. 28 United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (C.C.D.Wis.1905) (Sanborn, J.); see, e. g., Scribner Grain & Lumber Co. v. Wortman, 204 Neb. 92, 281 N.W.2d 394, 395-96 (1979); Massachusetts Bonding & Insurance Co. v. Master Laboratories, Inc., 143 Neb. 617, 10 N.W.2d 501, 506 (1943). J-R Grain argues that the district court should have disregarded the corporate entity 12 and thus held Westin and Leech personally liable as FAC shareholders. J-R Grain argues that Westin and Leech should not in fairness be permitted to raise limited corporate liability as a defense because they inadequately capitalized FAC and, in the face of adverse financial consequences, effectively looted FAC by transferring most of its corporate assets without consideration to D & D Commodity. 29 Adequate initial financing should not be confused with formal minimum paid-in capital requirements applicable in several jurisdictions. H. Henn, Law of Corporations § 146, at 253 n.18 (2d ed. 1970). As noted by the district court, there appears to be no minimum paid-in capital requirement under Nebraska law. 30 Inadequate capitalization as used here (by J-R Grain) means capitalization very small in relation to the nature of the business of the corporation and the risks the business necessarily entails. Inadequate capitalization is measured at the time of formation of the corporation. A corporation that was adequately capitalized when formed but has suffered losses is not undercapitalized. Whether a corporation is undercapitalized obviously presents a question of fact that turns on the nature of the business of the particular corporation. 31 Hamilton, The Corporate Entity, 49 Tex.L.Rev. 979, 985-86 (1971) (footnotes omitted). See also Henn, supra, § 146, at 252-54 & n.21. 32 The district court applied the general rule that inadequate capitalization is a factor to be considered in determining whether to disregard the corporate entity. J-R Grain Co. v. FAC, Inc., Civ. No. 75-0-261 (D.Neb. Mar. 12, 1979) (slip op. at 10, citing Annot., 63 A.L.R.2d 1051 (1959)). The district court decided not to disregard the corporate entity, noting that J-R Grain failed to establish what an adequate level of capitalization would be in the fertilizer brokerage business. J-R Grain's witness Ral Wright testified that the fertilizer brokerage business did not require a great deal of capital. 33 We do not find the district court's decision on this point was clearly erroneous. 13