026 Gallagher (P) vs. Germania Brewing Co.

(R), Barge and Vander (Interveners)

US CASE – SC of Minnesota

Topic: Corporate Entity – Disregarding the Corporate Entity

Facts:
 A person named Westphal delivered goods to respondent corporation, Germania
brewing Co. which were unpaid by said corporation.
 Westphal then assigned his rights to the plaintiff Gallagher to bring an action to recover
the value of the goods sold by Westphal to Germania Brewing Co., which Gallagher did,
in this current case.
 Barge and Vander (B & V) intervened in this case claiming that the two of them were the
only owners (each one-half) of all the capital stock of Germania Brewing Co. and that
each of them (as stockholders) had a valid and unsatisfied previous judgment against
Westphal upon a cause of action (different case) that happened before Westphal
assigned his rights to Gallagher. B&V was basically contending that Westphal, owed
them money before he assigned his creditor rights to Gallagher.
 B&V also contended that Westphal had been insolvent and that his estate, of which
Gallagher became the assignee, was so hopelessly insolvent that it was insufficient to
even pay the expenses of administering the assignment made.
 B&V’s relief sought: That their claims against Westphal be allowed by the court, in equal
amounts, as equitable set-offs to the claim of Gallagher (as Westphal’s assignee) against
B&V’s company - Germania Brewing Co.
 Lower Court: ruled in favor of interveners and allowed the set-off, to which plaintiff
herein appeals.
 Gallagher’s contention: B&V’s claims cannot be set off against a claim against Germania
Co. even if they were the only stockholders because a corporation is a legal entity,
entirely distinct from its stockholders.
Issue:
 WoN the set-off of claims should be allowed.

Ruling:
 No. B&V’s claims against Westphal (or Gallagher as Westphal’s assignee) are not the
subject of equitable set-off to a claim against the defendant corporation – Germania
Co..

 As a general rule, whenever necessary to accomplish equitable justice – the courts will
permit an equitable set-off although the debts accrued in different rights – ex. By
allowing a separate debt to be set off against a joint debt, or vice versa. Hence, had it
been a claim by Gallagher directly against B&V then there would have been no doubt of
the right to set-off the claims.

 But this case is different for it is to Germania Co. to which Gallagher has a claim and not
to its actual stockholders (B&V). To allow the set-off here, would be to wholly ignore the
legal doctrine that a corporate is an entity separate and distinct from the body of its
stockholders, and to treat the corporation as a mere association of individuals.
  It is essential, 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 complication and uncertainty. The transferable nature of stocks in a
corporation is also a good reason why the theory of a corporate entity should be
preserved and why it is necessary to discriminate sharply between corporate rights
and obligations versus those of the shareholders personally.

 If the rights or liabilities of a corporation could be affected by the acts of the

stockholders, or if shareholders could demand their several shares/equities against
persons having claims against the corporation, or conversely, if the claim is against
individual stockholders, It can result to confusion and chaos in corporate affairs. (This
would result to various stockholders, especially in large companies claiming from
different debtors of the corporation for their individual or personal shares and vice
versa, creditors of the corporation being able to claim against individual stockholders of
the corporation etc.)

 The only safe and sound rule would be to adhere strictly, in such cases, to the doctrine
of a corporate entity distinct from the individual stockholders.

Held:
Gallagher’s Petition is Granted. Order of Lower Court is reversed.