Appellant, Associated Vendors, Inc., brought this action against respondents Oakland Meat Co., Inc., (hereinafter referred to as Meat Co.) Oakland Meat & Packing Co., (hereinafter referred to as Packing Co.), and several individuals, to collect unpaid rental on property leased by appellant to respondent Packing Co., and to recover the difference between the rental provided in the lease with Packing Co. and the rental now being paid by a new tenant. Appellant alleged that, upon Packing Co.'s default in payment of rent and vacation of the premises, appellant relet the premises to one Frank H. Black, on Packing Co.'s behalf, at a monthly rental which was less than the rental Packing Co. was obligated to pay under the terms of the lease. Appellant sought to impose liability upon the Meat Co. and the individuals on the theory that Packing Co., the lessee under the lease, was the alter ego of the other respondents. Appellant also sought attorney's fees and an injunction against respondents restraining them from selling or otherwise transferring certain obligations incurred by Frank H. Black.
Following a trial on the merits, the court found in favor of appellant as against Packing Co., and in favor of the other defendants to the action. Appellant appeals from the judgment.
Statement of Facts
The appellant, as lessor, leases market space in the Housewives Market in Oakland. In November 1956, one of the appellant's tenants, Clarence Klieman, went into bankruptcy. The appellant thereupon entered into the negotiations hereinafter set forth for a lease of the premises formerly occupied by Klieman. At the time of said negotiations Meat Co. was an established meat wholesaler. The directors and officers of Meat Co. were Zaharis, Lafayette, White and Frueh. Zaharis was its president and the owner of 26 per cent of its stock. He had been an officer, director and shareholder since it was formed. Lafayette owned 26 per cent of the stock, while White and Frueh owned 24 per cent each. The preliminary negotiations for said lease were held at a meeting in November of 1956.
Allan Schulman, president of the appellant corporation, testified concerning said meeting as follows: that he, in his then capacity as secretary-treasurer of appellant, and Phil Davidson, one of its directors, met with respondents, Zaharis and Lafayette, at the office of Meat Co. to discuss the possible lease to Meat Co. of the meat department premises formerly occupied by Klieman; that Zaharis and Lafayette stated to him that "they" wanted to lease said department in order to recoup certain losses which they had sustained in sales of meat to Klieman; that he (Schulman) stated the rent would be $3,000 for the first month, and $1,500 every month thereafter, for a term of eight years; that he further stated that $4,500 was to be paid in advance, $1,500 thereof being lease security; and that no mention was made of the name of the person who would appear as lessee on the lease. Davidson's testimony regarding this meeting was substantially the same as Schulman's. He testified that at said meeting there was no mention of a lease to anyone other than Meat Co., and that he was of the opinion, then, that Associated Vendors was dealing with Meat Co.
Zaharis testified as follows with reference to the said meeting: That it was held on November 20, 1956, in Davidson's office, and not at that of the Meat Co.; that present, besides himself, were Davidson, Klieman, and Arthur Weikert. (Weikert was General Manager of the market.) That there never was any meeting between Schulman, Davidson, Lafayette
Klieman testified that such a meeting was held, and that present were the same persons mentioned by Zaharis. Klieman testified further that at this meeting Zaharis stated that "he would have to have a new corporation because he wanted no personal liability on himself" or the Meat Co. Weikert denied being present at the meeting and stated that he did not meet Zaharis until 1959.
The evidence discloses that contemporaneously with these negotiations Zaharis had been in contact with a Mr. Stanley Whitney concerning the acquisition of a corporation known as Town & Country Farms, which was organized for the purpose of developing real estate, had not issued any stock and had never commenced doing any business. Whitney was the attorney for said corporation and pursuant to negotiations with Zaharis undertook to amend the articles and certificate of said corporation by changing its name to Oakland Meat & Packing Company (referred to herein as Packing Co.).
