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The
Approach of New York, Wisconsin,
and Texas in Applying Their Law
to Foreign Corporations
(As Compared to California)
New York
The historic view of New York in regulating foreign
corporations was articulated by Judge (later U.S. Supreme Court Justice)
Benjamin Cardozo:
When countless corporations, organized on paper in
neighboring states, live and move and have their being in New York,
a sound public policy demands that our legislature be invested with
[a] measure of control.
German-American Coffee Co. v. Diehl,
216 N.Y. 57, 109 N.E. 875, 877 (1915) (quoted in Wilson v. Louisiana-Pacific
Resources, Inc., 187 Cal. Rptr. 852, 861, 138 Cal. App.3d 216, 229
(1982)). In fact, the New York Legislature applied more than a "measure
of control."
By 1850, most states had moved towards the concept of
limited liability through statutory enactments. New York, however, retained
the rule of double liability for shareholders of corporations
until 1923. Janet Cooper Alexander, "Unlimited Shareholder Liability
Through A Procedural Lens," 106 Harv. L. Rev. 387, 415, 415 n.
134 (1992). This is similar to California's history, which retained
pro rata shareholder liability for corporate shareholders until 1931. Id. at 415, 415 n. 135. See also Mark R. Patterson, "Is
Unlimited Liability Really Unattainable?: Of Long Arms And Short Sales," 56 Ohio St. L.J. 815, 820-21 (1995). Furthermore, while unlimited shareholder
liability for unpaid wages persisted into the 20th century but then
disappeared in 48 states, New York retains the rule to this day. Id.
at 821 (The other state which retains this rule is Wisconsin. See.infra.)
Does this history indicate that New York will apply
its corporation law to foreign corporations as indiscriminately as California
does? Not at all. The New York statute concerning shareholder joint
and several
liability for unpaid wages; was addressed in Armstrong
v. Dyer, 268 N.Y 671, 198 N.E 551 (1935). Here, the court held that
the statute was not applicable to foreign corporations, only
domestic. This case has never been overruled.
Although current New York corporation law nominally
applies to foreign corporations, it has never been interpreted in as
an aggressive manner as California's law. "New York corporation
law makes several provisions applicable to foreign corporations which
do a substantial amount of business in the state. See N.Y. Bus.
Corp. Law §§ 1317-20 (McKinney 1963 & Supp. 1981)." Stephen
R. Ginger, "Regulation Of Quasi- Foreign Corporations In California:
Reflections On Section 2115 After "Wilson V. Louisiana-Pacific
Resources, Inc.," 14 Sw. U.L. Rev 665, 667 n. 11 (1984). The
New York statutes are not as broad or as far reaching in their effect" as California Corporations Code Section 2115. Id, at 667.
When Wilson, supra, was decided, the New York
law was the only one in effect nationwide which was similar to
Section 2115. See Wilson, supra, 187 Cal. Rptr. at 860
n . 138 Cal App.3d at 227 n. 7. The court explained that the California
and New York statutes have different purposes:
It should be noted, however, that while the specific
aim of the California statute is to extend to pseudo-foreign corporations,
its traditional protection of the rights of shareholders and creditors,
New York . . . was as interested in liberalizing its entire statute
to keep pace with the more permissive states as it was in foreclosing
use of foreign incorporations as a means of escaping local regulation.
Id. (quoting Note, "The
Pseudo-Foreign Corporation In California," 28 Hastings L.J. 119,
126 1976). The court added that the New York statute has had little
impact on foreign corporations, as evidenced "by the dearth of
reported cases under them." Wilson, supra, 187 Cal. Rptr
at 860 n. 7, 138 Cal. App.3d at 227 n. 7.
Not only does research confirm this last statement,
but New York's entire approach to "piercing" is different
from California's:
New York and California courts appear to be on opposite
extremes regarding the evidence necessary to allow for piercing the
corporate veil. Historically, New York has generated many of the most
important corporate veil cases, and other jurisdictions have followed
the restrictive view of New York courts toward disregarding the corporate
entity. The basic position of these decisions is that the corporate
veil should not be readily pierced. In furtherance of this position,
New York and other states adopting this view require a strong showing
of fraud or other improper purpose. . . . In comparison, California
courts appear to be quite liberal in their application of the piercing
doctrine.
Comment, "Piercing The Corporate Veil In Federal
Courts: Is Circumvention Of A Statute Enough?" 13 Pacific L.J.
1245, 1251-52 (1982). Accord, Robert B. Thompson, "Piercing
The Corporate Veil: An Empirical Study," 76 Cornell L. Rev. 1036,
1052 (1991) ("New York, as this country's leading commercial center
has produced the most piercing cases. As a group, the New York decisions
seem somewhat more restrictive on piercing than cases from the rest
of the country.").
New York also takes a different approach from California
on the issue of dissolved corporations. As discussed in the previous
paper involving California law (at 14), a California appellate court,
in North American Asbestos Corp. v. Superior Court, 225
Cal. Rptr. 877, 180 Cal. App.3d 902 (1986), applied California law to
an Illinois corporation which had been dissolved years before. This
caused the corporation to defend a law suit for injuries arising out
of its predissolution activities in California.
New York, on the other hand, applies the law of the
state of incorporation upon the rationale that persons dealing with
the dissolved foreign corporation are charged with knowledge of the
statutes of the corporation's state of domicile, and are bound by them.
