Design Associates, Inc. v. Welch

• Citation: 36 Cal.Rptr. 341,224 Cal.App.2d 165
• Court: California Court of Appeals
• Decision Date: 20 January 1964
• Parties: DESIGN ASSOCIATES, INC., a California Corporation, Plaintiff and Appellant, v. Harold M. WELCH, Olga Welch, Anna S. Nisbet, Estate of Leland G. Nisbet, Donner Lake Development Company, a Nevada Corporation, Defendants and Respondents. Civ. 10589.

Page 341

36 Cal.Rptr. 341

224 Cal.App.2d 165

DESIGN ASSOCIATES, INC., a California Corporation, Plaintiff and Appellant, v. Harold M. WELCH, Olga Welch, Anna S. Nisbet, Estate of Leland G. Nisbet, Donner Lake Development Company, a Nevada Corporation, Defendants and Respondents.

Civ. 10589.

District Court of Appeal, Third District, California.

Jan. 20, 1964.

Hearing Denied March 18, 1964.

Charles W. Luther, Sacramento, for appellant.

Chamberlain & Chamberlain, Auburn, Leo J. Todd, Grass Valley, Frank G. Finnegan, Sacramento, for respondents.

PIERCE, Presiding Justice.

Plaintiff corporation sued defendant Harold M. Welch and his wife (hereinafter 'Welch') as individuals under a contract for performance of architectural services. The amount sued for was $13,215.78. He also claimed a lien in this amount against the premises for which plans were prepared. These premises are owned in fee by defendant Donner Lake Development Co., a corporation (hereinafter 'Development Co.'), which is selling under an executory contract of sale to defendant Anna S. Nisbet, who had assigned to Welch, who in turn had, prior to the contract sued on, assigned to Donner Lake Lodge, Inc. (hereinafter 'Lodge, Inc.'), not a party to the litigation. The case was tried to the court which gave judgment in favor of all defendants. The trial court found: (1) that the contract sued upon was between plaintiff and Lodge, Inc., and that Welch was not a party thereto; (2) that no valid mechanics lien could be imposed against the property because the planned improvement was never initiated; that it was invalid as against Development Co. and Nisbet because they had no knowledge of the work performed by plaintiff. Our holding is that the judgment must be affirmed for reasons which will be developed below.

Plaintiff's attack upon the trial court's holding that its contract was with Lodge, Inc., and not Welch is based upon the theory that the court, as a matter of law, should have applied the 'alter ego' doctrine; that it should disregard the corporate entity; pierce the corporate veil. Facts suggesting this theory were neither pleaded nor was the case tried by presenting all of the facts upon which the doctrine, equitable in nature, depends. Nothing in the printed record before us indicates that plaintiff relied upon anything in the trial court other than the contention that it had contracted with Welch as an individual. After stating the facts we will expand discussion of the doctrine sought to be invoked by plaintiff and explain why we deem it is unavailable to it on this appeal.

We now review the record and do so, as we must, viewing substantial evidence and inferences reasonably to be drawn in the light most favorable to respondents.

Welch, in February 1959, operated a resort known as Donner Lake Lodge. The real property, as indicated above, was being bought from Anna Nisbet who was buying from Development Co., owner of the fee. Prior to 1959 plaintiff had performed other architectural services--the preparation of a master plan--for the then-envisioned expansion of the resort. This was in 1957-1958. This work had been by contract with Welch as an individual and had been paid for.

Then in December 1958 the corporation, Lodge, Inc., having been organized, Welch contracted to sell the resort to the corporation.

No permit to Lodge, Inc., to issue corporate shares had then been granted. Modification of the original 'master plan' prepared by plaintiff was contemplated. Welch negotiated with plaintiff's chief architect and executive vice president, Riley, for this work and the preparation of cost estimates. Both were to be used as a part of the prospectus for a stock sale to the public, the proceeds of which were to be expended to defray costs of the project. Substantial evidence supports defendants' position that the existence of the corporation and the plan outlined above were known to plaintiff when the contract negotiations took place and that plaintiff agreed to look to the corporation for payment for its work. Welch testified: 'I had no contact with Design Associates until I called them myself in January or early February, 1959. At that time I definitely stated that it was now a corporation and I didn't want anything in my name; that I was president but was not directly responsible as an individual.' (Emphasis supplied.)

