Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-05232/USCOURTS-cand-5_04-cv-05232-33/pdf.json

Nature of Suit Code: 790
Nature of Suit: Other Labor Litigation
Cause of Action: 28:1331 Fed. Question

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28 1 The holding of this court is limited to the facts and the particular circumstances

underlying the present motion.

ORDER, page 1

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

DAN L. WHITNEY, JANET R.

HADLEY, MARGARET A. KORNOWBROWN, ERIC BRELLE,

Plaintiffs,

v.

CHARLES WURTZ, VERISCAPE, INC.,

RENEE TADLOCK, REGINA

RYGELIS, WILL ARNTZ, SAM

JACOB, GARY BERKOWITS, BRIAN

ROE and DOES 1-20,

Defendants. __________________________________

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Case No.: C 04-5232 PVT

ORDER GRANTING MOTION FOR

SUMMARY JUDGMENT BY

DEFENDANT ARNTZ

I. INTRODUCTION AND FACTUAL BACKGROUND

Plaintiffs Dan L. Whitney, Janet R. Hadley, Margaret A. Kornow-Brown and Eric Brelle

(collectively, “Plaintiffs”) allege breach of contract, termination, and deceit against their former

employer, Defendant Veriscape, Inc.1

 The Complaint also alleges that Defendants Charles

Wurtz (“Wurtz”), Renee Tadlock (“Tadlock”), Regina Rygelis (“Rygelis”), Will Arntz

(“Arntz”), Sam Jacob (“Jacob”), Gary Berkowits, and Brian Roe are liable as the alter ego of

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On May 2, 2007, the Court granted Defendant Jacob’s Unopposed Motion for Summary

Judgment.

ORDER, page 2

Defendant Veriscape. 

On October 6, 2006, Defendants Arntz and Jacobs moved for summary judgment,

claiming that there is no evidence that they are the alter egos of Veriscape and that alter ego is

the sole basis for liability against them.2

 The hearing was originally set for November 14, 2006. 

On October 18, 2006, Plaintiff Dan Whitney (“Whitney”) moved to continue the summary

judgment hearing under Local Rule 6-3, claiming that he needed additional discovery to oppose

the motion. On November 6, 2006, the Court granted Plaintiff’s motion to continue the hearing. 

On May 2, 2007, the parties appeared before Magistrate Judge Patricia V. Trumbull for

hearing on Defendant Arntz’ Motion for Summary Judgment. For the following reason’s

Defendant Arntz’ Motion for Summary Judgment is GRANTED. 

II. DISCUSSION

Veriscape sells a product called “Intellecat,” which assists companies in e-procurement,

or purchasing of supplies on-line. (Arntz Decl. ¶ 4.) Veriscape was actively involved in selling

Intellecat from 2001 through 2006, but is primarily dormant now. (Arntz Decl. ¶ 19.) Dr.

Charles Wurtz and Richard Dodd are the founders and incorporators of Veriscape. (Arntz Decl.

¶ 3.) Veriscape was incorporated in Delaware on May 5, 1999. (Kravitz Decl. Exh. E, Wurtz 

Depo. Tr. at 8.) At the inception of Veriscape, Charles Wurtz and Richard Dodd each owned

about 5,000,000 shares. (Arntz Decl. ¶ 8.) In September of 2001, seven months after Whitney

became employed by Veriscape, Arntz invested $600,000 and became a shareholder in

Veriscape. (Arntz Decl. ¶ 9.) In March, 2002 Artnz loaned Veriscape $150,000 in return for

12% interest and 150,000 stock options at a strike price of 10 cents per share. (Arntz Decl. ¶ 11.) 

The loan has not been repaid and remains outstanding in full. (Id.) Arntz joined the Board of

Directors in October of 2001 and remained on the board until he resigned in February of 2005. 

Arntz did not receive any compensation for his service on the Board. (Arntz Decl. ¶ 10.) 

Arntz resigned in February 2005 because he felt the company was not using his expertise

and he had other projects demanding his time. (Arntz Decl. ¶ 14.) In June of 2005, Whitney

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ORDER, page 3

contacted Arntz to request him to vote his shares in favor of a takeover of the company being

planned by Whitney and Dodd. Artnz informed Whitney that, due to the poor performance of 

Whitney and Dodd, it would not be in the shareholders’ best interests to vote for the takeover. 

