Aronson v. Price
| Decision Date | 20 December 1994 |
| Docket Number | No. 71S03-9412-CV-1240,71S03-9412-CV-1240 |
| Citation | 644 N.E.2d 864 |
| Parties | Spencer ARONSON, Plaintiff-Appellee below, v. Kent E. PRICE, Appellant-Defendant below. |
| Court | Indiana Supreme Court |
In this case the Court of Appeals affirmed important principles of Indiana corporate law by reversing a trial court judgment which had imposed personal liability on the owner of a corporation for acts of the corporation. Price v. Aronson (1994), Ind.App., 629 N.E.2d 268. We agree with the Court of Appeals.
On April 6, 1990, Spencer Aronson (plaintiff-appellee below) took his 1957 automobile to what was then known as Corbitt's Body Shop to get an estimate on restoring the car to show condition. Although the estimate did not indicate that the business was a corporation, the body shop was, in fact, owned by Corbitt's Body Shop, Inc., an Indiana corporation. Kent E. Price (defendant-appellant below) and his wife, Sandra, were the sole officers, directors, and shareholders of the corporation.
On June 29, 1990, Aronson drove the car to Corbitt's Body Shop for restoration work to be done based on the April 6 estimate. Sometime between June and October, 1990, the business name of Corbitt's Body Shop was changed to Shadow's Body Shop. Aronson was given a business card reflecting this new name.
During the months that Aronson's car was at the body shop neither Price nor his employees told Aronson that the body shop was incorporated. Additionally, none of the body shop's signs, sales slips, or business cards indicated that the body shop was incorporated.
On October 3 or 4, 1990, Aronson had the car towed from what was then Shadow's Body Shop to Fowler's Custom Paint because it was damaged by work performed on it at Shadow's.
Aronson subsequently brought this negligence and breach of contract action naming Kent E. Price d/b/a Corbitt's Body Shop, Corbitt's Body Shop, Inc., and Shadow's Body Shop as defendants. The trial court entered judgment against Price and Corbitt's Body Shop, Inc., jointly and severally, after a bench trial. The trial court "pierced the corporate veil" which protects the shareholders of Indiana corporations from personal liability for the acts of their corporations, holding Price personally liable because: (1) the sign on the front of the shop, the business cards, and the receipts did not indicate that the business was incorporated which the trial court concluded was required by Indiana Code § 23-1-23-1(a) (1988); 1 (2) neither Price nor his employees informed Aronson that he was dealing with a corporation; and (3) a certificate of assumed name was not filed with the state until May 3, 1991, which the trial court concluded violated Indiana Code § 23-15-1-1 (1993). 2
Price appealed the judgment entered against him personally. 3 The Court of Appeals reversed the trial court judgment, holding that: (1) Indiana Code § 23-1-23-1(a) does no more than establish administrative procedures for indicating corporate status in the records of the secretary of state; (2) the fact that Aronson was never informed that the body shop was incorporated was not sufficient to justify piercing the corporate veil; and (3) failure to comply with Indiana Code § 23-15-1-1 is insufficient, alone, to justify piercing the corporate veil. Price, 629 N.E.2d at 270-71.
Aronson now seeks transfer. He asserts that the Court of Appeals wrongly reversed the trial court's finding that Price should be personally liable for negligence and breach of contract. We agree with the Court of Appeals and grant transfer to approve its decision and to elaborate on its analysis.
Limitation on the liability of corporate shareholders was not part of our English common law heritage. Model Business Corporation Act Annotated (Third Edition) § 6.22 (Annotation). Rather, it emerged in this country as a new legal tool to help meet the economic challenges of the day. Bernard Schwartz, Main Currents in American Legal Thought 121 (1992). By 1840, virtually all state legislatures had determined that the "furthering of capital formation could best be accomplished by encouraging shareholders to invest through limiting their liability." Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 Nw.U.L.Rev. 148, 155 (1992). Historically, the imposition of limited liability was perceived as a means of encouraging the small-scale entrepreneur and of keeping entry into business markets competitive and democratic. Id. This rationale gave rise to the fundamental principle of American corporate law that corporate shareholders sustain liability for corporate acts only to the extent of their investment and are not held personally liable for acts attributable to the corporation. See E. Merrick Dodd, The Evolution of Limited Liability in American Industry: Massachusetts, 61 Harv.L.Rev. 1351, 1378 (1948).