An agreement was reached and the contract was drawn up by Riley acting for plaintiff. It was in letter form, dated February 6, 1959, addressed to 'Donner Lake Lodge, Inc. c/o Mr. Harold Welch, Donner Lake Lodge, U. S. 40, West of Truckee, California.' As framed it was a proposal signed 'Design Associates, Inc. Elvin Riley Architect.'

The typewritten agreement included a form for endorsement of acceptance. This was signed and returned by Welch who did not insert the corporate name above his signature nor add the title of his corporate office of president. He testified he had intended to do this but overlooked it.

The contract contemplated three phases of work: (1) 'pre-preliminary' work for modifying the master plan of 1958, including several artists' conceptions and construction cost estimates; (2) 'preliminary' work consisting of more design work and some mechanical and electrical work plans; (3) preparation of working drawings for the complete project. Phases (2) and (3) were not to be commenced unless and until approval by owner had been given of phase (1).

Plaintiff completed the 'pre-preliminary' drawings on March 6, 1959 and sent them to Welch. Also sent was an invoice for this work for $1,049. This invoice billed the work to Welch who made no protest that it was not billed to the corporation. He testified he had not noticed that the billing was to him. The invoice contained the same job number as the 1958 work which had been done for Welch as an individual. On the other hand, numerous letters by plaintiff regarding the work being done by it were addressed to the corporation, care of Welch.

Written approval of the 'pre-preliminary' work was never given; and Welch denied giving oral approval or authorization for further work. Plaintiff, nevertheless, proceeded with working drawings covered by the third stage. Riley testified plaintiff did this because he knew that Welch wanted the work to be completed for the Winter Olympic Games at Squaw Valley and therefore haste was essential. Welch denied he had pushed for completion in time for the Winter Olympics. The evidence in the record, while conflicting, presents a far from clear picture as to why plaintiff's personnel continued the work without explicit approval of the work of the first phase; also as to why phase (2) seems to have been by-passed for work on phase (3).

Welch denied knowledge of any plans prepared or work done by plaintiff other than the pre-preliminary work for which invoice had been received until he received another invoice in July which billed him for the total in excess of $13,000. He then told plaintiff to stop further work. Plaintiff had already stopped work in June.

On May 27, 1959, a permit was received by the corporation to issue shares. None were sold under this permit nor under a later permit.

Until September 1959 Welch continued to operate the resort as an individual and maintained the liquor license in his own name. On September 1, 1959, the business was transferred to the corporation. Until this transfer, the corporation's only asset was its contract of purchase and sale from Welch.

On July 15, 1959, plaintiff filed its claim of mechanic's lien of record. Neither then nor at any subsequent time before trial was any work of improvement done using the plans prepared by plaintiff or on the project contemplated thereby. Evidence supports the finding that neither the owner, Development Company, nor Anna Nisbet, had actual knowledge of the work done by plaintiff, although the latter had seen the artists' renditions prepared in March (for the prospectus). She was a director of the corporation, but had no knowledge of the contract with plaintiff. Although she was a part-time bookkeeper at the Lodge, she had never posted, nor had she knowledge of, the invoices sent by plaintiff.

Plaintiff, as stated above, contends on appeal that even though the contract was between it and the corporation, Lodge, Inc., the trial court should have disregarded the corporate entity, as a matter of law, holding Welch liable. Adequate for purposes of this opinion is discussion of the so-called 'alter ego' theory in 3 Witkin, Summary of California Law, 'Corporations,' sec. 4, p. 2303, et seq. This author says (on page 2303):

'When a corporation is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves or by the controlling corporation. It is often said that the court will disregard the 'fiction' of corporate entity, or will 'pierce the corporate veil.' Some writers have criticized this statement, contending that the corporate entity is not a fiction, and the doctrine merely limits the exercise of the corporate privilege to prevent its abuse. [Citations.]'

To be applicable so that the acts and obligations of the corporation can be considered those of the individual, all of the following circumstances must be present: (1) the individual sought to be charged must not only be the sole owner and manager of the corporation, but there must be such 'a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased;' and (2) the facts must be such that to deny individual liability would 'sanction a fraud or promote injustice.' (Minifie v. Rowley, 187 Cal. 481, 487, 202 P. 673, 676.) (Emphasis supplied.)

In Norins Realty Co. v. Consolidated A. & T. G. Co., 80 Cal.App.2d 879, 182 P.2d...