ZAIST v. OLSON

154 Conn. 563 (1967) | Cited 51 times | Supreme Court of Connecticut | March 7, 1967

The plaintiffs brought this actionagainst Martin Olson, The East Haven Homes, Inc.,and Martin Olson, Inc. The allegations of thecomplaint, briefly stated, are that the plaintiffsrendered services, supplied materials andfurnished equipment to The East Haven Homes, Inc.,for work on properties owned or leased by MartinOlson and Martin Olson, Inc., or by corporationssubsequently merged into the latter; that the services,material and equipment were furnished atthe instance and request of Martin Olson, who wasan officer and director and the person in generalcharge of the affairs of The East Haven Homes,Inc.; that this corporation acted as the agent orinstrumentality of Martin Olson and of MartinOlson, Inc., of which Martin Olson was also anofficer and director and the person in generalcharge; that the services rendered and thematerial and equipment furnished inured to thebenefit of Martin Olson and Martin Olson, Inc.;and that the plaintiffs were entitled to recoverthe amount due with interest.

The defendants' answer was a general denial, and,on stipulation of the parties, the court referredthe case to a referee to hear the facts and to report.The referee filed his report, recommending ajudgment in favor of the plaintiffs against MartinOlson and Martin Olson, Inc. The defendants made a

[154 Conn. 566]

     massive attack on the report by a motion tocorrect, in response to which the referee made alimited number of corrections, whereupon thedefendants filed with the court, and were heardon, exceptions to the report as corrected and arequest for further corrections by the court. Thecourt overruled the exceptions, refused to make thecorrections sought, and rendered judgment on thereferee's report. This appeal is from that judgment.

The judgment is that the plaintiffs recover ofMartin Olson and Martin Olson, Inc., a total of$31,596.95, which includes interest to the dateof judgment. It fails to dispose of the issuesbetween the plaintiffs and The East Haven Homes,Inc. All three defendants have appealed, however.The record in the case is, therefore, incompletebecause of the failure of the judgment file torecord any action by the court concerning The EastHaven Homes, Inc. Harris v. First National Bank &Trust Co., 139 Conn. 749, 751, 97 A.2d 260. Thereis, in fact, no judgment from which that defendantmay appeal. While this defect has obviouslyescaped the attention of the parties, the casestands before us as an appeal by the defendantsMartin Olson and Martin Olson, Inc.

The memorandum of decision makes clear thatrecovery was allowed to the plaintiffs againstonly Martin Olson and Martin Olson, Inc. It wasapparently through an oversight that nodisposition as to the other defendant was ordered.Pepin v. Ryan, 133 Conn. 12, 17, 47 A.2d 846. Thejudgment file was signed by the clerk; PracticeBook 270; and correctly followed the mandate ofthe memorandum of decision. Thus, it is properlysubject to correction only if we first set it aside.Lerner Shops of Connecticut, Inc. v. Waterbury, 151 Conn. 79,

[154 Conn. 567]

     94, 193 A.2d 472. Regardless of the decisionon the other issues involved, the judgment must beset aside and the case remanded so that the judgmentmay be corrected to dispose of the issues betweenthe plaintiffs and The East Haven Homes, Inc. Machizv. Homer Harmon, Inc., 146 Conn. 523, 526,152 A.2d 629; see Wexler Construction Co. v. Housing Authority,149 Conn. 602, 607 n., 183 A.2d 262.

We turn now to the appeal by the defendantsMartin Olson and Martin Olson, Inc., which, inactuality, is the only appeal briefed and arguedbefore us. These defendants once again attack, inwholesale fashion, the referee's finding of thefacts upon which the judgment was rendered. Astudy of the evidence submitted in the appendicesto the briefs satisfies us that no corrections inthe referee's amended report are merited and thatthe court did not err in overruling the exceptionsand objections to it or in refusing to make anycorrections in it. Except for a ruling onevidence, which will be later discussed, the onlyissue, and the basic one, is the claim that thecourt erred in rendering judgment on the basis ofthe conclusions that the services, materials andequipment furnished by the plaintiffs inured tothe benefit of Martin Olson and Martin Olson, Inc.,and that those defendants acted through the agencyor instrumentality of The East Haven Homes, Inc.

