Case brief - Hanewald v. Brian's Inc.

(North Dakota Supreme Court, 1988)

I. Facts
Keith and John Bryan incorporated Bryan's Inc. in 1984 to engage and operate in
retail clothing store industry. Board of directors' first meeting elected Keith
president, Bryan- secretary treasurer, George Bryan- vicepresident, registered a
gent and manager; Articles of Incorporation authorized corporation issuing 100 s
hares of common stock with par value 1000$/share, total authorized capitalizatio
n 100000 $, 50 shares stock: Keith B, 50 shares: Joan B.
Hanewald sold dry goods store to Bryan's Inc., who bought inventory, furniture,
fixtures of the business for 60,000$ and leased building for 5 years, for 600$/m
onth. Paid Hanewald in cash 55,000$, payment made from a loan from Union State B
ank, personally guaranteed, and gave him a promissory note of 5,000$ due 30 Aug
1985. Store didn't work=> closed, packed and removed inventory and delivered for
resale, sent a Note of Rescission to Hanewald to avoid lease, involuntary disso
lvation of Bryan;s Inc. Aug 1, 1986. Bryan's Inc. did not pay promissory note to
Hanewald, but paid off all other creditors (includin 55,000$ loan from Bank and
10,000 $ loan from Keith and Joan Bryan, which had been intended to be used for
operating costs and expenses).
II.History of proceedings
Hanewald sued Bryan's Inc. for a breach of the lease agreement and the promissor
y note, seeking to hold Bryans personally liable. Bryans said he had misrepresen
ted business profitability. Trial court entered judgement against Inc for 38,600
dollars but refused to hold them personally liable bc. corporation formed in cl
assical manner, with 10,000 $ loan by Keith bryan more than sufficient operating
capital, paid all obligations except promissory note, no evidence of bad faith,
corporate shield of Bryan's Inc. shouldn't be pierced.
Hanewald appealed from a part of the judgement of the trial court from the Distr
ict Court of Stark County, Southwest Judicial District, which refused to impose
personal liability on Keith, Joan and George Bryan for the insolvent corporation
's debt; it found that Bryan's Inc. didn't receive any payment, either in labor,
services, money, property for the issued stock.
II. Issue : Whether Joan, Keith and George Bryan were personally liable for the
insolvent company's debt
III. Holding : the ruling of the trial court is partially reversed in the appeal
ed matter of personal liability and remanded to the trial court.
IV. Rationale:
Organizing a company to avoid personal liability is legitimate, but limited pers
onal liabil. doesn't come free; the initial capital investments of the sharehold
ers protect their personal assets from
V. Rule