Court Opinion

ID: 9642497
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:00:24.281092+00
Date Added: 2024-06-11T18:10:48.581931
License: Public Domain

Dissenting Opinion by
Me. Justice Jones:
The basic question in this case is whether, under a written agreement between Barium Steel Corporation, the plaintiff, and the defendants Wiley for the sale of certain shares of stock by the latter to the former, Barium has a right of action for the recovery of an expense allegedly sustained by Barium’s corporate sub-subsidiary Avhich was not in existence when the agreement was entered into, was not mentioned or even anticipated therein and, unquestionably, did not qualify as a third party beneficiary of the contract. The learned court below allowed Barium such a recovery, and this court now does likewise, on the theory of “piercing the corporate veil” by applying the doctrine in reverse for the benefit of the fabricator of the veil.
The contract between Barium and the Wileys, which was entered into on July 3, 1946, provided for the sale by the Wileys to Barium of their 50% holding of the capital stock of the Wiley Equipment Company, a Pennsylvania corporation, together with an unincorporated business wholly OAvned by Glen M. Wiley Avhich is of no present moment. The agreement con-*56eluded with the express stipulation that it should not be assigned by either of the parties thereto without the consent of the other. No such consent was ever sought or given and, of course, the agreement was never assigned.
The stock in the Wiley Equipment Company, as so contracted fox’, was delivered by the Wileys to Barium at the latter’s office in New York on July 31, 1946, the closing date called for by the contract of July 3rd. At the same time, Barium also received from one Diamond, under a separate contract of purchase, the remaining 50% of the capital stock of Wiley Equipment Company.
A day or two after the Wileys and Diamond had delivered their shares in Wiley Equipment Company to Barium, the latter sold the entire lot to its wholly owned subsidiary, Clyde Iron Works, a Delaware corporation, for precisely the same price that Barium had paid for it. And, soxne two months later, viz., in September, 1946, Wiley Equipment Company transferred all of its assets to Wiley Manufacturing Company, a Delaware corporation. Clyde Iron Works was also the owner of the whole of the capital stock of the Wiley Manufacturing Company from August 1, 1946, onward. Thus, the relationship of these affiliated corporations was that Barium wholly owned Clyde, and Clyde wholly owned Equipment as well as Manufacturing, which latter corporation had also become the transferee of all of the assets of Wiley Equipment Company as already stated. The Equipment Company, having so disposed of its assets, was formally dissolved on March 11, 1947, upon tlxe filing of articles of dissolution with the Secretary of the Commonwealth at Harrisburg.
The stock sales agreement of July 3rd between the Wileys and Barium contained a warranty on the part *57of tlie Wileys that there were no unpaid taxes due and payable by the Equipment Company “in excess of reserves or accruals therefor except income and excess profits tax deficiencies not yet proposed or assessed for 1945.” However, just prior to the closing on July 31st under the July 3rd contract, the Wileys, at the insistence of Barium, signed a letter prepared by Barium’s attorney whereby, after a specific reference to the above-mentioned warranty in the July 3rd agreement concerning unpaid taxes of Equipment Company, the Wileys guaranteed payment of 50% of all unpaid taxes owing by Equipment Company assessed or declared deficient in excess of the reserves or accruals therefor.
On January 21, 1947, the Commissioner of Internal Revenue made a deficiency assessment with respect to Equipment Company’s liability for excess profits for 1943 and, on July 12, 1949, made further deficiency assessments with respect to Equipment Company’s income tax liability for 1943, its excess profits tax for 1944 and its income tax liability for 1945. These deficiency assessments became legally payable, and were actually paid, by Wiley Manufacturing Company as the transferee of Equipment Company’s assets.
Inasmuch as the deficiencies exceeded the Equipment Company’s stated reserves and accruals for taxes, Barium brought the instant suit against the Wileys under the contract of July 3, 1946, as supplemented by the letter of July 31st, seeking to recover in Barium’s own name and right the amount of Manufacturing Company’s tax deficiency payments in excess of Equipment Company’s reserves for taxes notwithstanding that the payment of Equipment Company’s deficiency taxes was at the expense of Manufacturing and not Barium; Barium had lost nothing whatsoever on its purchase and sale of the Wiley *58stock in Equipment Company and it never paid out a penny on account of any tax liability owing by Wiley Equipment Company. However, the court below was of the opinion that Barium could assert such a claim in its own right, as the grandparent of Wiley Manufacturing Company, apparently on the theory that Wiley Manufacturing Company had a right of recovery under Barium’s contract with the Wileys as a third party beneficiary. Such a conclusion is patently fallacious.