The essential facts, as found by the referee,may be summarized as follows: In 1943, MartinOlson, subsequently referred to as Olson, causedThe East Haven Homes, Inc., which we shall callEast Haven, to be incorporated. Two hundred sharesof stock were issued, of which Olson received 198;the other two shares were issued, one each, to his

[154 Conn. 568]

     lawyer and his bookkeeper. Olson was president,treasurer and a director. He continued aspresident until November, 1955, and as treasureruntil November, 1962, and, throughout all thedealings hereinafter related, he controlled EastHaven and was empowered to sign all checks for it.

During 1952 and 1953, Olson personally acquiredland in Groton for the purpose of erecting ashopping center. In April, 1954, he requested theplaintiffs to submit, and the plaintiffs didsubmit, prices for clearing and grading this land.The terms were mutually agreeable, and theplaintiffs began the work, setting the account ontheir records under the heading "Martin Olson".Thereafter, and before any payment was made, Olsontold the plaintiffs to send the bills to East Haven,and the plaintiffs did so, keeping their recordsvariously in the names of Olson and East Haven.

In 1954, Olson caused Martin Olson, Inc.,hereinafter called Olson, Inc., to beincorporated; in it he owned, personally or astrustee for three of his minor children, thirty-twoof the forty shares of issued stock. Olson waspresident and treasurer and in full control of thecorporation from its inception until October,1959. He and two of his children were thedirectors, and a son was vice-president.Thereafter, Olson quitclaimed a substantial partof his Groton land to Olson, Inc., which alsoacquired additional adjoining land from privateowners. The plaintiffs continued to work on theland, known to them only as the Groton shoppingcenter, unaware of any change in title. Olson, orin his absence his son, directed the work. In 1955,Olson, Inc., reconveyed part of the land to Olson.

While the plaintiffs were at work on the Groton

[154 Conn. 569]

     land, Olson and Olson, Inc., acquired land for ashopping center in New London. In 1955, Olsoncaused The New London Shopping Center, Inc., to beincorporated. Olson was president and treasurer ofthat corporation and held all the stock personallyor as trustee for his three minor children. Thereafter,Olson, this time describing himself aseither "of" or "acting for" East Haven, made threecontracts with the plaintiffs for work to be doneand materials to be furnished in developing theNew London shopping center land.

Later, Olson, Inc., voted to sell a large partof its New London land to The New London ShoppingCenter, Inc., which then had little if any capitalfunds, for $177,000, and Olson, as president,signed the deed. Meantime, East Haven voted tocontract with Olson, Inc., to erect a shoppingcenter in Groton for not over $450,000 and tocontract with The New London Shopping Center,Inc., to erect a shopping center in New London fornot over $1,700,000, but no such contracts wereever executed. While this was going on, theplaintiffs were continually working on theproperties both in Groton and New London; and EastHaven, with fixed assets consisting of officefurniture, a few small tools and cars and a truckof small value, had neither the funds nor theequipment to construct either of the shoppingcenters. Nevertheless, East Haven, acting by Olsonor his son, the vice-president of Olson, Inc.,engaged various contractors for both projects.Funds for the construction of both projects wereprovided by a bank loan of $1,700,000 secured bya mortgage given by The New London Shopping Center,Inc., the proceeds from which were paid overto East Haven. Neither corporation was able, withthese funds, to complete the New London project,

[154 Conn. 570]

     and Olson besought the lending bank for additionalfunds.

