STONE ET. AL. V. EACHO
were made by the
DOCTRINE: ​It is well settled that courts will not be blinded by corporate forms nor
permit them to be used to defeat public convenience, justify wrong or perpetrate
fraud, but will look through the forms and behind the corporate entities involved to
deal with the situation as justice may require. Not only is this done for the purpose of
holding a stockholder or parent corporation for debts created by an insolvent
corporate agent or subsidiary which is a mere instrumentality of the stockholder or
parent, but also for the purpose of allowing the creditors of the stockholder or parent
to reach assets held by such a subsidiary. And, where the court decides that the
corporate entity of the subsidiary should be completely ignored and its assets and
liabilities treated as those of the parent corporation, it is both logical and convenient
that this be done in one proceeding.
FACTS:
● Tip Top Tailors, Inc. owned and operated eight retail stores for the purpose
of conducting its made-to-measure clothing business. The business was
carried on in the following manner:
○ Customers would order from samples kept in the local stores and
the orders would be sent to the main office of the corporation
which was located in Newark, New Jersey. The garment would be
made up according to specification, sent to the store from which
the order came and delivered to the customer.
● The Delaware company (PARENT) incorporated a subsidiary in Virginia,
known as the Tip Top Tailors Virginia (SUBSIDIARY). The subsidiary opened a
store in Richmond and this store was operated in exactly the same manner
as the other retail outlets of the parent corporation. Both corporations had
the same officers and the subsidiary was merely a department of the parent.
● The parent company furnished the new store in Richmond and supplied it
with the piece of goods which were to serve as samples. All of the
furnishings and fixtures were charged at cost to the subsidiary’s account
which was kept on the parent corporation’s books and $900 was also
contributed by the parent for current petty cash expenditures. Expenses of
the Richmond store were paid by the Delaware corporation by its own check
and debited on its books to the Richmond store.
​ share ​pari passu with the other creditors of the insolvent subsidiary.
CLEMENTE
● Moreover, the contracts with dealers in hats, shirts, etc.
parent corporation authorizing such dealers to operate in the subsidiary
store, just as they operated in the other stores of the corporation, and that
the subsidiary store was charged and credited with respect to transactions
arising out of these contracts, just as were the other stores.
● The parent corporation was adjudicated bankrupt and appellant Stone was
appointed as its receiver. Later on, creditors of the subsidiary (dealers) levied
attachments on the assets of the subsidiary corporation. On the following
day, an involuntary petition in bankruptcy was filed against the subsidiary
corporation by Stone. The subsidiary corporation was adjudged bankrupt as
well and Stone filed a claim for the sum of $39,069 as the amount that the
subsidiary company owed to the parent company.
● This was opposed by the subsidiary corporation’s trustee in bankruptcy by
asking that at all events the petition be postponed to the claims of the local
creditors. ​This was because the subsidiary corporation was NOT a separate
entity, but a mere instrumentality or department of the parent corporation​,
and that the amount claimed represented a mere advancement of operating
capital.
● Stone, on behalf of the parent corporation, filed an application for
consolidation of the subsidiary and parent proceedings arguing that:
○ if the corporate entity should be disregarded, it should be done so
for all purposes.
○ The purpose for consolidating was was for all the creditors of both
the parent and subsidiary corporation share in the distribution of
the consolidated assets equally.
● The dispute was referred to a special master who reported that:
○ The subsidiary corporation was a “mere shell without reality” and a
“mere agency or corporate pocket” of the Parent corporation.
○ the claim of the parent trustee should be SUBORDINATED to the
claims of the subsidiary’s local creditors.
○ Where a subsidiary corporation that is merely an instrumentality of
the parent becomes insolvent, the parent will not be allowed to
 ● DISTRICT COURT: adopted the special master’s report and at the same time
dismissed the application for consolidation. It ruled in favor of the subsidiary
corporation.
ISSUE: W/N ​the subsidiary company is a separate and distinct corporation that would
give them the right to refuse to be consolidated with the bankruptcy proceedings of
the parent’s. (NO, it is an instrumentality of the parent company).
not merely those who have dealt with the subsidiary store, have rights with
respect thereto, as well as with respect to other assets of hte corporation,
these rights should be determined in the bankruptcy proceeding of the
parent corporation, and the two proceedings should be consolidated that
this may be done, with a pooling of assets and with the treatment of claims
filed in either proceedings as having been filed in the proceeding as
consolidated.

HELD: REVERSED AND REMANDED.

1. There is nothing in the record to show that any of the creditors who filed
claims in the bankruptcy proceedings of the Virginia corporation intended to
extend credit particularly to that corporation; and the fact that the bills of
the subsidiary store were paid by the parent corporation would indicate that
it must have been generally known to the creditors of the subsidiary store
that it was the parent corporation that was there engaged in the business.

2. There is no reason why all creditors of that corporation should not be

treated in exactly the same way; and that fact that it had obtained a charter
from the State of Virginia furnishes no good reason why the creditors dealing
with its Richmond (subsidiary) store should be dealt with differently from its
other creditors, since there is no showing that business was done under the
charter or that any of the creditors knew anything about it or relied on it in
any way.

3. Only by entirely ignoring the separate corporate entity of the subsidiary

corporation and consolidating the proceedings here with those of the parent
corporation can ALL the creditors receive that equality of treatment which it
is the purpose of the Bankruptcy Act to afford.

4. Where both corporations are insolvent, WHERE THE BUSINESS HAS BEEN
TRANSACTED BY AND THE CREDIT EXTENDED TO THE PARENT
CORPORATION, and WHERE THE SUBSIDIARY HAS NO REAL EXISTENCE
WHATEVER, there is no reason why the courts should not face the realities of
the situation and ignore the subsidiary for all purposes, allowing the
creditors of both corporations to SHARE EQUALLY in the pooled assets.

5. [SEE DOCTRINE]

6. Since the assets in the subsidiary company are unquestionably the assets of
the parent corporation, and since all of the creditors of that corporation, and
CLEMENTE