Small Claims Cases Involving Corporations

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Small Claims Cases Involving Corporations N.C.
Magistrates Association Spring Conference 2005
W. Mark C. Weidemaier Institute of
Government UNC Chapel Hill
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• Dissolution

• Venue

• Shareholder liability

• Agent liability

• Successor Liability

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Dissolution

• Can a dissolved company sue and be sued?

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Dissolution

• Can a dissolved company sue and be sued?

YES
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Venue Basic principles

• Small claims actions may be referred if defendant
  resides in county where magistrate resides.
• Corporate residence (domestic corporations G.S.
  1-79(b))
• Where registered or principal office is located
  OR where defendant maintains a place of business
• OR, if no registered/principal office and no
  place of business is maintained or can reasonably
  be found, anywhere where defendant is regularly
  engaged in carrying on business

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Venue Basic principles

• Objections to venue and personal jurisdiction
  made by motion before answering, or in the
  answer.
• Objections waived if not made prior to the date
  set for trial.
• Objections heard by chief district judge (or
  designee).
• Assignment suspended until ruling. Clerk gives
  notice of suspension.
• Judgment not void for improper assignment
  (7A-212).

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Venue Basic principles

• Example 1 (suit in Orange County)
• SAB does not file an answer or motion objecting
  to venue
• Jane appears at trial for SAB
• Articles of Incorporation Wake County
  registered office moves to dismiss
• Example 2 (suit in Orange County)
• SAB files answer raising objection to venue no
  hearing on objection scheduled

• Objections to venue and personal jurisdiction
  made by motion before answering, or in the
  answer.
• Objections waived if not made prior to the date
  set for trial.
• Objections heard by chief district judge (or
  designee).
• Assignment suspended until ruling. Clerk gives
  notice of suspension.
• Judgment not void for improper assignment.
  (7A-212).

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Shareholder liability

• Shareholders generally not liable for corporate
  debts (unless articles of incorporation provide
  for liability)
• Shareholders may be personally liable by reason
  of own acts/conduct
• One exception mere instrumentality rule

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Shareholder liability piercing the veil

• Mere instrumentality rule A shareholder who
  exercises actual control over a corporation,
  operating it as a mere instrumentality, is liable
  for the debts of the controlled corporation.
• 3 factors in applying mere instrumentality rule
• Control of the corporation complete domination
• Use of control to commit fraud or legal wrong
• Proximate cause of injury

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Shareholder liability piercing the veil

• Inadequate capitalization.
• Failure to comply with corporate formalities.
• Complete domination and control of the
• corporation so that it has no independent
• existence.
• Excessive fragmentation of a single enterprise
  into separate corporations.
• History of paying dividends
• Insolvency of the corporation
• Whether the dominant shareholder has siphoned
  corporate funds
• Non-functioning of other officers or directors
  and
• Absence of corporate records

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Shareholder liability piercing the veil

• Jane owns 100 of Smith Auto Bodys stock.
• Board Jane and her 2 sons. Jane is chair.
• Board has met once in 3 years. No minutes kept.
• Jane negotiated and signed the contract with Joe.
• Jane is President/CEO has complete mgmt.
  authority.
• No other officers were appointed to run the
  business.
• Smith Auto Body has no bylaws.
• Smith Auto Body has no assets to pay a judgment.
• Over the last 3 years, Smith Auto Body lent Jane
  1500. Jane has not paid any of the 1500 back.

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Shareholder liability piercing the veil

• Typically, there will be little if any evidence
  of any of this? What do you do?

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Agent liability for corporate contracts

• General Rule Agents who enter contracts on
  behalf of the corporation are not parties to the
  contract and are not personally liable.
• Distinction between disclosed and undisclosed (or
  partially disclosed) principals.
• The contract may provide that the agent is liable
  for corporate debts.

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Agent liability for corporate contracts

• Jane negotiated the contract.
• The only person Joe dealt with was Jane.
• During negotiations, Jane told Joe she needed
  someone to do maintenance work around my
  business.
• Contract is signed

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Agent liability for corporate contracts

• Jane negotiated the contract.
• The only person Joe dealt with was Jane.
• During negotiations, Jane told Joe she needed
  someone to do maintenance work around my
  business.
• Contract is signed

• What if Joe was paid from Smith Auto Bodys
  account?

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Successor liability

• Issue Liability of buyer of all or
  substantially all of sellers assets

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Successor liability
Jane Smith
100Stock
JS Auto Body
Assets

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Successor liability
Mark W.
Joan B.
50Stock
50Stock
MB Garage
Assets

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Successor liability

• Buyer of all or substantially all another corp.s
  assets is not liable for debts of the selling
  corporation.
• Exceptions
• Express or implied agreement to assume debts.
• Transfer made for purpose of defrauding
  corporations creditors.
• Purchasing corporation is a mere continuation
  of the selling corporation emphasis is on
  identity of ownership between buying/selling
  companies.

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Successor liability

• Smith Auto Body stops doing business is
  dissolved assets sold to third party to pay debt
  to Bank. Jane forms new corp., Janes Car Shop,
  and engages in identical business.
• Smiths Auto Body sells its assets for 50,000 to
  SS Auto Body, a new company owned 50/50 by Jane
  Smith and her brother, Bob. Jane is President
  and Chair of the board.

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Successor liability

• Attempt to defraud creditors (actual intent or
  inadequate consideration)
• Identity of shareholders/directors
• Plaintiff has burden of proof.

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Dissolution

• Key points
• Effect corporation still exists but may not
  conduct business other than winding
  up/liquidation
• Corp. may still sue and be sued, and claimants
  may enforce claims against it (and sometimes its
  shareholders) even after dissolution, but
• Claims may be barred if dissolved corp. gave
  notice of dissolution and claimant failed to act

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Dissolution

• Claims may be asserted against dissolved
  corporation to the extent of its undistributed
  assets, including insurance coverage
• Claims may be asserted against shareholders to
  the extent of any distributions they received in
  liquidation