Court Opinion

ID: 9574719
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:07:31.677396+00
Date Added: 2024-06-11T12:44:52.909754
License: Public Domain

*479Bobbitt, J.,
dissenting: In considering plaintiff’s motion to strike, we deal with the facts alleged.
On 15 February, 1951, Pollard, Burge and Lester owned 199 shares of plaintiff’s common stock. Bolicb owned the remaining 101 shares. Pollard, Burge and Lester owned common stock of defendant Park Builders, Inc. They were interested, as stockholders, in both corporations. This was the state of affairs when McLean purchased the 199 shares from Pollard, Burge and Lester, and the 101 shares from Bolich.
The release was signed by McLean. It was executed as recited therein, “as a part of the consideration for the purchase of said stock.” It provides that McLean “accepted the real estate and all improvements located thereon . . . owned by the corporation in its present condition.” The release, by its terms, is in favor of defendant Park Builders, Inc., as well as in favor of Pollard, Burge and Lester.
On 15 February, 1951, claims, if any, against Park Builders, Inc., “of any nature whatsoever because of defective workmanship, defective or inferior building materials in the structures located on said premises,” vested in Park Terrace, Inc., the plaintiff. When McLean purchased the 199 shares of common stock in plaintiff he agreed, as expressly provided in the release, that no claim of this nature would be made against Park Builders, Inc.
The plaintiff, a corporate entity, neither received nor gave a consideration. But McLean became its sole common stockholder in consideration of his execution of the release. It is clear that-McLean individually is precluded by his express agreement from asserting any claim against defendant Park Builders, Inc., or the surety on its bond, or Pollard, Burge and Lester, of any nature whatsoever because of defective workmanship or defective or inferior building materials in the structures located on said premises. The question for decision is whether, upon the facts alleged, Park Terrace, Inc., can assert such claims.
It is alleged that on 15 February, 1951, McLean became, and presently is, the owner of said 300 shares, the entire common stock of plaintiff; and that the only other stock outstanding is the 100 shares of preferred stock, having a par value of $1.00 per share, owned by the Federal Housing Administration.
The release is pleaded as a bar to plaintiff’s action. The case has been presented as turning upon the question as to whether the release is to be considered the contract of the plaintiff, the contention being that McLean acted as agent for the plaintiff and by virtue of his authority as sole common stockholder. However, we consider the facts as alleged; and it is for this Court to pass upon the legal significance of the allegations. In so doing, we approach the question not to determine whether the release is in fact or in law the corporation’s contract but rather to determine *480whether McLean can maintain under the guise of a corporation suit an action for his benefit as sole owner of the plaintiff’s common stock.
A corporation is an entity, distinct from its stockholders, although one individual owns its entire stock, or all but qualifying shares held by directors, 1 Fletcher, Cyc. of Corporations, sec. 25; 18 C.J.S., Corporations, sec. 4.
Too, as stated in the opinion of the Court, “a corporation is bound by the acts of its stockholders and directors only when they act as a body in regular session or under authority conferred at a duly constituted meeting.” Duke v. Markham, 105 N.C. 131, 10 S.E. 1017; Tuttle v. Building Co., 228 N.C. 507, 46 S.E. 2d 313. These principles are well settled in this jurisdiction. Nothing said herein is intended to indicate that I would modify or impair the authorities cited.
But a corporation should not be permitted to serve as a device, instrument or agency to enable its beneficial owners, the stockholders, to accomplish by indirection that which their solemn covenant forbids.
Sanborn, J., in a statement often quoted, says: “If any general rule can be laid down, in the present state of authority, it is that 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 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.” United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247; see 18 C.J.S., Corporations, secs. 6 and 7.
And Fletcher, op. cit., sec. 41, citing authorities, gives this summation: “A classification of the evidential facts on which the corporate entity will be disregarded is necessarily impossible beyond such categories as (a) fraud, (b) contravention of statute or law, (c) contravention of contract, (d) equitable titles or rights, (e) internal corporate transactions among all shareholders or members where third persons are not involved, (f) mere agencies and undisclosed principalships, and the like.” See, 13 Am. Jur., Corporations, sec. 7.