To meet the lending bank's demand, Olson causedViking, Inc., to be formed, to which The NewLondon Shopping Center, Inc., conveyed a part ofits land, which Viking, Inc., on the same daymortgaged to the lending bank for a loan of$650,000. Olson controlled, and was president,treasurer and a majority stockholder of, Viking,Inc., and was authorized by it to borrow such sumsas he deemed advisable. The proceeds of the$650,000 loan were paid over to East Haven and used topay bills on the New London project, and Viking,Inc., acting by Olson as its president, reconveyedto The New London Shopping Center, Inc., the landwhich was mortgaged to secure, and was covered by,the $650,000 mortgage.

During the month after Viking, Inc., was formed,Olson, Inc., acquired a tract of land in Waterfordon which the plaintiffs also worked under acontract with East Haven. Thereafter, The NewLondon Shopping Center, Inc., was merged intoOlson, Inc., the two corporations continuing underthe name of Olson, Inc., which remained under thefull control of Olson. A few months later Olson,Inc., quitclaimed a substantial portion of itsGroton land to Olson after Olson had notified theplaintiffs that, owing to the financial status ofEast Haven, "we would not be in a position todiscuss settlement with you for at least anotherfour months." About two months before this suitwas brought, Olson and his children conveyed theirstock in Olson, Inc., to a syndicate, so thatOlson no longer controls the corporation.

For five years subsequent to April, 1954, theplaintiffs had furnished labor, materials and equipment

[154 Conn. 571]

     on the aforementioned lands in Groton, NewLondon and Waterford to an amount in excess of$192,752.66, all of which labor, materials andequipment inured to the benefit of Olson andOlson, Inc. The plaintiffs had been paid$169,652.66 by checks of East Haven, of which anaggregate of $97,401.26 had been signed by Olsonand the balance by his son as vice-president ofEast Haven. The balance owed to the plaintiffs asof December 31, 1959, was $23,100.

The offices maintained by Olson, Olson, Inc.,East Haven, The New London Shopping Center, Inc.,and Viking, Inc., were all at the same address,and Olson's secretary was also secretary andbookkeeper for Olson, Inc., and East Haven. EastHaven was originally formed for the purpose ofbuilding homes and, prior to 1954, engaged in thatand other construction work on property of Olsonand others. During the period covered by theplaintiffs' work, East Haven maintained an officeand a checking account, kept corporate andfinancial records, filed corporation returns, andhad employees. The record is completely silent asto any similar activity or conduct on the part ofany of the other corporations involved except forthe single meeting of Olson, Inc., at which thatcorporation voted to sell land to The New LondonShopping Center, Inc., for $177,000, and thesingle meeting of Viking, Inc., which authorizedOlson to borrow such sums as he deemed advisable.The only corporate action found to have been takenby East Haven relating to these projects consistsof the two votes authorizing contracts with Olson,Inc., which were never consummated, to erectshopping centers in Groton and New London.

The referee concluded that East Haven, in allits dealings, was the agent of Olson and Olson, Inc.

[154 Conn. 572]

     The defendants not only denied this agency butalso claimed that no services, materials orequipment furnished by the plaintiffs inured tothe benefit of Olson or Olson, Inc., and thatneither of those defendants was indebted to theplaintiffs. The court concluded, in substance,that the referee could reasonably find that Olsontransacted business as an individual and alsothrough corporate entities under his control andthat all of the services rendered by theplaintiffs inured to the benefit of Olson andOlson, Inc. The second portion of this conclusionrequires no discussion. The facts recited demonstrateclearly enough that Olson or Olson, Inc.,received the benefit of the plaintiffs' servicesand the materials and equipment furnished by them.It is the first portion of the conclusion whichposes the question for decision, namely, thatOlson transacted the business as an individual andthrough corporate entities under his control.

