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Judge: Arlene’s Flowers owner can be sued in her personal capacity

The owner of a Richland flower shop being sued over her refusal to provide services for a same-sex wedding can be held personally liable in the case, a Benton County Superior Court judge ruled Wednesday.

The state attorney general and the couple both filed lawsuits against Barronelle Stutzman and her Arlene’s Flowers shop in 2013, after Stutzman declined to provide services for the couple’s wedding.

Stutzman, a Christian, has cited her religious beliefs about marriage.

Her attorneys said the claims against her in her personal capacity should be dropped, calling them unprecedented and unjust, while attorneys for the state and the couple argued that the law is clear about personal liability.

In his decision, Judge Alex Ekstrom sided with the state and couple, writing that “the clear language” of the Consumer Protection Act and state anti-discrimination law “supports both individual and corporate liability.”

Ekstrom did toss out one of the couple’s claims — that Stutzman aided her business in violating the state anti-discrimination law, writing that the law’s “aiding and abetting language does not apply to an individual ‘acting alone.’ ” The couple, who are represented by attorneys working with the ACLU of Washington, have conceded that claim should be dismissed.

Kristen Waggoner, one of Stutzman’s attorneys, said Wednesday that, “we’re disappointed in the ruling,” noting it means Stutzman would be on the hook personally for civil penalties and attorney fees should she lose.

Waggoner is senior counsel with the Alliance Defending Freedom.

In his 35-page decision, Ekstrom also upheld the Attorney General’s authority to bring its suit under the Consumer Protection Act, writing that, “the court concludes that the Legislature intended to allow the (attorney general) independent unfettered authority to bring this action.”

Stutzman’s attorneys have argued that the state’s lawsuit is based on an “unprecedented interpretation” of state law and goes against its specific terms and decades of practice by successive attorneys general…

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Washington State Constitution

ARTICLE I – DECLARATION OF RIGHTS

SECTION 11 RELIGIOUS FREEDOM

Absolute freedom of conscience in all matters of religious sentiment, belief and worship, shall be guaranteed to every individual, and no one shall be molested or disturbed in person or property on account of religion; but the liberty of conscience hereby secured shall not be so construed as to excuse acts of licentiousness or justify practices inconsistent with the peace and safety of the state.

No public money or property shall be appropriated for or applied to any religious worship, exercise or instruction, or the support of any religious establishment: PROVIDED, HOWEVER, That this article shall not be so construed as to forbid the employment by the state of a chaplain for such of the state custodial, correctional, and mental institutions, or by a county’s or public hospital district’s hospital, health care facility, or hospice, as in the discretion of the legislature may seem justified. No religious qualification shall be required for any public office or employment, nor shall any person be incompetent as a witness or juror, in consequence of his opinion on matters of religion, nor be questioned in any court of justice touching his religious belief to affect the weight of his testimony. [AMENDMENT 88, 1993 House Joint Resolution No. 4200, p 3062. Approved November 2, 1993.]

Amendment 34 (1957) — Art. 1 Section 11 RELIGIOUS FREEDOM — Absolute freedom of conscience in all matters of religious sentiment, belief and worship, shall be guaranteed to every individual, and no one shall be molested or disturbed in person or property on account of religion; but the liberty of conscience hereby secured shall not be so construed as to excuse acts of licentiousness or justify practices inconsistent with the peace and safety of the state. No public money or property shall be appropriated for or applied to any religious worship, exercise or instruction, or the support of any religious establishment: Provided, however, That this article shall not be so construed as to forbid the employment by the state of a chaplain for such of the state custodial, correctional and mental institutions as in the discretion of the legislature may seem justified. No religious qualification shall be required for any public office or employment, nor shall any person be incompetent as a witness or juror, in consequence of his opinion on matters of religion, nor be questioned in any court of justice touching his religious belief to affect the weight of his testimony. [AMENDMENT 34, 1957 Senate Joint Resolution No. 14, p 1299. Approved November 4, 1958.]