Neither the warranty in the agreement of July 3rd nor the supplementary letter of July 31st evidences any understanding of the parties thereto that the provisions of the contract and letter, respecting unpaid taxes chargeable to Equipment’s operations, were to be for the benefit of someone other than Barium. Had such been the intention, then that fact should contemporaneously have been revealed to both of the contracting parties (the Wileys as well as Barium) before some other person could thereby acquire an interest as a third party beneficiary of the contract. In Spires v. Hanover Fire Insurance Company, 364 Pa. 52, 70 A. 2d 828, where the sole question was whether the plaintiffs could recover on a fire insurance policy in which they were not named as a party and in which they were not referred to in any manner whatsoever, our present Chief Justice declared (pp. 56-57) that,— “To be a third party beneficiary entitled to recover on a contract it is not enough that it be intended by one of the parties to the contract and the third person that the latter should be a beneficiary, but both parties to the contract must so intend and must indicate that intention in the contract. . .
The Wileys could not possibly have thought, when they executed the agreement of July 3rd and signed the letter of July 31st, that Manufacturing was there*59by acquiring a right under the contract. There is not the slightest suggestion in the evidence, nor could there be in the circumstances, that the Wileys had any knowledge that, the day following the closing under their contract with Barium, the latter would sell all of its Equipment Company stock to Clyde Iron Works and that Clyde, in turn, would sell the same stock to Wiley Manufacturing Company. Indeed, it was only on July 24th (just one week before the closing) that Barium had caused Manufacturing to be incorporated and organized, and there is no evidence that even Manufacturing’s name, let alone an interest on its part, ever figured in the transactions between Barium and the Wileys.
Furthermore, if Manufacturing were in reality a third party beneficiary, it was necessary under Buie 2002 (a) of the Pa. R. C. P. that it sue on its cause of action in its own name. The court below sought to avoid that requirement by applying the exception contained in Rule 2002 (b) (2) which provides that “(b) A plaintiff may sue in his own name without joining as plaintiff or use-plaintiff any person beneficially interested when such plaintiff ... (2) is a person with whom or in whose name a contract has been made for the benefit of another.” The case of Kusmaul v. Stull, 356 Pa. 276, 51 A. 2d 602, where the exception was applied and upon which the court below relied, presented an entirely different situation than is here involved. In that case, the contract for the sale of realty by the defendants was, to the knowledge of all parties to the agreement, for the benefit of a- third person rather than the named vendee: see p. 278. Here, the warranty and guarantee were made for Barium’s own benefit and not for the benefit of another. Hence, exception (b) to Rule 2002 Pa. R. C. P. is not presently applicable.
*60Since the warranty and the guarantee concerning unpaid taxes of Equipment Company were for Barium’s benefit, it follows that any damage for the Wileys’ breach of the warranty or their failure to fulfill the guarantee would have to be shown to have been suffered by Barium before it could recover substantial damages therefor in its own right. And, that, Barium was unable to show. The court below, apparently realizing the situation, assumed to allocate to Barium credit for Manufacturing’s payment of the deficiency taxes owing by Equipment but assessed against Manufacturing, the transferee of Equipment’s assets. This, the court did by disregarding the separate corporate entities in the chain from Barium through Clyde to Manufacturing and by then treating the deficiency taxes paid by Manufacturing as an expense to Barium. The decisions in this State will be searched in vain for a single instance where a piercing of the corporate veil has been judicially sanctioned in order to confer a benefit upon the ones responsible for the presence of the veil. Certainly, the opinion for this court in the instant case cites no such decision.