Although Olson was the person with whom theplaintiffs dealt, he directed them to look to EastHaven for payment, and the plaintiffs did so. Allchecks issued in payment of bills rendered wereEast Haven checks signed by either its vice-presidentor by Olson, who was its president. EastHaven was, as a corporation, a separate legalentity. It must be assumed, from the facts found,that the plaintiffs undertook to deal with thiscorporation. The facts indicate that they wereunaware of, and probably indifferent to, theidentity of the owners of the property, who wereto receive the actual benefit of their work. Nothingis indicated to warrant the conclusion that Olsonever enlightened them on this subject or that theyever asked him to do so. These circumstances did notprevent the plaintiffs, once they learned that their

[154 Conn. 573]

     undertaking was for the benefit of Olson andOlson, Inc., from seeking to hold them, as theydid in this action. Simon v. Fernandez, 100 Conn. 438,442, 123 A. 904; Merrill v. Kenyon, 48 Conn. 314,319; see Fleischer v. Wein, 92 Conn. 372,374, 102 A. 769. So long as other requirementswhich justified a recovery were met, theplaintiffs were entitled to hold Olson and Olson,Inc., for the amount due them. And this brings usto the basic question of the plaintiffs' right tolook beyond East Haven, the corporate entity withwhich they dealt, to Olson and Olson, Inc., for arecovery of the amount due them.

The referee and the court based this right onagency. No express agency was found to exist, and,consequently, either an implied agency was meant,or the term "agency" was loosely used, as issometimes done, to pierce the shield of immunityafforded by the corporate structure in a situationin which the corporate entity has been socontrolled and dominated that justice requiresliability to be imposed on the real actor. 1Fletcher, Corporations (Perm. Ed. 1963 Rev.) 43;Ballantine, Corporations (Rev. Ed.) 136. Thecomplaint alleged that East Haven was "the agentor instrumentality" of Olson and Olson, Inc. Wethink that it was the latter.

Courts> will disregard the fiction of separatelegal entity when a corporation "is a mereinstrumentality or agent of another corporation orindividual owning all or most of its stock."Hoffman Wall Paper Co. v. Hartford, 114 Conn. 531,535, 159 A. 346; see Humphrey v. Argraves,145 Conn. 350, 354, 143 A.2d 432; Swiss Cleaners,Inc. v. Danaher, 129 Conn. 338, 345,27 A.2d 806; Hill v. Jones, 118 Conn. 12, 17,170 A. 154. "Under such circumstances the generalrule, which recognizes the individuality of

[154 Conn. 574]

     corporate entities and the independent characterof each in respect to their corporatetransactions, and the obligation's incurred byeach in the course of such transactions, will bedisregarded, where, as here, the interests ofjustice and righteous dealing so demand."Connecticut Co. v. New York, N.H. & H.R. Co.,94 Conn. 13, 26, 107 A. 646; New Haven Metal &Heating Supply Co. v. Danaher, 128 Conn. 213, 222,21 A.2d 383. The circumstance that control isexercised merely through dominating stockownership, of course, is not enough. Hoffman WallPaper Co. v. Hartford, supra; see Kulukundis v.Dean Stores Holding Co., 132 Conn. 685, 689,47 A.2d 183. There must be "such domination offinances, policies and practices that thecontrolled corporation has, so to speak, noseparate mind, will or existence of its own and isbut a business conduit for its principal." 1Fletcher, op. cit., p. 205.

In the present case, Olson, Inc., owned none ofthe stock of East Haven. On the other hand, Olsonheld a dominating stock interest in both EastHaven and Olson, Inc., and was president,treasurer and a director of both corporations. Itis not the fact that he held these positions whichis controlling but rather the manner in which heutilized them. The essential purposes of thecorporate structure, including stockholderimmunity, must and will be protected when thecorporation functions as an entity in the normalmanner contemplated and permitted by law. When itfunctions in this manner, there is nothinginsidious in stockholder control, interlockingdirectorates or identity of officers. When,however, the corporation is so manipulated by anindividual or another corporate entity as to becomea mere puppet or tool for the manipulator, justicemay require the courts> to disregard the corporate

[154 Conn. 575]

     fiction and impose liability on the realactor. Wenban Estate, Inc. v. Hewlett, 193 Cal. 675,697, 227 P. 723; Minifie v. Rowley, 187 Cal. 481,488, 202 P. 673; United Transit Co. v. Nunes,99 R.I. 501, 508, 209 A.2d 215, and cases cited;see Starr Burying Ground Assn. v. North LaneCemetery Assn., 77 Conn. 83, 92, 58 A. 467. It isbecause of this that there have arisen what arecalled the "instrumentality" or "identity" rules.Powell, Parent and Subsidiary Corporations 2, 3.