Zaharis testified, further, that the day after the aforesaid meeting, Weikert phoned him for "his answer"; that he told Weikert he "personally was interested in it" and that he "told them that if they wanted me to form a new corporation, sign the lease, that I wanted no personal liability, I would be glad to do it"; that Weikert said he would discuss it with the officials of appellant, and that if they agreed that they would make a lease and bring it to him; that a "day or two after the market was opened" he received another telephone call from Weikert wherein Weikert stated that "the officials of the corporation at the Housewives Market was interested in getting the lease signed because we were operating without
Copies of the lease in question had, in the meantime, been prepared by Robert C. Burnstein, attorney for appellant, who forwarded them to Whitney with a letter of transmittal specifically requesting that the lease be signed by an authorized officer of Packing Co. and that the seal of said corporation be impressed upon it. Whitney had continued to act as attorney for Packing Co., and upon the change of name becoming effective, proceeded to make application for a permit to issue stock under the new name. Both copies of the lease were subsequently signed in Whitney's office by Zaharis and White as president and secretary-treasurer, respectively, of Packing Co. and its seal was affixed thereto. Whitney then brought both copies of the lease, together with Packing Co.'s check for $4,500 representing the first month's rent and the security deposit, to the appellant's premises where they were signed by two officers of the appellant. The said lease designates the appellant as lessor and Packing Co. as lessee, and bears an execution date of December 3, 1956.
Whitney testified that he never represented Meat Co. and did not know of its existence until the time he was engaged to effect the said change of name. After the lease was signed, Whitney negotiated on behalf of Packing Co. for the purchase of certain fixtures from a certain Al Weikert (brother of the Weikert hereinbefore referred to). A conditional sales contract was entered into between said Al Weikert, as seller, and Packing Co., as purchaser. This contract was signed by Zaharis and White in their capacities as officers of Packing Co. Whitney testified that when he delivered the contract to Al Weikert it bore these signatures and Packing Co.'s seal. The terms of said contract provided for a down payment of $1,032.89, and a time balance of $14,787.08.
Pursuant to a permit for the issuance of stock, Zaharis became the sole shareholder of Packing Co. by the acquisition of 80 shares of its stock for which he paid $8,000. A certificate for said stock to Zaharis was issued on April 24, 1957. The officers and directors of Packing Co. were Zaharis, White and Frueh. Zaharis was elected its president. According
Schulman testified, further, that at the time said lease was being negotiated he was familiar with Meat Co.; that it had a good reputation and credit; and that he had not heard that a new company was being organized. He testified that he first heard of Packing Co. in November of 1958, and that prior to that time he did not know that there was a difference between Meat Co. and Packing Co., and that although he knew the lease was in Packing Co.'s name he did not know that this identified an organization separate from Meat Co. He also testified that he never saw a Packing Co. sign on the market premises.
Zaharis' total investment in Packing Co. was the $8,000 which he paid for the corporate stock. He withdrew $6,000 to $7,000 from Meat Co. These were personal funds and not company funds. Of the said sum of $8,000, the sum of $4,500 was used to pay the first month's rent and the lease deposit to appellant, the sum of $1,032.89 was used as a down payment on the fixtures, and the sum of $700 was paid as the first installment under the fixture conditional sale contract. When Packing Co. began business operations it had about $1,500 in cash. It had acquired on credit an opening inventory valued at between $2,000 and 3,000. The monthly rental was $1,500, the installment payment on the fixtures $700, and the weekly payroll was $893.67. The equipment in the shop belonged to the Trustee in Bankruptcy who permitted Packing Co. to use it pending the bankruptcy sale. The fixtures which were purchased for approximately $16,000 were valued by Zaharis at $60,000 in place, less than $50,000 if not installed. They were subsequently sold for $9,000.
About three months after the commencement of business Packing Co. was in need of funds. The sum of $3,500 was required to purchase the equipment from the trustee. Zaharis loaned $5,000 to the Packing Co. There are no minutes and no vote evidencing the transaction. A year later Zaharis needed the $5,000 for another venture. Packing Co. did not have the money to repay the loan, so a loan of $5,000 was made by Meat Co. to Packing Co. in order to repay Zaharis. This was the only loan ever made by Meat Co. to Packing Co. A chattel mortgage upon Packing Co.'s equity in the fixtures was executed on May 26, 1958, but was not recorded until December 17, 1958. This loan has not been repaid, nor has
During Packing Co.'s business operations, Meat Co. advanced credit to Packing Co. Meat Co., however, was only one of several suppliers who continued to supply on credit. Packing Co.'s purchases amounted to approximately $25,000 per month. From 60 per cent to 70 per cent of such merchandise was procured from suppliers other than Meat Co. No price advantage was given or received by Meat Co. When Packing Co. vacated the leased premises it still owed Meat Co. about $15,000. This debt has not been paid nor have any arrangements been made for repayment. Zaharis testified: that this bill was not paid because the other creditors were paid in preference to Meat Co.; that he had guaranteed all other companies that there was no connection between the two companies; that he did not want to be responsible for owing any creditor any money; that he wanted to take the loss if any should arise; and that he wanted to protect his reputation. Lafayette testified: that Meat Co. did not intend to sue Packing Co. for this indebtedness because Packing Co. has no assets; that a suit would be worthless; and that the obligation would be merely written off. Packing Co. has paid all of its other obligations, bills and all of the rent up to the time it ceased doing business in January 1959.
