Youngren v. Rezzonico

• Decision Date: 09 December 1975
• Docket Number: CA-CIV,No. 1,1
• Citation: 543 P.2d 142,25 Ariz.App. 304
• Parties: Louis P. YOUNGREN, Individually, Appellant, v. Richard A. REZZONICO, Appellee. 2696.
• Court: Arizona Court of Appeals

Page 142

543 P.2d 142

25 Ariz.App. 304

Louis P. YOUNGREN, Individually, Appellant, v. Richard A. REZZONICO, Appellee.

No. 1 CA-CIV 2696.

Court of Appeals of Arizona, Division 1, Department A.

Dec. 9, 1975.

Rehearing Denied Jan. 15, 1976.

Review Denied Feb. 10, 1976.

Price, Tinney, Lindberg & Gianas, by John Price, Tucson, for appellant.

Mangum, Wall & Stoops, by Daniel J. Stoops, Flagstaff, for appellee.

OPINION

OGG, Presiding Judge.

The controlling question in this case is whether it was proper to set aside the corporate entity under the 'alter ego' theory and hold a stockholder liable for a corporate debt.

The defendant-appellant Louis P. Youngren, as President of Taurus Industries, Inc., purchased a registered quarter horse from the plaintiff-appellee Richard A. Rezzonico. As payment for the horse Rezzonico received a $10,000 promissory note signed by Louis P. Youngren, as President of Taurus Industries, Inc. When the note was not paid and Taurus Industries, Inc. went into bankruptcy, Rezzonico brought suit to collect the note from Youngren as an individual.

The case was tried to a jury and a verdict and judgment thereon was rendered in favor of Rezzonico and against Louis P. Youngren. Youngren now brings this appeal.

It is Youngren's position that the corporation Taurus Industries, Inc. has the sole obligation to pay the judgment.

Where there has been proper compliance with statutory requirements for the formation of a corporation, the private property of a stockholder cannot normally be reached to satisfy corporate debts. Employer's Liability Assurance Corporation v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957); Ferraroll v. Robinson, 11 Ariz.App. 473, 465 P.2d 610 (1970).

In this case Taurus Industries, Inc. had complied with the statutory requirements (§ 10--122, subsection 9, Arizona Revised Statutes Annot.) exempting its shareholders private property from liability for corporate debts.

Arizona case law has specifically stated that:

'Before a court is entitled to disregard the corporate entity there must be a resulting injustice in addition to a situation that justifies a finding that the corporation is the alter ego of the individual.' Home Builders & Suppliers v. Timberman, 75 Ariz. 337, 344, 256 P.2d 716, 721 (1953).

Dietel v. Day, 16 Ariz.App. 206, 492 P.2d 455 (1972), further provides that:

'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, supra; 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).'

The term injustice or unjust act as used in the Arizona cases is not easy to define. Injustice falls within the realm of equity and has been interpreted as:

'Equity is reluctant to permit a wrong to be suffered without remedy. It seeks to do justice and is not bound by strict common law rules or the absence of precedents. It looks to the substance rather than form. It will not sanction an unconscionable result merely because it may have been brought about by means which simulate legality. And once rightfully possessed of a case it will not relinquish it short of doing complete justice.' Sanders v. Folsom, 104 Ariz. 283, 451 P.2d 612 (1969).

In the case of Employer's Liability Assurance Corporation v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957), the Arizona Supreme Court was faced with the same questions presented by this appeal. In that case the court allowed the corporate veil to be pierced after finding the corporation was solely owned and controlled by one family and that the operations of the family were the alter ego of the corporation. The court found the alter ego with few factual details expressed in the opinion and concentrated on the other part of the inquiry as to whether the observance of the corporate form would sanction a fraud or promote injustice. The court found that the large purchase by the corporation at a time when its liabilities exceeded its assets, coupled with the fact that there was never any attempt to repay, could be the basis for the conclusion that the corporation did not intend to pay for the merchandise at the time of purchase.

In this jurisdiction it is also settled that a fraud may be perpetrated by the giving of a promise to perform a future act made with the present intention not to perform. Waddell v. White, 56 Ariz. 420, 108 P.2d 565 (1940); Law v. Sidney, 47 Ariz. 1, 53 P.2d 64 (1936). In the case under consideration the jury was submitted three interrogatories which are answered as follows:

'1. Did Defendant LOUIS P. YOUNGREN personally guarantee the Promissory Note to Plaintiff? Answer--no

2. Was the manner in which the corporation was conducted such that the corporate entity should be disregarded and LOUIS P. YOUNGREN be held personally liable on the Promissory Note? Answer--yes

3. Did LOUIS P. YOUNGREN practice any fraudulent conduct upon Plaintiff RICHARD A REZZONICO in connection with the giving of the Promissory Note? Answer--no'

It should be noted that Youngren objected to interrogatories 1 (personal guarantee theory) and 3 (fraud theory), but there was no objection to interrogatory 2 (should the corporate entity be disregarded). The following instruction was given to the jury without objection.

'In the present case, the Plaintiff dealt with a corporation known as Taurus Industries, Inc. He urges that this is an appropriate case in which the legal entity of Taurus Industries, Inc. should be disregarded, and that he should be entitled to require payment of the indebtedness due him, if any, from Louis P. Youngren.

You should consider the following facts in determining whether or not to disregard the legal entity of Taurus Industries, Inc. and return a verdict in favor of the Plaintiff against Louis P. Youngren as an individual.

1. Whether or not Louis P. Youngren owned all the stock in Taurus Industries, Inc.

2. Whether or not Louis P. Youngren exercised direction and control over the management of the corporation known as Taurus Industries, Inc.

3. Whether or not Louis P. Youngren, directly or indirectly, furnished all, or substantially all, the financial investment in Taurus Industries, Inc.

4. Whether or not Taurus Industries, Inc. was adequately financed, either originally or subsequently, for the business in which it was to engage.

5. Whether or not there was actual participation in the affairs of Taurus Industries, Inc. by persons other than Louis P. Youngren, and whether stock was issued to them.

6. Whether or not Taurus Industries, Inc. observed the formalities of doing business as a corporation, such as the holding of regular meetings, keeping of corporate minutes, the issuance of stock, the filing of necessary reports, and similar matters.

7. Whether or not Taurus Industries, Inc. existed merely to do a part of the business of Louis P. Youngren and for his personal benefit.

If your determination of these facts, or most of them, as well as the other evidence in the case,...