The instrumentality rule requires, in any casebut an express agency, proof of three elements:(1) Control, not mere majority or complete stockcontrol, but complete domination, not only offinances but of policy and business practice inrespect to the transaction attacked so that thecorporate entity as to this transaction had at thetime no separate mind, will or existence of itsown; (2) that such control must have been used bythe defendant to commit fraud or wrong, toperpetrate the violation of a statutory or otherpositive legal duty, or a dishonest or unjust actin contravention of plaintiff's legal rights; and(3) that the aforesaid control and breach of dutymust proximately cause the injury or unjust losscomplained of. Lowendahl v. Baltimore & O.R. Co.,247 A.D. 144, 157, 287 N.Y.S. 62; Fisser v.International Bank, 282 F.2d 231, 238 (2d Cir.);Powell, op. cit. 2, 3; see Steven v. Roscoe TurnerAeronautical Corporation, 324 F.2d 157, 160 (7th Cir.).

Complementing the instrumentality rule is theidentity rule. Powell, op. cit. 24. Itsapplication is illustrated in Luckenbach 5.5. Co.v. W. R. Grace & Co., 267 F. 676 (4th Cir.). Inthat case, Edgar F. Luckenbach owned 94 percent ofthe stock of the Luckenbach Steamship Company

[154 Conn. 576]

     and almost 90 percent of the stock of theLuckenbach Company. The Luckenbach SteamshipCompany had a capital of $10,000 and owned noships. The Luckenbach Company was capitalized at$800,000 and did own ships which it leased to thesteamship company. Both corporations had the sameofficers and directors, and Luckenbach waspresident of and personally managed both. When thesteamship company defaulted on a contract with W.R. Grace and Company, the latter, in a suitagainst the two corporations, was allowed recoveryagainst the Luckenbach Company. The court said(p. 681): "For all practical purposes the two concernsare one and it would be unconscionable to allowthe owner of this fleet of steamers, worthmillions of dollars, to escape liability becauseit had turned them over a year before to a$10,000 corporation, which is simply itself in anotherform." The proposition has been otherwiseexpressed as follows: "If plaintiff can show thatthere was such a unity of interest and ownershipthat the independence of the corporations had ineffect ceased or had never begun, an adherence tothe fiction of separate identity would serve onlyto defeat justice and equity by permitting theeconomic entity to escape liability arising out ofan operation conducted by one corporation for thebenefit of the whole enterprise." Mull v. Colt Co.,31 F.R.D. 154, 163 (S.D.N.Y.); Walkovszky v. Carlton,24 App. Div.2d 582, 583, 262 N.Y.S.2d 334.

The facts in the present case are, beyond question,that Olson caused the creation of both EastHaven and Olson, Inc., and thereafter completelydominated and controlled not only them but hisother corporate creations. All shared the same

[154 Conn. 577]

     office. All the work and material furnished by theplaintiffs went into land which, after beingjuggled about, came to rest in Olson or Olson,Inc. The record is significantly silent withregard to any formal corporate action by thedirectors or stockholders of any of the severalcorporations except in the insignificant instancesspecifically mentioned. See Namura v. Machulsky,96 Conn. 465, 467, 114 A. 672. East Haven had nosufficient funds of its own and acquired no fundsfor the work on its own initiative. It had noproprietary interest in the property on which thework was done, and, so far as appears, it gainednothing from whatever part it played in thetransaction. Its domination and control are aptlydefined in Lowendahl v. Baltimore & O.R. Co.,supra, 154, namely, "a domination and control socomplete that the corporation may be said to haveno will, mind or existence of its own and to beoperated as a mere department of the business ofthe stockholder." With no showing of anyresponsible corporate action of its own, it wasused by Olson for the benefit of Olson and Olson,Inc. On the facts established, the cause ofjustice would not be served by denying to theplaintiffs the amount found due them and unpaidbecause of the inadequate resources of East Haven.