Zaharis, White and Frueh rendered services to Packing Co. without compensation. They did, however, continue to receive their regular compensation from Meat Co. Zaharis testified that he devoted all of his time to Meat Co., and that his participation in the management of Packing Co. consisted of telephoning the manager of the market two or three times a day. Lafayette acted gratuitously as a business advisor and on occasion examined Packing Co.'s books. Lafayette testified, however, that he did not do any work on Packing Co.'s books, nor did he sign any of its checks. On occasion Lafayette would pick up the cash from the retail market.
Other than its retail activities in the Housewives Market, Packing Co. did not maintain an office. Its books were kept at the Meat Co.'s address, and its bookkeeper worked on Packing Co.'s books at the Meat Co.'s office. Most of Packing Co.'s mail was addressed to the retail premises, but on occasion some of it was addressed to the Meat Co.'s office.
The licenses and permits permitting Packing Co. to operate a retail meat business bore the name "Oakland Meat Company." These licenses and permits were posted in a conspicuous place by the manager. City license notices were sent to "Oakland Meat Company, Housewives Market." The fees, however, were paid for by Packing Co. Zaharis testified that he had not seen the licenses and permits, and that the name "Oakland Meat" was put thereon without his permission. He also stated that this name was an abbreviation of Packing Co.'s name. The union contract covering Packing Co.'s retail employees only showed the name "Oakland Meat" as employer and was signed by Crowell, the manager of the retail department. Zaharis testified he had never seen a copy of this contract and that it should have shown Packing Co.'s name as the employer. A union representative testified that retail butcher complaints and wage claims were taken up with Lafayette. Separate workmen's compensation and fire policies were carried by Packing Co. in its own name, but the public liability and property damage insurance coverage for Packing Co. was added to Meat Co.'s policy. The insurance broker testified that this was done at the suggestion of the insurance company because the identity of the individuals exposed to liability, with the exception of Lafayette,
Zaharis also testified as to his credit, stating he could get several thousand dollars worth of meat on the signature of an employee in the market. He stated further that the sum of $1,000 to $1,500 together with the cash intake of $25,000 per month was adequate to operate the market for a month. It was his testimony that the market had brought in about $25,000 per month prior to Packing Co. taking over, and that while Packing Co. was operating the retail market it brought in from $6,000 to $7,000 per week. Several wholesalers' representatives testified that credit was extended to Packing Co. because they relied on Zaharis' personal credit and integrity and upon the standing of Meat Co. in the meat industry.
A Mr. Pitcher testified that he sold and serviced equipment at the retail premises from time to time; that he billed Meat Co.; and was never informed that the bill was directed to the wrong company. He testified further that he was told by a butcher at the retail market to deliver the merchandise there, but to send the bill to the Meat Co. Pitcher stated that he didn't know there was any difference between Meat Co. and Packing Co., and that he didn't realize that they were two different companies. He stated further that he did work for both the Meat Co. and Packing Co. and testified that certain invoices for merchandise delivered to and work done at the retail market were paid for by Packing Co. checks.
Other testimony was adduced from several persons who dealt with Packing Co. showing that some confused the names of the two corporations. A Mr. Pariani testified that he charged meat delivered to the retail store to Packing Co. but invoiced it to "Oakland Meat." Pariani, however, testified that he knew of the existence of the two companies; that he dealt with both of them; and that each had a separate account number. Mr. Egland, a representative of Swift & Company, stated that meat delivered to Packing Co. was billed to "Oakland Meat Company," but he also testified Swift sold meat to both companies; that he was aware of the existence of the two companies at the different addresses, and the different nature of the two companies. A Joseph Thelen testified that the records of his company (Lewis &
There was also evidence presented that Packing Co. and Meat Co. kept separate bank accounts, separate sets of accounts, made separate disbursements, using checks bearing the individual company name; maintained separate payrolls; that the companies used different fiscal years for tax purposes; that they were represented by different counsel; and that they maintained separate minutes.
