The Economic Entity

Fordham Law Review, Dec 1953

By Maurice J. Dix, Published on 01/01/53

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The Economic Entity

hTe E Maurice J. Dix 0 0 Thi s Article is brought to you for free and open access by FLASH: The F ordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The F ordham Law Archive of Scholarship and History. For more information , please contact Recommended Citation Maurice J. Dix, Th e Economic Entity, 22 Fordham L. Rev. 254 (1953). Available at: http://ir.lawnet.fordham.edu/flr/vol22/iss3/3 - Article 3 MAURICE J. DIXt W HEN will the courts honor or dishonor the separate corporate form of each legal entity in a group of corporations, and with what consequences? The decision cannot rest on the architect's convenience.1 The courts give effect to the purpose of the organization.2 The question presented must be determined by the facts.3 The armor of the judicial conception of each constituent legal entity will be tested in three ways,4 to wit: (1) by the law of agency (2) by the principles of equity, and (3) by the doctrines of public policy. The legal entity derives its breath of life from the sovereignty, through the medium of charter, granted under general or special statute. It should have its own government, its own board of directors, its own officers, its own assets, its own liabilities, and its own life. It may function independently, and at its peril, with other corporations. The legal entity is an artificial person, separate and distinct from the natural (or artificial) persons who own its stock. The legal entity may not serve as a mere convenience for those who own its stock or participate in its corporate life.5 The simple allegation that one corporation is the "alter ego" of another corporation is not sufficient to require the Court to disregard the separate corporate form of either. Allegations of fact are essential to "pierce the corporate veil." Disregard of the separate corporate form will only be 1953] THE ECONOMIC permitted when necessary to prevent injustice. Mere stock ownership is not enough.' On the other hand it is not necessary to show that one has been misled, deceived or defrauded. 7 Intervention in the management of a legal entity, so as to make it a tool, agency, or instrumentality or to dominate it, infects the actor with liability for all obligations incurred by the legal entity or arising during such management.8 Stock ownership is not essential.' To preserve the benefits of a separate corporate existence, a legal entity must have an independent life or a separate legal entity.10 A legal entity differs from an economic entity. The economic entity does not have any corporate charter. It is an economic choice of management. It ties in legal entities for operation in a common endeavor or enterprise. The idea behind an economic entity is joinder or merger of activity-unity of life-in the goal of the common undertaking or enterprise. In an economic entity, each legal entity has dedicated itself and its property to the success of the common undertaking. In re PittsburghRailways" dealt with an economic entity, known as Pittsburgh Railways System, not in reorganization, as distinguished from Pittsburgh Railways Company, a debtor in reorganization. The System, without its own separate corporate charter, was created in 1902, by means of leases and operating agreements with a large number of corporations, called "underliers," under which their properties were operated by the debtor, Pittsburgh Railways Co., in conjunction with its own. Thereby the City of Pittsburgh and surrounding municipalities were provided with a unified system of transportation. There were over 50 underlier corporations: 36 of its underliers were known as Philadelphia underlers, because they were all directly or indirectly controlled by the debtor's parent, Philadelphia Company, through ownership of all or majority of their stock; 9 of the underliers were known as guaranteed underliers, since they leased their property in 1902 under 900 year leases guaranteed by the Philadelphia Company, which, however, did not have stock control over these corporations. The remainder was called unguaranteed underliers for their leases were not guaranteed and Philadelphia Company did not have stock control over them. These properties were operated in such a fashion that a single route or passenger ride might involve the use of a number of the underlying corporations' properties and routes."2 The system functioned through a series of departments all operated from one headquarters. 3 "Ascertainment of a proper proportion of the receipts of the system as a whole to the respective contributions of the underlying companies is obviously an impossible task.' 4 In 1938, the debtor filed a petition for reorganization under the Bankruptcy Act. No proceedings were filed by or against any of the underliers. Since it was necessary to preserve the economic entity of the System, and the underliers were unwilling to go into reorganization, the City of Pittsb (...truncated)


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Maurice J. Dix. The Economic Entity, Fordham Law Review, 1953, Volume 22, Issue 3,