Brief Fact Summary. Harold E. Hanewald, (Appellant), appeals the part of his judgment that refused to impose personal liability upon Keith, Joan and George Bryan, (Appellees) for the debt of Bryan’s Inc.
Synopsis of Rule of Law. A shareholder is liable to corporate creditors to the extent his stock has not been paid for.
Keith and Joan Bryan incorporated Bryan’s Inc. to operate a retail store. The articles of incorporation authorized the corporation to issue 100 shares of stock at $1,000 per share with a total authorized capitalization of $100,000. Bryan’s Inc. issued 50 shares of stock each to Keith, Joan, and George Bryan for no consideration. Bryan’s Inc. purchased a dry goods store from Appellant for $60,000 and leased the building for $600 per month for five years. Bryan’s Inc. paid Appellant $55,000 cash and gave him a promissory note for $5,000. The payment was made from a loan by the Union State Bank of Hazen to the corporation personally guaranteed by Keith and Joan Bryan. The business dissolved after several months. Bryan’s Inc. paid off all its creditors but Appellant including Joan and Keith Bryan who had loaned the corporation $10,000 for various operating expense. Appellant brought suit to recover on the promissory note and lease. The trial court ruled in favor of Appellant but r
efused to hold Appellees individually liable.
Issue. Whether Appellees as the corporation’s sole shareholders shall be personally liable for the debt incurred by Bryan’s Inc. to Appellant.
Held. Yes. Appellees are liable to the corporation’s creditors to the extent they failed to pay for the stock issued to them.
Discussion. Points of Law - for Law School Success
Organizing a corporation to avoid personal liability is a legitimate goal and is one of the primary advantages of doing business in the corporate form. View Full Point of Law
Bryan’s, Inc. was authorized to issue 100 shares of stock at $1,000 per share. The three Appellees each received 50 shares for no consideration. This makes them personally liable for the corporation’s debt. The loan was a debt not an asset of the corporation and was repaid before the business was abandoned. Therefore the loan cannot be considered a capital contribution.