Business Law Chapter 39 Homework States And Thus May Authorize State Actions

CHAPTER 39: CORPORATE FORMATION AND FINANCING 593

added), that Code section explicitly states that this occurs “[a]fter incorporation.” Moreover, nothing in the language of

§ 10–2B-16.01 requires records to be kept as a prerequisite of proper incorporation-in fact, § 10–2B-16.01 only

Case 39.3

Ky.App.,2010.

Schultz v. General Elec. Healthcare Financial Services, Inc.

Not Reported in S.W.3d, 2010 WL 566547 (Ky.App.)

FN2. Hereinafter the appellees will collectively be referred to as “GE.”

FN3. GE stipulated that it was willing to settle for this amount in order to end the legal proceedings.

Mr. Schultz argues that the judgment on the pleadings was in error because he denied the allegations GE made which would allow

a piercing of the corporate veil and that his affirmative defenses precluded a judgment on the pleadings. In the alternative, he

argues that if GE was entitled to pierce the corporate veil, then the $450,000 amount awarded was too much and should be

lowered. GE argues that the judgment on the pleadings was properly granted and that $450,000 was the proper amount awarded.

corporate veil and hold him personally liable for the judgment against Intra-Med.

On April 17, 2007, GE filed a motion for partial judgment on the pleadings in which it requested a partial judgment in the amount of

$1,150,000. This was allegedly the amount of Intra-Med funds which Schultz used improperly.

On August 10, 2007, the trial court held that Mr. Schultz’s admissions in his answer to GE’s third-party complaint support the

conclusion that Schultz improperly used Intra-Med’s funds. It also held that none of Mr. Schultz’s affirmative defenses would

[A] judgment on the pleadings can be granted only if, on the admitted material facts, the movant is clearly entitled to a judgment.

Relief must be denied if there is a material issue of fact … When a party moves for judgment on the pleadings, he admits for the

purposes of his motion not only the truth of all of his adversary’s well-pleaded allegations of fact and fair inferences therefrom,

but also the untruth of all of his own allegations which have been denied by his adversary. The question thus presented is one of

law and requires an examination of the pleadings. (Citations omitted).

individually, purchased and improved real property located at 8700 Dixie Highway, Louisville, KY 40258, using Intra-Med funds;

after entry of the GE judgment, Mr. Schultz sold the Dixie Highway property, which had been purchased and renovated by Mr.

Schultz with Intra-Med funds, for $850,000; Intra-Med did not receive any of the proceeds from the sale of the Dixie Highway

property; on or about May 24, 2001, Mr. Schultz, individually, purchased a marina slip for $23,000 with Intra-Med funds; and that

Intra-Med did not receive any of the proceeds from the subsequent sale of the marina slip. It is from these admitted facts that GE

Id.

Mr. Schultz argues that the judgment on the pleadings should be reversed because he denied the allegations in the complaint

regarding the elements of the instrumentality theory. We disagree. In its complaint, GE specifically alleged each of the three

elements of the instrumentality theory separately from its allegations of the facts relied upon to satisfy those elements. In his

answer, Mr. Schultz denied these allegations while admitting the alleged facts. We find that his denials were insufficient to

withstand a judgment on the pleadings because they were denials of conclusions of law and not material facts. As noted in

Archer,

claims that the defenses negate the finding of fraud and unjust loss, which are elements of the instrumentality theory. He

specifically cites to three defenses: that GE, at the time it entered into its agreement, knew Intra-Med could not pay the full amount

owed if there was a default of the lease; that GE had access to all of Intra-Med’s financial information and still proceeded with the

transaction; and that GE had the option of asking Mr. Schultz to individually guarantee these agreements.

The first two defenses cited are without merit. While GE had Intra-Med’s financial information, it certainly did not expect Mr. Schultz

defenses is true, as is required for a judgment on the pleadings,

Sheffer, supra,

none of the defenses negate the fact that he

admittedly used corporate funds and property as his own to GE’s detriment. Mr. Schultz’s admissions fulfill all three elements of the

instrumentality theory for piercing the corporate veil and support the trial court’s judgment on the pleadings.

In the alternative, Mr. Schultz argues that even if the corporate veil should be pierced, the $450,000 judgment is too much and

Supplemental Case Printout for:

Shifting Legal Priorities for Business

596 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91, 60 USLW 4423

QUILL CORPORATION, Petitioner

v.

NORTH DAKOTA By and Through its Tax Commissioner, Heidi HEITKAMP.

No. 91-194.

Argued Jan. 22, 1992

Decided May 26, 1992.

