Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 10. Damages
face formidable barriers in attempting to establish personal liability on the part of
the corporation’s stockholders. The fact that the fleet ownership has been
deliberately split up among many corporations does not ease the plaintiff’s burden
in that respect. The corporate form may not be disregarded merely because the
assets of the corporation, together with the mandatory insurance coverage of the
vehicle which struck the plaintiff, are insufficient to assure him the recovery sought.
If Carlton were to be held individually liable on those facts alone, the decision
would apply equally to the thousands of cabs which are owned by their individual
drivers who conduct their businesses through corporations organized pursuant to
section 401 of the Business Corporation Law. These taxi owner-operators are
entitled to form such corporations, and we agree with the court at Special Term that,
if the insurance coverage required by statute ‘is inadequate for the protection of the
public, the remedy lies not with the courts but with the Legislature.’ It may very
well be sound policy to require that certain corporations must take out liability
insurance which will afford adequate compensation to their potential tort victims.
However, the responsibility for imposing conditions on the privilege of
incorporation has been committed by the Constitution to the Legislature and it may
not be fairly implied, from any statute, that the Legislature intended, without the
slightest discussion or debate, to require of taxi corporations that they carry
automobile liability insurance over and above that mandated by the Vehicle and
Traffic Law. . . . In sum, then, the complaint falls short of adequately stating a cause
of action against the defendant Carlton in his individual capacity.
Why don’t all corporations follow defendant Carlton’s lead, and organize themselves into smaller
units to avoid any large judgments? One author thinks that this is, in fact, where things are
heading. Lynn M. Lopucki suggests that changing the substantive law of torts may amount to
nothing more than rearranging “the deck chairs on the Titanic”:
The system by which money judgments are enforced is beginning to fail. The
immediate cause is the deployment of legal structures that render potential
defendants judgment proof. The liability system has long accepted that those who
do not have the financial ability to pay judgments do not pay them. The system
employs a complex web of social, economic, and legal constructs to determine who
can or cannot pay. Those constructs can be, and are, manipulated by potential
defendants to create judgment-proof structures. . . . Included among them are
secured credit, shareholder limited liability, national sovereignty, and the ownership
of property. . . .
For a large, publicly held company, the most effective strategy would be a
combination of secured debt and ownership strategies. The debtor would first
reduce its assets through asset securitization, then compartmentalize by
incorporating subsidiaries and dividing its assets among them. Finally, it would
encumber the assets in those subsidiaries beyond their remaining value.
Lynn M. Lopucki, The Death of Liability, 106 YALE L.J. 1, 4-5 (1996).
Of course, reorganizing one’s firm strictly to avoid liability is not free. It can be
expensive indeed, and in complex organizations it may be preclusively cumbersome, since
corporate form serves many purposes, not just managing liability. Firms seem to do huge
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