Amendment 4 (1904) — Art. 1 Section 11 RELIGIOUS FREEDOM — Absolute freedom of conscience in all matters of religious sentiment, belief and worship, shall be guaranteed to every individual, and no one shall be molested or disturbed in person or property on account of religion; but the liberty of conscience hereby secured shall not be so construed as to excuse acts of licentiousness or justify practices inconsistent with the peace and safety of the state. No public money or property shall be appropriated for or applied to any religious worship, exercise or instruction, or the support of any religious establishment. Provided, however, That this article shall not be so construed as to forbid the employment by the state of a chaplain for the state penitentiary, and for such of the state reformatories as in the discretion of the legislature may seem justified. No religious qualification shall be required for any public office or employment, nor shall any person be incompetent as a witness or juror, in consequence of his opinion on matters of religion, nor be questioned in any court of justice touching his religious belief to affect the weight of his testimony. [AMENDMENT 4, 1903 p 283 Section 1. Approved November, 1904.]

Original text — Art. 1 Section 11 RELIGIOUS FREEDOM — Absolute freedom of conscience in all matters of religious sentiment, belief, and worship, shall be guaranteed to every individual, and no one shall be molested or disturbed in person, or property, on account of religion; but the liberty of conscience hereby secured shall not be so construed as to excuse acts of licentiousness, or justify practices inconsistent with the peace and safety of the state. No public money or property shall be appropriated for, or applied to any religious worship, exercise or instruction, or the support of any religious establishment. No religious qualification shall be required for any public office, or employment, nor shall any person be incompetent as a witness, or juror, in consequence of his opinion on matters of religion, nor be questioned in any court of justice touching his religious belief to affect the weight of his testimony.

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Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil.

A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a “sham”, a “fraud” or some other phrase, and would still allow the old company to sue the man for breach of contract. A court would look beyond the legal fiction to the reality of the situation.

Despite the terminology used which makes it appear as though a shareholder’s limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability.[2] For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.

Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders. The limits of this protection have narrowed in recent years. Shareholders are increasingly personally liable.

Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.

There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.

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In the United States, corporate veil piercing is the most litigated issue in corporate law. Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the plaintiff. In most jurisdictions, no bright-line rule exists and the ruling is based on common law precedents. In the United States, different theories, most important “alter ego” or “instrumentality rule”, attempted to create a piercing standard. Mostly, they rest upon three basic prongs—namely “unity of interest and ownership”, “wrongful conduct” and “proximate cause”. However, the theories failed to articulate a real-world approach which courts could directly apply to their cases. Thus, courts struggle with the proof of each prong and rather analyze all given factors. This is known as “totality of circumstances”.

There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. All corporations have one specific state (their “home” state) to which they are incorporated as a “domestic” corporation, and if they operate in other states, they would apply for authority to do business in those other states as a “foreign” corporation. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation’s home state. This issue can be significant, for example, the rules for allowing a corporate veil to be pierced are much more liberal in California than they are in Nevada, thus, the owner(s) of a corporation operating in California would be subject to different potential for the corporation’s veil to be pierced if the corporation was to be sued, depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California.

Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.

Factors for courts to consider

  • Absence or inaccuracy of corporate records;
  • Concealment or misrepresentation of members;
  • Failure to maintain arm’s length relationships with related entities;
  • Failure to observe corporate formalities in terms of behavior and documentation;
  • Failure to pay dividends;
  • Intermingling of assets of the corporation and of the shareholder;
  • Manipulation of assets or liabilities to concentrate the assets or liabilities;
  • Non-functioning corporate officers and/or directors;
  • Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
  • Siphoning of corporate funds by the dominant shareholder(s);
  • Treatment by an individual of the assets of corporation as his/her own;
  • Was the corporation being used as a “façade” for dominant shareholder(s) personal dealings; alter ego theory;

It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable.

Undercapitalization

  • Minton v. Cavaney, 56 Cal. 2d 576 (1961). Mr. Minton’s daughter drowned in the public swimming pool owned by Mr. Cavaney. Then-Associate Justice Roger J. Traynor (later Chief Justice) of the Supreme Court of California held: “The equitable owners of a corporation, for example, are personally liable…when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.”
  • Kinney Shoe Corp. v. Polan, 939 F.2d 209 (4th Cir. 1991). The veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalized and was only used to shield a shareholder’s other company from debts.

Internal Revenue Service

In recent years, the Internal Revenue Service (IRS) in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income, estate, or gift tax revenue, particularly from business entities created primarily for estate planning purposes. A number of U.S. Tax Court cases involving Family Limited Partnerships (FLPs), such as Strangi, Hackl, Shepherd, and Bongard, show the IRS’s use of veil-piercing arguments. Since owners of U.S. business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories.

 Source:  Wiki

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‘Fiat justitia et ruant coeli’

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