The Economic Entity
hTe E
Maurice J. Dix 0
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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
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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)