, J., delivered the opinion for a unanimous Court with respect to Parts I, II, and III, and the opinion of the Court with

respect to Part IV, in which , C.J., and , , and , JJ., joined. , J., filed an opinion concurring in part and concurring in

G. Julian, David J. Bradford, , ,

and

;

for Carrot Top Industries, Inc., et al. by and

James F. Blumstein;

for the

Clarendon Foundation by

;

for the Coalition for Small Direct Marketers by

Richard J. Leighton

and

;

for the Direct

Marketing Association by

, ,

and

Robert J. Levering;

for the National Association of Manufacturers et al. by

Bruce J.

Ennis, Jr., , Jan S. Amundson,

and

John Kamp;

for Magazine Publishers of America, Inc., et al. by

Eli D. Minton, , ,

and

;

and for the Tax Executives Institute, Inc., by

Timothy J. McCormally.

Virginia, and

;

for the State of New Jersey by

,

Attorney General,

,

Deputy Attorney General,

Joseph L. Wannotti,

Assistant Attorney General,

,

and

;

for the State of New Mexico by

Tom Udall,

Attorney General, and

,

Special

Assistant Attorney General; for the City of New York by

, ,

and

Stanley Buchsbaum;

for the International Council of

Shopping Centers, Inc., et al. by

Charles Rothfeld;

for the Multistate Tax Commission by and

;

for the National

Governors’Association et al. by

;

and for the Tax Policy Research Project by

.

granted certiorari, we must either reverse the State Supreme Court *302 or overrule While we agree with much of

the state court’s reasoning, we take the former course.

I

Quill is a Delaware corporation with offices and warehouses in Illinois, California, and Georgia. None of its

employees work or reside in North Dakota, and its ownership of tangible property in that State is either insignificant or

nonexistent. Quill sells office equipment and supplies; it solicits business through catalogs and flyers,

we shall explain, Quill’s interests in the licensed software does not affect our analysis of the due process

issue and does not comprise the “substantial nexus” required by the Commerce Clause. See n. 8,

infra

.

As a corollary to its sales tax, North Dakota imposes a use tax upon property purchased for storage, use, or

consumption within the State. North Dakota requires every “retailer maintaining a place of business in” the State to

collect the tax from the consumer and remit it to the State. . In 1987, North Dakota amended the statutory definition

The North Dakota Supreme Court reversed, concluding that “wholesale changes” in both the economy and the law

made it inappropriate to follow today. The principal economic change noted by the court was the remarkable

growth of the mail-order business “from a relatively inconsequential market niche” in 1967 to a “goliath” with annual

sales that reached “the staggering figure of $183.3 billion in 1989.” Moreover, the court observed, advances in

computer technology greatly eased the burden of compliance with a “ ‘welter of complicated obligations’ ” imposed by

establish nexus is encompassed within the test” and that the relevant inquiry under the latter test was whether “the

state has provided some protection, opportunities, or benefit for which it can expect a return.”

Turning to the case at hand, the state court emphasized that North Dakota had **1909 created “an economic climate

that fosters demand for” Quill’s products, maintained a legal infrastructure that protected that market, and disposed of

24 tons of catalogs and flyers mailed by Quill into the State every year. Based on these facts, the court concluded

the Clauses pose distinct limits on the taxing powers of the States. Accordingly, while a State may, consistent with

the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate

the Commerce Clause. See,

e.g.,

.

The two constitutional requirements differ fundamentally, in several ways. As discussed at greater length below, see

Part IV,

infra,

the Due Process Clause and the Commerce Clause reflect different constitutional concerns. Moreover,

may fall because of its burdening effect upon the commerce. And, although the two notions cannot always be

separated, clarity of consideration and of decision would be promoted if the two issues are approached, where they

are presented, at least tentatively as if they were separate and distinct, not intermingled ones.” (Rutledge, J.,

concurring in part and dissenting in part).

Heeding Justice Rutledge’s counsel, we consider each constitutional limit in turn.

III

Court suggested that such presence was not only sufficient for jurisdiction under the Due Process Clause, but also

necessary. We expressly declined to obliterate the “sharp distinction … between mail-order sellers with retail outlets,

solicitors, or property within a State, and those who do no more than communicate with customers in the State by

mail or common carrier as a part of a general interstate business.”

.

Our due process jurisprudence has evolved substantially in the 25 years since particularly in the area of judicial

physical presence in the State. As we explained in :

“Jurisdiction in these circumstances may not be avoided merely because the defendant did not

physically*308

enter

the forum State. Although territorial presence frequently will enhance a potential defendant’s affiliation with a State

and reinforce the reasonable foreseeability of suit there, it is an inescapable fact of modern commercial life that a

substantial amount of business is transacted solely by mail and wire communications across state lines, thus

superseded by developments in the law of due process.

In this case, there is no question that Quill has purposefully directed its activities at North Dakota residents, that the

magnitude of those contacts is more than sufficient for due process purposes, and that the use tax is related to the

benefits Quill receives from access to the State. We therefore agree with the North Dakota Supreme Court’s

conclusion that the Due Process Clause does not bar enforcement of that State’s use tax against Quill.