The equitable doctrine of piercing the corporate veil was evolved and has been applied in order to prevent the perpetration of a wrong or injustice through the technical use of corporate forms. Thus, a corporation may not, for its own immunity, invoke a disregard of its separate entity or that of- a subsidiary: Homestead Borough v. Defense Plant Corporation, 356 Pa. 500, 52 A. 2d 581; see, also, Commonwealth v. Gulf Oil Corporation, 359 Pa. 583, 60 A. 2d 46, where escape from liability for taxes’ by the device of piercing the corporate- veil was judicially' thwarted. Instances under Pennsylvania law where the courts have looked behind the corporate form have been such as'to enable creditors to seize a corporate debtor’s assets otherwise *61beyond tbeir reach (see, e.g., McCarthy v. Ference, 358 Pa. 485, 58 A. 2d 49), or where minority shareholders’ interests conld best be adequately and efficiently protected thereby (see Hirshhorn v. Mine Safety Appliances Company, 54 F. Supp. 588 D.C.W.D. Pa.), or where the corporate veil has been used in an attempt to cover or conceal an unlawful act (see Tucker v. Binenstock, 310 Pa. 254, 165 A. 247), or where evasion of statutory law has thus been prevented (see Armour Transportation Company v. Pennsylvania Public Utility Commission, 154 Pa. Superior Ct. 21, 34 A. 2d 821).
Waring v. WDAS Broadcasting Station, Inc., 327 Pa. 433, 194 A. 631, which the opinion for the court cites in apparent opposition to the view herein expressed, was not even a case of piercing the corporate veil. It is but an illustration of the rule that when a corporation is the mere alter ego of a person, the corporate form may be disregarded, — a recognized exception to the general rule that a corporation and the stockholders who compose it are separate entities: Homestead Borough v. Defense Plant Corporation, supra. The case of Commonwealth v. VanBuskirk, 155 Pa. Superior Ct. 613, 631, 39 A. 2d 311, also cited in the opinion for the court, was a case of a conviction on an indictment charging embezzlement and did not involve the piercing of the corporate veil to confer a legal right which did not otherwise exist. Tucker v. Binenstock,- cit. supra, likewise cited in the opinion for the court, was, as wé have already seen, an instance where the corporate forms of two companies were disregarded because the veil had been used in an attempt to cover or conceal an- unlawful act. The remaining cases cited in the opinion-for the court are equally in-apposite.
Barium is plainly without a right of action against the Wileys for taxes paid by Manufacturing *62on account of Equipment Company’s liability. The judgment for Barium should, therefore, be reversed and be here entered for the defendants on Barium’s claim, while Glen Wiley’s claim for salary should be allowed as the jury found it and as this court now accredits it.
It so happens that the members of this court who heard the argument of these appeals are evenly divided on the question of the legal propriety of piercing the corporate veil in the circumstances disclosed by the record. A judgment of affirmance is therefore indicated as a matter of course; and, since a right of action in Barium is thus accorded, I approve the reduction which the court makes in the judgment under review. But, my own further thought is that, in computing the defendants’ liability on account of Equipment Company’s tax deficiencies, the reserves and accruals for taxes to be reckoned with should be $28,908-.72, the actual amount thereof as of the closing date, July 31, 1946, instead of $17,021.51, the amount of the reserves and accruals for taxes as shown by the balance sheet of December 31, 1945. There is no need to make a fetish of the non-current balance sheet when the parties did not intend it to be conclusive. The contract of July 3, 1946, expressly provided, — “That the representations and warranties contained [therein] shall in all material respects be true and correct as of the closing date . . .” which the contract fixed as July 31, 1946. Barium then knew as well as, if not better than, the Wileys the probable extent of Equipment Company’s liability for taxes. For upwards of four months immediately prior to .the execution of the contract of July.3, 1946, Barium had had its auditors, examiners and accountants in the Wiley Equipment Company’s offices and plant with full and unrestricted access to the Equipment Company’s records and books of account.
*63Consequently, on the theory of liability approved by this court, the judgment in favor of Barium should be further reduced by $5,443.60, being one-half of the additional reserves for taxes on July 31, 1946, over the $17,021.51 shown by the 1945 balance sheet.
Mr. Justice Allen M. Steakne and Mr. Justice Chidsey join in this dissenting opinion.