The Trial Court's Findings
The appellant does not attack any specific finding of the trial court but contends not only that the uncontroverted evidence discloses factors which require that the corporate entity be disregarded, but that the two elements of unity of ownership and inequity are so conclusively present as to compel the disregard of such entity. The appellant further asserts that Packing Co. was under-capitalized as a matter of law and that this factor is sufficient in itself to warrant a disregard of the corporate entity. In attempting to sustain its position the appellant relies, generally, upon appellate decisions which have upheld judgments disregarding the corporate entity where the factual situation presented supplied factors which allowed the trial court to arrive at that conclusion.
Did the Trial Court Err in Refusing to Disregard the Corporate Entity?
The gist of the cases which have considered the doctrine is that both of these requirements must be found to exist before the corporate existence will be disregarded; that such determination is primarily one for the trial court and is not a question of law; and that the conclusion of the trier of fact will not be disturbed if it be supported by substantial evidence. (See also H.A.S. Loan Service, Inc. v. McColgan, supra, 21 Cal.2d 518, 524; Kasutoff v. Wahlstrom, 196 Cal.App.2d 65, 69
A review of the cases which have discussed the problem discloses the consideration of a variety of factors which were pertinent to the trial court's determination under the particular circumstances of each case. Among these are the following: Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses (Riddle v. Leuschner, 51 Cal.2d 574 [335 P.2d 107]; Talbot v. Fresno-Pacific Corp., supra, p. 431; Thomson v. L.C. Roney & Co., 112 Cal.App.2d 420 [246 P.2d 1017]; Asamen v. Thompson, 55 Cal.App.2d 661 [131 P.2d 841]; Goldberg v. Engelberg, 34 Cal.App.2d 10 [92 P.2d 935]; Sweet v. Watson's Nursery, 33 Cal.App.2d 699 [92 P.2d 812]); the treatment by an individual of the assets of the corporation as his own (Minton v. Cavaney, 56 Cal.2d 576 [15 Cal.Rptr. 641, 364 P.2d 473]; Thomson v. L.C. Roney & Co., supra; Riddle v. Leuschner, supra); the failure to obtain authority to issue stock or to subscribe to or issue the same (Automotriz etc. De California v. Resnick, supra, 47 Cal.2d 792; Wheeler v. Superior Mortgage Co., 196 Cal.App.2d 822 [17 Cal.Rptr. 291]; Marr v. Postal Union Life Ins. Co., 40 Cal.App.2d 673 [105 P.2d 649]; Claremont Press Pub. Co. v. Barksdale, 187 Cal.App.2d 813 [10 Cal.Rptr. 214]; Engineering etc. Corp. v. Longridge Inv Co., 153 Cal.App.2d 404 [314 P.2d 563]; Shafford v. Otto Sales Co., Inc., 149 Cal.App.2d 428 [308 P.2d 428]); the holding out by an individual that he is personally liable for the debts of the corporation (Stark v. Coker, supra, 20 Cal.2d 839; Shafford v. Otto Sales Co., Inc., supra); the failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entities
In the instant case the presence or absence of any of these factors, as well as the consideration of any other circumstances which would have warranted the trier of fact to disregard the corporate entity, were within the province of the trial court.
Considerable stress is laid by the appellant upon the claim of undercapitalization and its assertion that such appears in the instant case as a matter of law. Appellant has not cited any case in which an appellate court has held that a business was undercapitalized when the court made a contrary finding. In almost every instance where the trial court has found inadequate capitalization there are other factors present. (See cases above cited with reference to capitalization.) In some cases there were no assets or capitalization at all.
The appellant's assertion of inequitable result is predicated upon the argument that the respondents intentionally created a corporation without sufficient assets to meet daily business requirements. The thrust of this argument is the claim of undercapitalization and the contention that a creditor will remain unsatisfied if the corporate veil is not pierced. As we have pointed out above, the prerequisite of "inequitable result" must coexist with the other requirement of unity of interest and ownership, which the trial court has found not to exist in this case. Moreover, we have also indicated that the trial court was justified in its finding of adequate capitalization.
The judgment is affirmed.
Bray, P.J., and Sullivan, J., concurred.
Appellant's petition for a hearing by the Supreme Court was denied February 13, 1963.