See Bayer v. Sarot, 381 N.Y.S.2d 489 (App. Div. 1976),
aff'd, 364 N.E.2d 848 (1977).
As can be seen, New York, although having a statutory
scheme which nominally applies its corporation law to foreign corporations,
has been far less aggressive than California in doing this. A state
which acts this way is less likely to "pierce the corporate veil"
of a foreign corporation. In fact, as the evidence indicates, New York
is less likely to "pierce" in any case when compared to other
states in general, or California in particular. New York takes a pro-business,
anti-paternalistic view of the situation at issue. This is quite refreshing
compared to the view of California's courts.
Wisconsin
As stated above, Wisconsin is the only state, besides
New York, to impose pro rata shareholder liability for unpaid employee
wages. This is limited to six months of wages. Wis. Stat. Ann. § 180.0622(2)(b)
(West 1992). See Patterson, supra, 56 Ohio St. L.J. at
821, 821 n. 28. This statute was at issue in Joncas v. Krueger, 61
Wis. 2d 529, 213 N.W.2d 1 (1973). The court held that this statute was
applicable to a foreign corporation. The court stated:
We see no valid distinction why shareholders of foreign
corporations should be favored or why Wisconsin employees working
in Wisconsin should be classified for benefits depending upon where
their employer is incorporated.
Id. at 535, 213 N.W.2d
at 4. The court rejected the argument that public policy prevented applying
the law to shareholders of foreign corporations:
Such policy finds no valid basis respecting the shareholders
of foreign corporations doing business in Wisconsin; such shareholders
should not be treated differently than shareholders of a domestic
corporation. Wisconsin can impose such liability as a condition of
doing business in this state.
Id. at 534, 213 N.W.2d
at 3.
This broad statement was supported by the citation of
Pinney v. Nelson, 183 U.S. 144 (1901) and Thomas v. Matthiessen,
232 U.S. 221 (1914). As discussed in the previous paper involving
California law (at 2-4), these two cases upheld the right of California
to apply its law to foreign corporations. However, the court apparently
did not consider the fact that since only Wisconsin and New York have
statutes dealing with shareholder liability for employee wages, and
48 states do not, a foreign corporation in Wisconsin is likely to be
subjected to inconsistent regulations. As such, this raises the possibility
of a violation of the commerce clause. (See previous paper involving
California law, at 7.) Thus, if the issue ever reaches the Wisconsin
appellate courts again, it is likely that a proper commerce clause analysis
would render that statute inapplicable to foreign corporations.
Apparently, this was Wisconsin's only attempt at applying
its law to a foreign corporation. As it does not have a law similar
to California or New York regarding application of its law to foreign
corporations doing substantial business there, it is unlikely that a
large amount of cases will arise there. If they do, individual statutes
will be applied on a case-by-case basis, and the analysis will have
to confront the commerce clause.
Texas
The state of Texas represents a proper legislative response
to the dangers of judicial legislation. In Castleberry v. Branscum,
721 S.W.2d 270 (Tex. 1986), the court "pierced the corporate
veil" on very broad grounds. It held that a plaintiff need only
prove constructive fraud which is:
The breach of some legal or equitable duty which irrespective
of moral guilt, the law declares fraudulent because of its tendency
to deceive others, to violate confidence, or to injure public interests.
Id. at 273.
In apparent response to this case, the Texas Legislature
acted See Thompson supra, 76 Cornell L. Rev. at 1042.
It passed a statute in 1989:
That limits a shareholder's liability for fraud arising
from a corporation's contractual obligations 'unless the obligee demonstrates
that the [shareholder] caused the corporation to be used [for] actual
fraud . . ., primarily for the direct personal benefit of the [shareholder].'
Id. (quoting Tex. Bus.
Corp Act Ann. art. 2.21A(2) Vernon Supp. 1991).
"Another provision purports to block shareholder
liability for a corporation's contractual obligations based on absence
of corporate formalities." Thompson, supra, 76 Cornell L,
Rev. at 1042 (citing Tex. Bus. Act Ann. Art. 2.21A(3). Most important
was the enactment of Tex. Bus Act Ann. art. 8.02 (Vernon 1991), which:
States that the laws of the jurisdiction of incorporation
of a foreign corporation shall govern internal affairs and 'the liability,
if any, of shareholders of the foreign corporation for the debts,
liabilities and obligations of the foreign corporation for which they
are not otherwise liable by statute or agreement.'
Thompson, supra, 76 Cornell L. Rev. at 1054 n.
96 (quoting art. 8.02).
Thus, Texas, by statute, makes it clear that it will
not apply its law to foreign corporations. Instead, internal affairs
and shareholder liability will be governed by the law of the state of
incorporation. This is a very enlightened position which should increase
business in the state of Texas.
Conclusion
Although New York has a statutory scheme similar to
California's, it has not been applied to foreign corporations in as
aggressive a manner as California has done. Further, given the high
level of fraud required to "pierce" in New York, it is unlikely
that, anytime soon, New York will aggressively apply its law to foreign
corporations.
Wisconsin does not have a similar statutory scheme,
and its "history" of applying an individual statute to a foreign
corporation is misguided, and quite possibly unconstitutional. Texas
seems to have solved this problem in an intelligent manner, leaving
the internal affairs of corporations, as well as the issue of shareholder
liability, to be guided by the law of the state of incorporation.
Thus, in comparison, none of these states poses a threat
to foreign corporations that California does. Fortunately, as previously
discussed, California's method is vulnerable to constitutional attack
under the commerce clause.
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