Dietel v. Day

• Decision Date: 06 January 1972
• Docket Number: No. 2,CA-CIV,2
• Citation: 492 P.2d 455,16 Ariz.App. 206
• Parties: Kenneth L. DIETEL, Appellant, v. James W. DAY and Margaret C. Day, husband and wife, Appellees. 1022.
• Court: Arizona Court of Appeals

Page 455

492 P.2d 455

16 Ariz.App. 206

Kenneth L. DIETEL, Appellant, v. James W. DAY and Margaret C. Day, husband and wife, Appellees.

No. 2 CA-CIV 1022.

Court of Appeals of Arizona, Division 2.

Jan. 6, 1972.

Rehearing Denied Feb. 2, 1972.

Review Denied March 7, 1972.

Johnson, Darrow, Hayes & Morales, by Raymond F. Hayes, Tucson, for appellant

R. Lamar Couser, Tucson, for appellees.

KRUCKER, Chief Judge.

This is an appeal by Kenneth L. Dietel (hereinafter Dietel), a resident of the State of California, third-party defendant, of the Judgment rendered against him individually in favor of James W. Day and Margaret C. Day (hereafter Day or Days), third-party plaintiffs. The Judgment in question This case involves many parties and many individual defendants and includes a certified record of 99 items, numerous exhibits and three volumes of Abstract of Record. The action originated in a suit by Fotomat, Inc. of California against Filmlab, Inc., Kenneth Dietel, James Day and others for infringement of trade names, trademarks and unfair competition. Day, a franchisee of Filmlab, then filed a third-party complaint against Dietel, as the alter-ego of Filmlab, Inc., for breach of contract. The court found Dietel to be the alter ego of Filmlab, Inc. and awarded the Judgment holding Dietel personally liable.

ran against Dietel individually and against Filmlab, Inc., a California corporation of which he was a shareholder, director and subsequently, the president. The case was tried without a jury, before the Honorable Judge Laurance T. Wren, Judge of the Superior Court of Coconino County, sitting in Pima County. On March 18, 1971 Judge Wren filed fifty-four (54) findings of fact and twelve (12) conclusions of law as the basis for the Judgement of $9,900.00. The amount of the Judgment represents $8,700.00, as the amount paid by Day under the franchise agreement, and $1,200.00 as the out-of-pocket expenses and operating losses incurred by Mr. and Mrs. Day.

The question presented to this court is whether the corporate veil was properly pierced to hold Dietel personally liable.

PIERCING THE CORPORATE VEIL

The law regarding corporate entity and the piercing of the corporate veil is more easily stated than applied. As a general rule, a corporation will be treated as a legal entity until sufficient reason appears to disregard the corporate form. The corporate fiction will be disregarded when the corporation is the alter ego or business conduit of a person, and when to observe the corporation would work an injustice. The alter-ego status is said to exist when there is such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist. Employer's Liability Assurance Corporation v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957); Cooper v. Industrial Commission, 74 Ariz. 351, 249 P.2d 142 (1952). See also, 18 Am.Jur.2d, Corporations §§ 13--16 (1965); and Fletcher, 1 Cyclopedia Corporations §§ 41.--41.3 (1963).

Where a corporation is operated and maintained for the purpose for which it was incorporated and Not as a mere shield of the stockholders, the corporate form should Not be disregarded. Cooper, supra. If a corporation was formed or is employed for fraudulent purposes then clearly the corporate fiction should be disregarded. And in Arizona it has been held that fraud may be the promise to do a future act with the present intent not to perform. Employer's Liability v. Lunt, supra. But it must be noted that a legitimate purpose of incorporation is to avoid personal liability and if the corporate fiction is too easily ignored and personal liability imposed, then incorporation is discouraged. Stock ownership by a few persons does not mean necessarily that corporation debts should be imposed upon them. If there is no unification of interests and intermingling of funds, so that the corporation losses its separate identity, then the owners should not be personally liable.

The Court of Appeals recently discussed the alter ego question in Ferrarell v. Robinson, 11 Ariz.App. 473, 465 P.2d 610 (1970):

'As previously stated, the mere fact that Kramer was an officer and the sole shareholder in R.I.C., Inc., does not in and of itself make this situation one in which the corporate form should be disregarded. Cooper v. Industrial Commission, 74 Ariz. 351, 249 P.2d 142 (1952). The evidence would have to show that the corporation was not only influenced and governed by defendant Kramer, but that there was also such a unity of interest and ownership that the individuality or separateness of defendant Kramer and the corporation had ceased to exist. Whipple v. Industrial Commission, 59 In the case sub judice, the trial court must have found the above-discussed factors to be present, since the judgment was awarded against Filmlab, Inc. and Dietel personally.

Ariz. 1, 121 P.2d 876 (1942): Home Builders & Suppliers v. Timberman, 75 Ariz. 337, 256 P.2d 716 (1953). A review of the record in this action has failed to disclose any basis for such a finding herein. There was no substantial evidence of intermingling of corporate and personal assets, affairs or funds, or that the corporate structure was in any way used for other than legitimate corporate purposes. Further, there would have to be a showing that observance of the corporate form would sanction a fraud. See Home Builders & Suppliers v. Timberman, Supra; Phoenix Safety Investment Co. v. James, 28 Ariz. 514, 237 P. 958 (1925). While it is clear that plaintiffs did not receive the benefit of their bargain, that alone does not constitute any evidence of fraudulent conduct and it is not sufficient to justify the disregarding of the corporate entity.' 11 Ariz.App. at 476, 465 P.2d at 613.

APPELLATE REVIEW

The role of the appellate court in review is to determine if there is substantial evidence in support of the judgment. If reasonable men might differ as to whether certain evidence establishes a fact in issue, then such evidence must be considered substantial. State v. Bearden, 99 Ariz. 1, 405 P.2d 885 (1965); City of Phoenix v. Burke, 9 Ariz.App. 395, 452 P.2d 722 (1969). On appeal this court must consider the evidence and possible inferences therefrom in a manner most favorable to upholding the judgment. State v. Harris, 9 Ariz.App. 288, 451 P.2d 646 (1969); Romney Produce Co. v. Edwards, 9 Ariz.App. 258, 451 P.2d 338 (1969). While the Court of Appeals is bound by the trial court's findings of fact, unless clearly erroneous, this doctrine does not apply to the trial court's conclusions of law and the Court of Appeals may draw its own legal conclusions from the facts. Zellerbach Paper Co. v. Valley National Bank, 13 Ariz.App. 431, 477 P.2d 550 (1970); Park Central Development Co. v. Roberts Dry Goods, Inc., 11 Ariz.App. 58, 461 P.2d 702 (1969). See, Rule 52, Rules of Civil Procedure, 16 A.R.S.

FINDINGS OF FACT

First, we agree with the trial court's finding as a matter of law that Dietel was not guilty of fraud (Minute Entry dated January 11, 1971, Abs. of Record 335--336).

After examining the entire record, we find several of the trial court's findings of fact to be clearly erroneous and others to be irrelevant to the Judgment holding Dietel personally liable as the alter-ego of Filmlab, Inc. And after viewing the entire record and the trial court's findings of fact which are not clearly erroneous, we are unable to reach the legal conclusion that Dietel was guilty of anything which should make him personally liable.

Finding No. 8 by the trial court is clearly erroneous and is contradictory to the first part of Finding No. 52 (Franchise Agreement Exhibit N, Abs. of Record...