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Employer's Liability Assur. Corp. v. Lunt

Supreme Court of Arizona

June 18, 1957

EMPLOYER'S LIABILITY ASSURANCE CORPORATION, Ltd., a corporation, John H. Barr, John H. Barr Marketing Company, and Tom Barr, Appellants.
Heaton LUNT and Virgil Lunt, copartners dba Heaton Lunt & Son, Appellees.

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[82 Ariz. 322] Jennings, Strouss, Salmon & Trask and Roderic M. Jennings, Phoenix, for appellant Employer's Liability Assur. Corp.

[82 Ariz. 323] Jerman & Jerman, and Charles E. Butler, Phoenix, for appellants John H. Barr, John H. Barr Marketing Co. and Tom Barr.

Anderson & Smith, Safford, for appellees.


The action originated as a suit against the John H. Barr Marketing Company, a corporation, John H. Barr and Tom Barr, as the alter ego thereof, and the Employer's Liability Assurance Corporation, Ltd., as its surety, for the sum of $1,938, being the unpaid balance on the purchase price of 1,200 sacks of onions. Judgment was rendered against all of the above-named parties, and all have appealed except the Marketing Company, which is insolvent. The questions have involve the liability of the respective appealing parties for this debt.

John H. Barr and Tom Barr urge by their appeal that the court erroneously determined they were the alter ego of the Marketing Company and erroneously disregarded the corporate entity in rendering judgment against them for the corporate debt. We first observe that a corporations is organized as a legal entity to do business in its own right and on its own credit as distinct from the credit of its officers and stockholders. The two appellants, John H. and Tom Barr, are not, of course, personally liable for the corporate debts simply by reason of being officers of the Marketing Company, Arizona Association of Credit Men v. Associated Indemnity Corporation, 44 Ariz. 548, 39 P.2d 626. That a few individuals own the stock of the corporation or control its actions does not mean necessarily that the debts of the corporation should be imposed upon them personally, Home Builders & Suppliers v. Timberman, 75 Ariz. 337, 256 P.2d 716; Cooper v. Industrial Commission, 74 Ariz. 351, 249 P.2d 142. Were the rule otherwise, it would often defeat the purpose of incorporation and tend to destroy the corporate form as a method of doing business.

The corporate fiction will, however, be disregarded upon the concurrence of two circumstances; that is, when the corporation is, in fact, the alter ego of one or a few individuals and when the observance of the corporate form would sanction a fraud or promote injustice. Whipple v. Industrial Commission, 59 Ariz. 1, 121 P.2d 876; Walker v. Southwest Mines Development Co., 52 Ariz. 403, 81 P.2d 90; Gonzales & Co., Brokers v. Thomas, 42 Ariz. 308, 25 P.2d 552; Mosher v. Lee, 32 Ariz. 560, 261 P. 35; Phoenix Safety Investment

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Co. v. James, 28 Ariz. 514, 237 P. 958; Rice v. Sanger Bros., 27 Ariz. 15, 229 P. 397. The disregard of the corporate fiction has not been milited to instances where the incorporation is for fraudulent purposes, but may be observed if after organization the corporation is employed for fraudulent purposes. Stark v. Coker, 20 Cal.2d 839, [82 Ariz. 324] 129 P.2d 390; Advertects, Inc., v. Sawyer Industries, Fla., 84 So.2d 21; Whitney v. Leighton, 225 Minn. 1, 30 N.W.2d 329.

In the instant case, it is undisputed that John H. Barr engaged in the business of marketing farm products, both as an individual, and as a partnership with others, prior to February, 1950. At or shortly after that time, the Marketing Company was organized. It continued in business until its affairs were terminated by insolvency in the latter part of September, 1951. John H. Barr was issued the shares of the corporate stock; his wife, Ida, fifty shares; and his son, Tom, one hundred forty shares. Raymond Homeyer was issued one share. The three Barrs were the principal officers, directors and stockholders of the corporation. They controlled the corporation's assets and its operations. The business engaged in by the corporation was the same business that John H. Barr had conducted prior to incorporation. Its area of operation, office location, office equipment, Post Office address and telephone number were identical. That the Barr family was the alter ego of the Marketing Company is so obvious that it cannot be a matter of serious dispute.

The Barr appellants urge that there was not sufficient evidence of fraud to justify the trial court's looking through the corporate fiction and holding them personally liable for the corporate debt. There was evidence that the Marketing Company, at the time of its formation in April of 1950, had assets of approximately $20,000, but that at the time of the termination of its business activities in September of 1951, just three weeks prior to the purchase of the onions from appellees, its liabilities exceeded its assets, for it was acknowledged that the officers personally paid the utility bills in order to continue operations. The onions, out of which this debt arose, were resold at a profit, but the money obtained from that sale was not used to pay the Lunt indebtedness. While the Marketing Company had purchased produce from appellees prior to the transaction involved here, those purchases had always been paid within a day or two. There was no discussion of the time of payment for the onions in this particular sale; apparently the Lunts relied on the prior practice. The Lunt sales were explained by the appellant Tom Barr to be what he called 'cash sales, they were sold to us on open account.' From the facts just recited the trial Judge could have drawn the conclusions that at the time of purchase the Marketing Company was insolvent and known to be insolvent to its officers and that appellants did not intend to pay for merchandise at the time of purchase.

In this jurisdiction it is 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. [82 Ariz. 325] Waddell v. White, 56 Ariz. 420, 108 P.2d 565; Law v. Sidney, 47 Ariz. 1, 53 P.2d 64. It also seems to be accepted that a buyer's nondisclosure of insolvency constitutes fraud where it is coupled with an intent not to pay for the goods.

'Starting with Donaldson v. Farwell, 93 U.S. 631, 23 L.Ed. 993, it has been settled by a number of decisions in federal courts that it is a fraud for an insolvent, concealing his condition, to buy goods, for which he does not mean to pay. * * *' California Conserving Co. v. D'Avanzo, 2 Cir., 62 F.2d 528, 530.

The gist of the fraud here complained of is not in the breach of the agreement to perform, but in the implied representation of an existing intent to perform where such intent is, in fact, nonexistent, 23 Am.Jur. 887. The intent not to perform can be inferred from the fact that having resold the onions at a profit within

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a few days and having the means available to pay this debt, no attempt was made to apply the proceeds to the extinguishment thereof. The record does not reflect any reason for the Barrs to believe that the Marketing Company could be expected to pay ...

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