Brennan's,INC V Colbert

Background and fact ;Pip, Jimmy and Theodore Brennan are brothers and shareholders of Brennan's Inc., which owns and operates New Orleans's famous Brennans restaurant,In 1998, the Brennans brothers retained attorney Edward Colbert and his firm Kenyon&Kenyon LLP to represent Brennans Inc in dispute with another family member. All bills were sent to Brennans Inc, and the payments came from the company checking account.

As a close corporation Brennans Inc did not hold formal corporate meetings with agendas and minutes but did maintain corporate books, hold corporate bank accounts and file corporate tax returns.IN 2005 Brennans sued Colbert and his law firm for legal malpractice. In its answer, Kenyon &Kenyon appealed .The law firm argued that the court should pierce the corporate veil because Brennans Inc did not observe corporate formalities and because the Brennans brothers did not honor their promises to pay their legal bills.

In the language of the court

As a general rule, a corporation is a distinct legal entity, separate from the individuals who compose it , thus insulating the shareholders from personal liability.

There are limited exceptions where the court may ignore the corporate fiction and find the shareholders personally liable for the corporation's debts. One of those expectations is that the corporation is found to be the "alter ego" of the shareholders.It usually involves situations where fraud or deceit has been practiced by the shareholders through the corporation. Another basis is where the shareholders disregard the corporate formalities to the extent that the corporation and shareholders are no longer distinct entities.

Absent fraud, malfeasance or criminal wrongdoing, courts have been reluctant to hold shareholders personally liable for corporation obligations. When a party seeks to pierce to coprtate veil, the totality of the circumstance is determined.

The Kenyon firm was aware of the nature of the operation of Brennans Inc before being retained. The client was Brennans Inc bills sent to Brennans Inc, and payments were paid with checks from Brennans Inc's bank account. Brennans Inc maintained its accounting records and filed its own tax return. The Kenyons firm acknowledges that Brennan's Inc acting through its shareholders, promised to take a good on the debt.

There is no evidence that the Brennans ever agreed to bind themselves personally for any debt incurred in connection with legal services provided by the Kenyon firm . There is no written retention agreement between the corporation and the Kenyon firm nor a written guarantee from any of the brothers.

The Kenyon firms admit that there is no requirement for small corporations to operate with the formality usually expected of more giant corporations. The Kenyon firm has filed to establish that the lack of corporation formalities, particularly meeting agendas and minutes, is sufficient to pierce to corporate veil. Brennans Inc at all times since its inception has maintained corporate books and corporate bank accounts and has filed corporate tax return.

The Kenyon firm has not proven that any of the Brennan brothers made promises to pay the firm's bills without the intent to deliver them.

Questions:

1. The ethical dimension; Should the Brennans brothers are held personally liable because they misled their attorneys ? Why or why not?

2. The Economic dimension; Do corporations benefit from shareholders' limited liability? If so, how?