Chung v. Animal Clinic, Inc.

• Decision Date: 24 September 1981
• Docket Number: No. 6696,6696
• Citation: 63 Haw. 642,636 P.2d 721
• Court: Hawaii Supreme Court
• Parties: Nam Y. CHUNG, Claimant-Appellee, v. ANIMAL CLINIC, INC., Employer-Appellant, and Fireman's Fund American Insurance Co., Insurance Carrier-Appellant.

Page 721

636 P.2d 721

63 Haw. 642

Nam Y. CHUNG, Claimant-Appellee, v. ANIMAL CLINIC, INC., Employer-Appellant and Fireman's Fund American Insurance Co., Insurance Carrier-Appellant.

No. 6696.

Supreme Court of Hawai'i.

Sept. 24, 1981.

Syllabus by the Court

1. The essential prerequisite for coverage under Hawaii's Workers' Compensation Law is the existence of an employer-employee relationship.

2. A court may disregard corporate entity and treat corporation not as separate entity from its shareholders where recognition of corporate fiction would bring about injustice and inequity or when there is evidence that the corporate fiction has been used to perpetrate a fraud or defeat a rightful claim.

3. Fact that injured individual was sole director, sole stockholder, and president of the corporation by which he was employed was insufficient grounds on which to disregard the corporate entity and deny benefits under Workers' Compensation Law.

4. Under HRS § 386-3, coverage is established by the unitary test, and unitary test is that if injury can be said to be causally related with any incident or condition of employment, then it is deemed to arise out of and in the course of employment.

5. The presumption that a claim for compensation is for a work-connected injury may be rebutted only by substantial evidence that it is unrelated to the employment.

6. In HRS § 386-85, substantial evidence means relevant and credible evidence of a quality and quantity sufficient to justify a conclusion by a reasonable person that an injury or death is not work-connected.

7. The standard of review governing the supreme court's examination of the Labor and Industrial Relations Appeals Board's decision is contained in Hawaii's Administrative Procedure Act, which sets out the "clearly erroneous" standard of review.

8. The "clearly erroneous" standard requires the court to sustain the Board's findings unless the court is left with a firm and definite conviction that a mistake has been made.

9. Board's decision that heart attack was work-connected was not erroneous, despite medical testimony attributing heart attack to pre-existing heart disease and physical exertion.

Roland Q. F. Thom, Char, Hamilton, Taylor & Thom, Honolulu (Roy A. Vitousek, Honolulu, with him on the briefs; Donald A. Beck, Honolulu, with him on opening brief; Cades, Schutte, Fleming & Wright, Honolulu, of counsel), for employer-appellant and insurance carrier-appellant.

Hideki Nakamura, Honolulu (Lowell K. Y. Chun-Hoon, Honolulu, with him on the brief, King, Nakamura & Takahashi, Honolulu, of counsel), for claimant-appellee.

Before RICHARDSON, C. J., OGATA, MENOR and LUM, JJ., and ACOBA, Circuit Judge, in place of NAKAMURA, J., recused.

LUM, Justice.

This is an appeal ¹ brought by appellants Animal Clinic, Inc., and its insurance company from a decision of the Labor and Industrial Relations Appeals Board (Board) granting appellee Dr. Nam Y. Chung compensation benefits under Hawaii's Workers' Compensation Law (chapter 386, Hawaii Revised Statutes).

On December 23, 1974, Dr. Chung suffered a heart attack after office hours while jogging around the Kalani High School track. At the time of his heart attack, Dr. Chung was employed as the president of Animal Clinic, Inc. He was also the sole director and sole stockholder of the corporation.

Four issues are presented by this case: (1) whether Dr. Chung was an "employee" of his own professional corporation within the meaning of Hawaii's Workers' Compensation Law (HRS § 386-1) when he suffered his heart attack; (2) whether the Board applied the proper legal standard in determining whether Dr. Chung's heart attack arose out of and in the course of his employment, under HRS § 386-3; (3) whether the presumption contained in HRS § 386-85(1) that a claim is a covered work injury applies to this case; and (4) if the presumption applies, whether the appellants successfully rebutted the presumption with substantial evidence that the heart attack was not work-connected.

I.

Appellants' first argument is that Dr. Chung was not an "employee" of Animal Clinic, Inc., within the definition of HRS chapter 386, at the time he suffered his heart attack.

The essential prerequisite for coverage under Hawaii's Workers' Compensation Law is the existence of an employer-employee relationship. Kepa v. Hawaii Welding Co., 56 Haw. 544, 549, 545 P.2d 687, 691 (1976); Evanson v. University of Hawaii, 52 Haw. 595, 598, 483 P.2d 187, 190 (1971). HRS § 386-1 (1976 & Supp.1980) defines an "employee" as "any individual in the employment of another person" except where such employment is solely for personal, family, or household purposes. In addition, the statute makes it apparent that coverage under the law is dependent on the existence of a contractual relationship between the employer and the employee. HRS § 386-1, in pertinent part, provides:

"Employment" means any service performed by an individual for another person under any contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully entered into.

