Corporations – Liabilites – Inadequate Capitalization as Ground for Disregarding Corporate Entity

Defendant Resnick, meeting minimum statutory incorporation requirements, organized a corporation and thereafter persuaded defendants Cowan to join him in operating a used car enterprise under the corporate name. No stock was issued, nor capital paid in, although a checking account was opened for use by the business. Car purchases were financed through loans made or guaranteed by the elder Cowan, who held title until resale. Proceeds from resale transactions were deposited in the checking account, from which defendant Resnick reimbursed Cowan for money advanced. Sales volume averaged from $100,000 to $150,000 monthly. Assured that the elder Cowan was “backing” the corporation, plaintiff sold cars to defendants following the described procedure. Corporate checks drawn by Resnick for the balance due on eight cars were dishonored, and when the corporation filed in bankruptcy, plaintiff sued defendants on a theory of individual liability. The trial court held for plaintiff. On appeal, held, affirmed, one justice dissenting. Capital investment was totally inadequate for the volume of business conducted, and this factor, together with the failure to issue stock, is under the circumstances sufficient ground for disregarding the corporate entity. Automotriz Del Golfo de California v. Resnick, (Cal. 1957) 306 P. (2d) I.