Opinion
No. 20335
Decided December 5, 1946.
Corporations — Company organized to lease and operate coal mines — Entire stock owned by coal-selling corporation — Contract between operating and selling corporations having same officers — Selling corporation not liable for debts of operating corporation to customer, when — Action by customer against bankrupt operator and selling agent — Judgment against customer — Judgment dismissing cross-petition of operator — Both judgments entered at close of customer's evidence — No hearing on cross-petition and prejudicial to dismiss, when.
APPEAL: Court of Appeals for Cuyahoga county.
Messrs. Burgess, Fulton Fullmer and Messrs. Slabaugh, Guinther, Jeter Pflueger, for The Ohio Edison Company.
Mr. Carl G. Bachmann, for the trustee for Warner Coal Corporation.
Messrs. Bulkley, Butler Pillen, for W.H. Warner Company, Inc.
The plaintiff has appealed from a judgment entered against it at the close of the plaintiff's evidence, and the defendant A. Spates Brady, as trustee in bankruptcy of the Warner Coal Corporation, has cross-appealed from a judgment dismissing his cross-petition, entered at the same time.
In this action the plaintiff is seeking to charge W.H. Warner Company, Inc., with responsibility for debts ostensibly incurred by the Warner Coal Corporation, a distinct legal entity.
A reading of the record discloses that for a considerable period before the happening out of which this action arose, W.H. Warner Company, Inc., acted as selling agent for certain West Virginia coal mines and as such selling agent sold coal to the plaintiff. For reasons unimportant here the owners of the mines desired to sell them. The plaintiff was interested in preserving a source of coal supply and W.H. Warner Company, Inc., was interested in continuing its relation as selling agent for the mines. They set themselves to the task of devising some plan to accomplish their respective desires. At first, they considered the plan of having the plaintiff buy the mines and employ W.H. Warner Company, Inc., to supervise their operation. That plan was abandoned because of the unwillingness of the plaintiff to proceed. Then a plan was devised and executed, whereby the Warner Coal Corporation was organized. Its entire capital stock of $50,000 was subscribed and paid for by W.H. Warner Company, Inc., and the plaintiff advanced $100,000 as a prepayment on coal to be delivered. Another corporation, The Cleveland Cliffs Iron Company, advanced $50,000, also for coal to be delivered.
After the Warner Coal Corporation was duly organized it entered into a contract with W.H. Warner Company, Inc., to act as selling agent and perform most of the management of the corporate affairs.
It is clear from the record that the purpose of W.H. Warner Company, Inc., was to continue the relation of selling agent for the coal mines and not to become the owner thereof with its attendant responsibilities. That purpose must have been fully understood by the plaintiff. There is no doubt that all the forms of law were complied with at all times to accomplish that purpose, unless the fact that W.H. Warner Company, Inc., owned all the stock of the Warner Coal Corporation and the two corporations had the same officers defeats that purpose.
While it is claimed that W.H. Warner Company, Inc., usurped complete control of all the corporate functions of the Warner Coal Corporation, we find that in the contract between the two corporations the ultimate authority of the board of directors of the Warner Coal Corporation was expressly stipulated.
This is not a case of a mere mask behind which W.H. Warner Company, Inc., was conducting its own business. The Warner Coal Corporation held the mines as lessee. It operated the business of mining the coal and had a substantial capital reasonably regarded as adequate to enable it to operate its business and pay its debts as they matured. Various unforeseen economic factors intervened to defeat this expectation.
It is undoubted law that a corporation may be formed, and usually is, for the specific purpose of avoiding liability and loss beyond the contribution to its capital. That is not a fraudulent intent. On the contrary, the law recognizes it as a purpose in conformity to sound public policy. In the case at bar, no other intent is disclosed and that intent was fully understood by the plaintiff at the time.
Of course, if the record disclosed facts showing that, through this parent corporation and wholly-owned subsidiary, W.H. Warner Company, Inc., was in fact the lessee of the mines and was operating them, that the wholly-owned subsidiary was simply its agent in the ostensible ownership and operation of the mines, and that W.H. Warner Company, Inc., was the undisclosed principal, a case of liability would be presented even in the absence of any other consideration. But no such case is presented here. The existence of the two corporations as distinct entities was preserved at all times. Nor were their properties, capital or business commingled.
As the law authorizes the creation of corporations for the purpose of limiting liability and as the Warner Coal Corporation was organized and conducted in conformity to such law, we are of the opinion that the Common Pleas Court was correct in holding that no case was presented for the disregard of the corporate entity and holding W.H. Warner Company, Inc., liable for the debts of the Warner Coal Corporation.
We are of the opinion that the case of North v. Higbee Co., 131 Ohio St. 507, 3 N.E.2d 391, is dispositive of this case on the point of disregard of the corporate entities and precludes such disregard. There is nothing in the record indicative of any relation between these corporations other than that shown by the documents which preserved the corporate identity of each. Treating them as distinct entities, we find nothing in the evidence tending to prove that W.H. Warner Company, Inc., intended to or did incur a liability to the plaintiff.
We find no error in the action of the court in directing a verdict for W.H. Warner Company, Inc., and in entering judgment on the verdict. The judgment is, therefore, affirmed.
The bill of exceptions shows that, at the time the court sustained the motion of W.H. Warner Company, Inc., for a directed verdict, the court dismissed the action of The Ohio Edison Company against the Warner Coal Corporation and its trustee in bankruptcy, without prejudice, and particularly without prejudice to its right to proceed in the bankruptcy proceeding against the Warner Coal Corporation or its trustee in bankruptcy, to which The Ohio Edison Company did not except; and that the court dismissed the cross-petition of the trustee in bankruptcy against The Ohio Edison Company, to which the trustee in bankruptcy excepted. The trustee by his cross-appeal seeks to have that judgment of dismissal reversed.
The plaintiff had been given full opportunity to prove its cause of action against the defendants and had failed. That was the justification for the court's action in entering judgment against it. The Warner Coal Corporation and its trustee had been given no such opportunity to prove their cross-petition. The trial of the issues raised by the cross-petition and the answer thereto had not begun. That fact seems to have been overlooked by the trial judge.
No reason was assigned for the dismissal, but we get the impression from what was done that the court was of the opinion that no cause of action was stated in the cross-petition. However that may be, the fact remains that the effect would be to adjudge the merits of the claim without trial and without the opportunity to invoke the discretion of the court to allow an amendment to the cross-petition, should it be determined that the cross-petition does not state a cause of action.
For these reasons, the judgment on the cross-petition of the trustee in bankruptcy is reversed and the cause remanded for further proceedings thereon.
Judgment accordingly.
HILDEBRANT, P.J., MATTHEWS and ROSS, JJ., concur.
HILDEBRANT, P.J., MATTHEWS and ROSS, JJ., of the First Appellate District, sitting by designation in the Eighth Appellate District.