This statutory requirement of a contract between the employer and the employee has also been articulated in our case law. See Evanson v. University of Hawaii, supra at 598, 483 P.2d at 190.

At the hearing before the Board, an employment agreement, dated March 12, 1973, was introduced into evidence. This agreement was between Animal Clinic, Inc., as employer and Dr. Chung as employee. Dr. Chung signed for Animal Clinic, Inc., as "its president"; he also signed as employee.

Appellants do not dispute the existence of this employment agreement between Dr. Chung and Animal Clinic, Inc., but they argue that "this so-called agreement is null and void" because Animal Clinic, Inc., should not be considered to have a legal existence separate from Dr. Chung for workers' compensation purposes. Appellants contend that because Dr. Chung had the sole authority to run the business and to define his own work and salary, and because he was the director, president, and sole stockholder, this court should "pierce the corporate veil" and find that Dr. Chung is the "alter ego" and not an "employee" of Animal Clinic, Inc.

The general rule is that a corporation and its shareholders are to be treated as distinct legal entities. The corporate "veil" will be pierced and the legal entity of the corporation will be disregarded only where recognition of the corporate fiction would bring about injustice and inequity or when there is evidence that the corporate fiction has been used to perpetrate a fraud or defeat a rightful claim. Kahili, Inc. v. Yamamoto, 54 Haw. 267, 271-72, 506 P.2d 9, 12 (1973); Industrial Commission v. Lavach, 165 Colo. 433, 437, 439 P.2d 359, 361 (1968).

There is a split of authority as to whether dominant or exclusive stock ownership and control of corporations is in itself reason to disregard the corporate entity.

One line of authority holds that the sole or major stockholder of a corporation who is also a corporate officer or runs the business as his or her own cannot sustain an employer/employee relationship with his or her corporation. Martines v. Terminal Methods, Inc., 101 R.I. 599, 225 A.2d 790 (1967); Roark v. Roark Motors Co., 196 Kan. 741, 413 P.2d 1019 (1966); Duvick v. Industrial Commission, 22 Wis.2d 155, 125 N.W.2d 356 (1963); Leigh Aitchison, Inc. v. Industrial Commission, 188 Wis. 218, 205 N.W. 806 (1925).

The other line of authority holds that dominant or exclusive stock ownership and control of corporations does not prevent a finding that such stockholders were employees. Marlin Electric Co. v. Industrial Commission, 33 Wis.2d 651, 148 N.W.2d 74 (1967); Industrial Commission v. Lavach, supra; Gottleib v. Arrow Door Co., 364 Mich. 450, 110 N.W.2d 767 (1961); Corcoran v. P. G. Corcoran Co., 245 Minn. 258, 71 N.W.2d 787 (1955).

In Industrial Commission v. Lavach, supra, the decedent was a joint owner with his wife of an incorporated business involved in moving, storage, and truck rentals. The Colorado Supreme Court held that when decedent died in an automobile accident while driving home in the company truck, the accident was compensable under Colorado workers' compensation law. The court stated:

The fact that decedent owned all the stock in the corporation, standing alone, is insufficient grounds on which to base a denial of benefits under the Workmen's Compensation law. This court in Box v. Roberts, 112 Colo. 234, 148 P.2d 810, approved this rule in the following terms:

" * * * Even where all the stock is owned by a sole shareholder, there seems no adequate reason to depart from the general rule that the corporation and its shareholders are to be treated as distinct legal persons. * * * "

The record in the instant case contains no evidence tending to show that Lavach conducted his business through the Company "as a means of accomplishing a fraud or an illegal act."

Id. at 437, 439 P.2d at 361.

We decide to follow the second line of authority. Under Hawaii law, there is no specified or minimum number of stockholders that is required for valid corporate existence. The fact that a sole or principal stockholder dominates a corporation violates no statutory requirement, is not opposed to public policy, and constitutes no fraud on creditors. Since we decide that exclusive stock ownership and control of corporations is not solely determinative on the issue of whether we should disregard the corporate entity, we must include other facts in our analysis.

There was an employment agreement between the employer and the claimant. During 1974, Animal Clinic, Inc., employed two veterinarians and 15 to 18 other full and part-time personnel. The record shows that the largest part of Dr. Chung's workdays were spent in clinical work, typical of any veterinarian in similar employment. Based on these facts, we find that there was a corporate entity which clearly functioned as an...