This principle of limited liability of corporate shareholders has been the common law of Indiana at least since 1897. 4 See Gainey v. Gilson (1897), 149 Ind. 58, 60-61, 48 N.E. 633, 634. The Indiana General Assembly codified this principle in the course of enacting the Indiana Business Corporation Law in 1986, providing that "a shareholder of a corporation is not personally liable for the acts or debts of the corporation." Ind.Code § 23-1-26-3(b) (1993). At the same time the legislature also codified the common law exception to this principle by providing that "the shareholder may become personally liable by reason of the shareholder's own acts or conduct." Id.
While an Indiana court will impose personal liability to protect innocent third parties from fraud or injustice, the burden is on the party seeking to pierce the corporate veil to prove that the corporate form was so ignored, controlled or manipulated that it was merely the instrumentality of another and that the misuse of the corporate form would constitute a fraud or promote injustice. Winkler v. V.G. Reed & Sons, Inc. (1994), Ind., 638 N.E.2d 1228, 1232 ().
In deciding whether a plaintiff has met this burden of proof, an Indiana court considers whether the plaintiff has presented evidence showing: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. See Eden United, Inc. v. Short (1991), Ind.App., 573 N.E.2d 920, 933, trans. denied; Stacey-Rand, Inc. v. J.J. Holman, Inc. (1988), Ind.App., 527 N.E.2d 726, 728; State v. McKinney (1987), Ind.App., 508 N.E.2d 1319, 1321.
In this case, the specific grounds cited by the trial court for piercing the corporate veil do not overcome the presumption of limited shareholder liability. Furthermore, the plaintiff has failed to meet its burden of proving misuse of the corporate form constituting fraud or promoting injustice.
Plaintiff first contends that the failure of the corporation to include the abbreviation "Inc." or other words indicating corporate existence in its name violated Ind.Code § 23-1-23-1 and, therefore, exposed its shareholders to personal liability.
Contrary to plaintiff's contention, Indiana Code § 23-1-23-1 does not require an Indiana corporation to use words designating its corporate form in its signage, business forms, invoices, or business cards. The requirements of this section of the Indiana Code go only to legal requirements of a corporate name for purposes of issuance of a corporate charter by the Indiana Secretary of State. There is no requirement in the corporate code that a corporation must do business under the name by which it was chartered, and we refuse to read any such requirement into the statute. Moreover, as the Court of Appeals pointed out, even if we were to agree with the plaintiff on the meaning of this statute, we would be unwilling to impose personal liability on the shareholders of the corporation solely for this reason in the absence of such a sanction being specifically provided by statute. See Price, 629 N.E.2d at 270 (quoting Fairbanks v. Chambers, 665 S.W.2d 33, 37 (Mo.Ct.App.1984)).
Plaintiff also contends that the failure of the corporation to file an assumed business name certificate with the County Recorder indicating that Corbitt's Body Shop, Inc., was doing business as "Shadow's Body Shop" violated Indiana Code § 23-15-1-1 and, therefore, exposed its shareholders to personal liability.
It is not disputed that the corporation failed to file an assumed business name certificate in accordance with the statute. However, as did the Court of Appeals, we conclude that this failure did not serve to impose personal liability on Price. We believe that the legislature intended the assumed business name filing requirement to provide information to litigants and others as to the true party in interest when contracts are made or business is done in an assumed name. Humphrey v. City Nat'l Bank (1921), 190 Ind. 293, 305-6, 130 N.E. 273, 277. This requirement has the effect of protecting the public from fraud and imposition by preventing business entities from concealing their identity. Sheraton Corp. of America v. Kingsford Packing Co. (1974), 162 Ind.App. 470, 480, 319 N.E.2d 852, 858. We find no basis in law for imposing personal liability on a shareholder for acts of the corporation solely because of the failure...
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