We do not wish to be understood to countenance,by anything we have said here, the imposition ofthe legitimate indebtedness of a corporation upona majority stockholder in derogation of his legalimmunity merely because of the corporate controlinherent in his stock ownership. The present casepresents a set of circumstances far different fromthat. The only reasonable meaning to attach to thetransactions spread upon this record is that EastHaven undertook no obligation of its own to the

[154 Conn. 578]

     plaintiffs, was financially unable to cope withthe actual transaction, and reaped no benefit fromit. The undertaking throughout was Olson's,planned and carried out through his various othercorporate creatures for his own and Olson, Inc.'s,enrichment, a part of which, if the plaintiffswere to be denied a recovery, would consist of theamount which East Haven, as the plaintiffs' ostensibledebtor, is unable to pay because Olson and Olson,Inc., have not provided the final necessary funds.

On the basis of the referee's report, the courtcould properly conclude that Olson so completelycontrolled East Haven that that corporation had"no separate mind, will or existence of its own";see 1 Fletcher, Corporations (Perm. Ed. 1963 Rev.)p. 205; that the control was used to perpetrate anunjust act in contravention of the plaintiffs'rights; and that it caused the unjust losscomplained of. Consequently, a judgment againstOlson was warranted. The court could, with equalpropriety, reach the conclusion that the identityof Olson and Olson, Inc., was such that judgmentagainst Olson, Inc., was warranted. The court infact rendered judgment for the full amount againstboth Olson and Olson, Inc. This aspect of thejudgment is not in issue since neither of thosedefendants has claimed that the other is eithersolely or partially responsible for the amountfound due. Indeed, each of those two defendantssteadfastly denied that either was liable to theplaintiffs for anything.

A ruling on evidence remains to be considered.After deeds had been offered to show conveyancesof the land in Groton to and from Olson and Olson,Inc., maps of the area which had been filed severalyears later were offered "to assist the Court infollowing the transactions here." The defendants

[154 Conn. 579]

     objected on the ground that "the map doesn'tclearly show the condition during the period thatwe are involved in." During a lengthy colloquy,the plaintiffs added a statement that the map inquestion Gas offered "to merely show locations ofwhere Martin Olson ended up owning." The refereeobserved: "The only purpose I can see of having amap in anyway is so that the witness, if he can,will point out some place on the map where he sayshe worked." The maps were admissible to enable thecourt to visualize the general situation. Dawsonv. Davis, 125 Conn. 330, 332, 5 A.2d 703. Thereferee placed no such limitation, however, inadmitting the maps in evidence. The defendants nowargue that the maps were offered to show Olson'sownership of the land and were inadmissible forthat purpose. The objection made at the time ofthe offer did not clearly raise this issue, andthe report shows that the referee relied on deedsrather than the maps to establish ownership. Theruling was harmless.

There is error in the form of the judgment, itis set aside and the case is remanded withdirection to correct the judgment by adjudgingthat the defendant The East Haven Homes, Inc.,recover of the plaintiffs its costs, and otherwiseto render judgment as on file.

In this opinion KING, C.J., and RYAN, J., concurred.

1. "That a `one man' corporation is a valid juralperson was decided by the House of Lords in 1897, and hasnot been doubted ever since." United States v. Weissman,219 F.2d 837, 838 (2d Cir.) (L. Hand, J.).

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