Law School Case Brief
Hanewald v. Bryan's, Inc. - 429 N.W.2d 414 (N.D. 1988)
Organizing a corporation to avoid personal liability is legitimate. Indeed, it is one of the primary advantages of doing business in the corporate form. However, the limited personal liability of shareholders does not come free. The mere formation of a corporation, fixing the amount of its capital stock, and receiving a certificate of incorporation, do not create anything of value upon which the company can do business. It is the shareholders' initial capital investments which protects their personal assets from further liability in the corporate enterprise. Thus, generally, shareholders are not liable for corporate debts beyond the capital they have contributed to the corporation.
Plaintiff creditor appealed a judgment from the District Court of Stark County, Southwest Judicial District (North Dakota) that held defendant incorporators were not personally liable for their corporation's breach of a lease agreement and failure to pay a promissory note, but which also held that the corporation was liable to the creditor. The trial court found that the incorporators had not paid the corporation for the shares of stock they received either in labor, services, money, or property. However, it held that they were not personally liable for the corporate debt to the creditor because of a loan they made to the corporation for its operating capital was sufficient for those purposes.
Were the incorporators personally liable for the corporation's debts in favor of the creditor?
The court reversed the judgment in favor of the incorporators because they could only have been shielded from liability to the extent of their payment for the stock issued to them pursuant to N.D. Cent. Code §10-19-22. Because they had not paid for the stock, the incorporators were personally liable for the corporate debt. The court rejected the incorporators' claim that the loan for operating capital shielded them from liability. The incorporators' loan to the corporation was a debt of the corporation, and when the corporation repaid it before it ceased operations that loan could not be considered a capital contribution.
Access the full text case
Not a Lexis+ subscriber? Try it out for free.
Be Sure You're Prepared for Class