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Gallagher V. Germania Brewing CO. 53 Minn. 1893

1) Two shareholders of a corporation, Barge and Vander Horck, each owned half of the corporation's capital stock and had unsatisfied judgments against Westphal, who had made an assignment to the plaintiff for the benefit of creditors. 2) Barge and Vander Horck intervened in a case where the plaintiff was suing the corporation for goods sold, seeking to set off their claims against Westphal against the plaintiff's claim against the corporation. 3) The court considered whether to allow the set-off by ignoring the legal doctrine that a corporation is distinct from its shareholders. It determined that while shareholders' interests must be considered regarding creditors and membership obligations, the corporate entity doctrine must generally be maintained to keep

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195 views3 pages

Gallagher V. Germania Brewing CO. 53 Minn. 1893

1) Two shareholders of a corporation, Barge and Vander Horck, each owned half of the corporation's capital stock and had unsatisfied judgments against Westphal, who had made an assignment to the plaintiff for the benefit of creditors. 2) Barge and Vander Horck intervened in a case where the plaintiff was suing the corporation for goods sold, seeking to set off their claims against Westphal against the plaintiff's claim against the corporation. 3) The court considered whether to allow the set-off by ignoring the legal doctrine that a corporation is distinct from its shareholders. It determined that while shareholders' interests must be considered regarding creditors and membership obligations, the corporate entity doctrine must generally be maintained to keep

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© © All Rights Reserved
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GALLAGHER v.

GERMANIA BREWING
CO. 53 Minn. 1893.
The plaintiff, as assignee of one Westphal under a general assignment for
the benefit of creditors, brought this action to recover for goods sold and
deUvered by his assignor to the defendant corporation. Jacob Barge and
John Vander Horck intervened, and set up in their complaint that they
owned, and for nearly two years had owned, (each one-half,) all the capital
stock of the defendant, no other person but themselves having any interest
in the stock or prop- erty of the corporation ; that each of them had a valid
and unsatisfied judgment against Westphal upon a cause of action which
accrued before the assignment to plaintiff ; that Westphal was, and for over
two years had been, utterly insolvent ; and that his estate, of which plaintiff
is the assignee, was so hopelessly insolvent that it was insufficient to pay
even the expenses of administering the assignment. The relief, sought was
that their claims against Westphal might be allowed, in equal amounts, as
equitable set-offs to the claim of the plaintiff against the defendant
corporation. From an order over- ruUng a demurrer to the complaint, the
plaintiff appeals, his conten- tion being First, that Barge and Vander
Horck had no such interest in the litigation as to entitle, them to intervene ;
second, that their claims cannot be set off against a claim against the
corporation, because a corporation is a legal entity, entirely distinct from its
stock- holders. These two propositions amount really to the same thing,
for, if Barge and Vander Horck .cannot set off their claims against that of
plaintiff against the corporation, they have no such interest in the subject of
litigation as would entitle them to intervene ; on the other hand, if their
claims are proper equitable set-offs, their right to inter- vene for the
purpose of setting them up is very clear.
The case is certainly a novel one, for we doubt whether an instance can be
found in the books where stockholders ever attempted to set up their
several equities by way of set-off to claims against the corporations. Of
course, the want of a precedent is by no means controUing with courts,
especially in administering equitable rehef ; but it would seem that, if the
relief here asked was consistent with legal or equitable principles, some
case would be found where it had been granted. laration of war. ... It is a
living thing with a separate existence which cannot be swept aside as a
technicality. It is not a mere name or mask or cloak or device to con- ceal
the identity of persons and it is not suggested that the company was
formed for any dishonest or fraudulent purpose.") In People's &c. Park Co.
v. Rohleder, 109 Va. 439, held a restrictive covenant that title to the laud in
controversy should never "vest in a person or persons of African descent"

is not breached by conveyance to a corporation composed entirely of


colored people.

The facts of the present case appeal to a natural sense of justice, for
while, by fiction of law, a corporation is a distinct entity, yet in reality it is an
association of persons who ape in fact the beneficial owners of all the
corporate property. Hence, if interveners cannot set off their claims, the
practical result is that Westphal's estate will collect its entire claim out of
what is really their property, while the- estate is at the same time indebted
to them on claims of greater amount, which they will wholly lose because
of Westphal's insolvency ; but, as has been often said, hard cases are
hable to make bad law. The right of equitable set-off is, of course, not
derived from, or dependent upon, statute, but rests upon a distinctly
equitable doc- trine, which courts of equity have applied on certain wellrecognized equitable grounds, the object being to effect a clear equity and
pre- vent irremediable injustice ; and it may be stated as a general rule
that, whenever necessary to accomplish that end, the courts will permit an
equitable set-off, although the debts accrued in different rights ; as, for
example, by allowing a separate debt to be set off against a joint debt, or,
conversely, a joint debt against a separate debt. They will also disregard
the nominal parties to the record, and consider the real parties in interest ;
as, for example, when the assignor of a chose in action sues for the benefit
of the assignee, or a trustee for the benefit of the cestui que trust. Hence;
had the plain- tiff's claim been a joint one against the interveners, there
would have been no doubt of their right to set off their separate claims
against it, for insolvency is well recognized as a distinct equitable ground
for allowing such a set-off. But such a case is not analogous to the
present. To allow the set-off here, it is necessary to wholly ignore the legal
doctrine, or fiction, whichever you may call it, that a corporation is an entity
separate and distinct from the body of its stockholders, and to treat it as a
mere association of individuals who are the real parties in interest. In
dealing with the rights of creditors, and the obhgations existing between a
corporation and Its share- holders by reason of their contract of
membership, undoubtedly the courts often find it necessary to consider the
real parties in interest as the individual shareholders ; but it may be laid
down as a rule that, expept in such cases, it has been found absolutely
essential, for the administration of justice, to treat a corporation as a
collective entity, without regard to its individual shareholders. In no other
way can the title to corporate property be kept free from compUcation and
uncertainty. The transferable nature of stock in a corporation is also a good
reason why the theory of a corporate entity should be pre- served, and why
it is necessary to discriminate sharply between corporate rights and

obhgations and those of shareholders personally. If the rights or liabilities


of a corporation could be affected by the acts of the stockholders, except
when acting in the corporate, name, or if shareholders could set up their
several equities against persons

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