In Home Fire Ins. Co. v. Barber, 93 N.W. 1024, the facts, in brief, were these: An individual purchased all of a corporation’s outstanding capital stock, the sellers being stockholders, directors and officers of the corporation. After ownership and control had passed to the purchaser, a suit was brought by the corporation to recover from one of the sellers on the ground of alleged prior mismanagement of the corporation’s affairs. Upon the premise that stockholders who acquire their shares and interest in the corporation from the alleged wrongdoer have no standing to complain thereof, (with which we are not concerned,) the court, opinion by Pound, C., says: “Conceding, then, that all of the present stockholders are so circumstanced that no relief should be afforded them in a court of *481equity, may the corporation recover, notwithstanding? ¥e tbink not. "Where a corporation is not asserting or endeavoring to protect a title to property, it can only maintain a suit in equity as the representative of its stockholders. If they have no standing in equity to entitle them to the relief sought for their benefit, they cannot obtain such relief through the corporation or in its own name. (Citations) It would be a reproach to courts of equity if this were not so. If a court of equity could not look behind the corporation to the shareholders, who are the real and substantial beneficiaries, and ascertain whether these ultimate beneficiaries of the relief it is asked to grant have any standing to demand it, the maxim that equity looks to the substance, and not the form, would be very much limited in its application. ‘It is the province and delight of equity to brush away mere forms of law.’ Post, J., in Fitzgerald v. Fitzgerald & Mallory Construction Company, 44 Neb. 463, 492, 62 N.W. 899. Nowhere is it more necessary for courts of equity to adhere steadfastly to this maxim, and avoid the danger of allowing their remedies to be abused, by penetrating all legal fictions and disguises, than in the complex relations growing out of corporate affairs. Accordingly, courts and text-writers have been in entire agreement that equity will look behind the corporate entity, and consider who are the real and substantial parties in interest, whenever it becomes necessary to do so to promote justice or obvjate inequitable results.”
The distinguished jurist, (later known to us as Dean Pound), concludes.: “To permit persons to recover through the medium of a court of equity that to which they are not entitled, simply because the nominal recovery is by a distinct person through whom they receive the whole actual and substantial benefit, and that nominal person would, in ordinary eases, as representing beneficiaries having a right to recover, be entitled to relief, is perversion of equity. It turns principles meant to do justice into rules to be administered strictly without regard to the result. It is contrary to the very genius of equity. When the corporation comes into equity and seeks equitable relief, we ought to look at the substance of the proceeding, and, if the beneficiaries of the judgment sought have no standing in equity to recover, we ought not to become befogged by the fiction of corporate individuality, and apply the principles of equity to reach an inequitable result.”
“Thus it has been held that where a corporation was but the instrumentality through which an individual for convenience transacted his business, all of the authorities, not only equity, but the law itself, would hold such a corporation bound as the owner of the corporation might be bound, or conversely, hold the owner bound by acts which bound his corporation. Llewellyn Iron Works v. Abbott Kinney Co., 172 Cal. 210, 214, 155 P. 986; Industrial Research Corp. v. General Motors Corp. (D.C.) 29 *482F. (2d) 628, 625. In the ease of Clark v. Millsap, 191 Cal. 765, 782, 242 P. 918, 925, the Court states: ‘The doctrine of corporate entity is not so sacred that a court of equity will hesitate to look through form to the substance of the thing, and it may, in proper cases, ignore it to preserve the rights of persons imposed upon or circumvented by fraud. In such cases, corporate fiction is disregarded.’ That this rule is not limited to equity is clearly stated in Llewellyn Iron Works v. Abbott Kinney Co., supra, and the cases there cited.” Mirabito v. San Francisco Dairy Co., 47 P. 2d 530 (Cal. 1935).
In North Carolina, legal and equitable rights and remedies are determined in one and the same action. Constitution of N. C., Art. IV, see. 1; Reynolds v. Reynolds, 208 N.C. 578, 182 S.E. 341.
The foregoing principles have been applied to diverse factual situations in a multiplicity of cases in other jurisdictions. It is generally accepted that “disregarding corporate entity” does not connote that the corporation has ceased to exist. Nor will corporate entity be disregarded when to do so would prejudice the corporation’s creditors or other third parties. It is fundamental that the court will look behind the corporate entity only in relation to the facts of an appropriate case and to further the ends of justice. '
If it should appear, when the evidence is developed, that McLean would be the beneficiary of any recovery by the corporation herein, the corporation in such case would in reality, prompted by McLean’s ownership and control, be acting as his device, instrument or agency to reap for him an unjust gain. A court of equity should not permit the concept of corporate entity to aid him in such conduct.
It should be noted, however, that we are concerned now only with pleadings. The evidence, of course, may cast a different light both upon the questions presented and the legal principles applicable thereto.
• In my view, the challenged allegations are relevant. The defense, in substance, is that the plaintiff cannot maintain this action because McLean, the beneficiary of the recovery, has contracted that such claim will not be made. Unless McLean is barred, the corporation is not barred. Hence, it seems to me that McLean is a necessary party. Therefore, I would reverse the ruling striking the challenged allegations and remand the cause with instructions that McLean be made a party.
JOHNSON, J., concurs in dissent.