, we declared that “no State has the right to lay a tax on interstate commerce in any form.” We later narrowed that

rule and distinguished between direct burdens on interstate commerce, which were prohibited, and indirect burdens,

which generally were not. See,

e.g.,

, aff’d

sub nom.

. , and subsequent decisions rejected this formal, categorical

analysis and adopted a “multiple–taxation doctrine” that focused not on whether a tax was “direct” or “indirect” but

rather on whether a tax subjected interstate commerce to a risk of multiple taxation. However, in , we embraced

required to pay its fair share of state taxes.” ; see also (“It was not the purpose of the commerce clause to

relieve those engaged in interstate commerce from their just share of [the] state tax burden even though it

increases the cost of doing business”) (internal quotation marks and citation omitted).

was decided in 1967, in the middle of this latest rally between formalism and pragmatism. Contrary to the suggestion

of the North Dakota Supreme Court, this timing does not mean that rendered “obsolete.” rejected and formal

Thus, three weeks after was handed down, we cited for this proposition and discussed the case at some length. In ,

we affirmed the continuing vitality of “sharp distinction … between mail-order sellers with [a physical presence in the

taxing] State and those … who do no more than communicate with customers in the State by mail or common carrier

as part of a general interstate business.” We have continued to cite with approval ever since. For example, in , we

expressed “doubt that termination of an interstate telephone call, by itself, provides a substantial enough nexus for a

the due process nexus analysis requires that we ask whether an individual’s connections with a State are substantial

enough to legitimate the State’s exercise of power over him. We have, therefore, often identified “notice” or “fair

warning” as the analytic touchstone of due process nexus analysis. In contrast, the Commerce Clause and its nexus

requirement are informed not so much by concerns about fairness for the individual defendant as by structural

concerns about the effects of state regulation on the national economy. Under the Articles of Confederation, state

contacts” requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce.

Accordingly, contrary to the State’s suggestion, a corporation may have the “minimum contacts” with a taxing State as

required by the Due Process Clause, and yet lack the “substantial **1914 nexus” with that State as required by the

Commerce Clause.

North Dakota’s use tax illustrates well how a state tax might unduly burden interstate commerce. On its face,

well … due process requirement[s].” . Although such comments might suggest that every tax that passes

contemporary Commerce Clause analysis is also valid under the Due Process Clause, it does not follow that

the converse is as well true: A tax may be consistent with due process and yet unduly burden interstate

commerce. See,

e.g.,

.

*314 The State Supreme Court reviewed our recent Commerce Clause decisions and concluded that those rulings

silence does not imply repudiation of the rule.

it is true, renounced and its progeny as “formalistic.” But not all formalism is alike. formal distinction between taxes

on the “privilege of doing business” and all other taxes served no purpose within our Commerce Clause

jurisprudence, but stood “only as a trap for the unwary draftsman.” In contrast, the bright-line rule of furthers the

ends of the dormant Commerce Clause. Undue *315 burdens on interstate commerce may be avoided not only by a

46. We agree. Although title to “a few floppy diskettes” present in a State might constitute some minimal

nexus, in , we expressly rejected a “ ‘slightest presence’ standard of constitutional nexus.” We therefore

conclude that Quill’s licensing of software in this case does not meet the “substantial nexus” requirement of

the Commerce Clause.

Like other bright-line tests, the rule appears artificial at its edges: Whether or not a State may compel a vendor to

It is worth noting that Congress has, at least on one occasion, followed a similar approach in its regulation of

state taxation. In response to this Court’s indication in , that, so long as the taxpayer has an adequate nexus

with the taxing State, “net income from the interstate operations of a foreign corporation may be subjected to

state taxation,” Congress enacted Pub.L. 86-272, codified at . That statute provides that a State may not

impose a net income tax on any person if that person’s “only business activities within such State [involve] the

interests test applied in our Commerce Clause cases.” We first observed that “the principle of

stare decisis

counsels us, here as elsewhere, not lightly to set aside specific guidance of the sort we find in ” In deciding to reject

the analysis, we were influenced by the fact that the “mechanical test” was “anachronistic,” that the Court had rarely

relied on the test, and that we could “see no strong reliance interests” that would be upset by the rejection of that test.

None of those factors obtains in this case. First, the rule was “anachronistic” because it relied on formal distinctions

area and the doctrine and principles of

stare decisis

indicate that the rule remains good law. For *318 these

reasons, we disagree with the North Dakota Supreme Court’s conclusion that the time has come to renounce the

bright-line test of

This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be

better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate

(1973).

Indeed, even if we were convinced that was inconsistent with our Commerce Clause jurisprudence, “this very fact

[might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect