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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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