(Arntz Decl. ¶ 17.) Two weeks later, Whitney named Arntz as a Defendant in this suit. 

III. LEGAL STANDARDS

A. Summary Judgment

Summary judgment is proper “if the pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if any, show that there is no genuine issue as

to any material fact and that the moving party is entitled to a judgment as a matter of law.”

Fed.R.Civ. P. 56©. The moving party bears the initial burden of demonstrating the absence of a

genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The burden then

shifts to the non-moving party to “designate ‘specific facts showing that there is a genuine issue

for trial.’” Id. at 324 (quoting Rule 56(e)). A “material” fact is one which might affect the

outcome of the case under the applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248 (1986). A dispute about a material fact is genuine if a reasonable jury could return a verdict

for the non- moving party. Id. In deciding a motion for summary judgment, a court must view

the evidence in the light most favorable to the non-moving party, and draw all justifiable

inferences in its favor. Id. at 255. 

B. Alter Ego Liability

Alter ego is an extreme remedy, sparingly used. Sonora Diamond Corp. v. Superior

Court, 83 Cal.App.4th 523, 539 (2000). “In considering whether to disregard the corporate

form, we apply federal substantive law, although we may look to state law for guidance.” Board

of Trustees v. Valley, 877 F.2d 769, 772 (9th Cir. 1989) quoting Laborers Clean-Up Contract

Admin. Trust Fund v. Uriarte Clean-Up Serv., 736 F.2d 516, 523 (9th Cir.1984); see also

Ministry of Defense of the Islamic Republic of Iran v. Gould, Inc., 969 F.2d 764, 769 n. 3 (9th

Cir. 1992) (Noting that California law and Federal Common law on later ego liability are

substantially similar). Federal law has concentrated on three factors: the amount of respect

given to the separate identity of the corporation by its shareholders, the degree of injustice

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ORDER, page 4

visited on the litigants by recognition of the corporate entity, and the fraudulent intent of the

incorporators.” Seymour v. Hull & Moreland Eng'g, 605 F.2d 1105, 1111 (9th Cir. 1979). A

plaintiff attempting to pierce the veil “must prevail on the first threshold factor and on one of the

other two”. UA Local 343 v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1475 (9th Cir.), see also 

Board of Trustees v. Valley Cabinet & Mfg. Co., 877 F.2d 769, 773 (9th Cir. 1989). 

At the hearing, Plaintiffs asserted that once the corporate veil was pierced as to any

shareholder, all shareholders would be liable as alter egos of the corporation. Plaintiffs are

mistaken; the inquiry into alter ego liability is individual:

Before the acts and obligations of a corporation can be legally recognized as those

of a particular person, and vice versa, the following combination of

circumstances must be made to appear: First, that the corporation is not only

influenced and governed by that person, but that there is such a unity of interest

and ownership that the individuality, or separateness, of the said person and

corporation has ceased; second, that the facts are such that an adherence to the

fiction of the separate existence of the corporation would, under the particular

circumstances, sanction a fraud or promote injustice

Wood v. Elling Corp., 20 Cal.3d 353, 365 n.9 ( 1977), quoting Minifie v. Rowley, 187 Cal. 481,

487 (1921) (emphasis added); see also American Home Insurance Co. v. Travelers Indemnity

Co., 122 Cal.App.3d 951 (1981) (“The fraud or inequity sought to be eliminated must be that of

the party against whom the alter ego doctrine is invoked, and ‘such party must have been an

actor in the course of conduct constituting the “abuse of the corporate privilege’ ”)(citation

omitted). Passively receiving the benefit of a fraud is insufficient to establish alter ego liability. 

The application of the alter ego doctrine is limited to “individuals who influence and govern the

corporation or who were actors in the course of conduct constituting the abuse of the corporate

privilege.” Firstmark Capital Corp. v. Hempel Financial Corp., 859 F.2d 92, 95 (9th Cir.

1988)(overruling finding of alter ego liability for spouse of controlling party)(citation omitted). 

Accordingly, unless Plaintiffs can raise a genuine issue of fact as to Defendant Arntz having

control of the corporation or participating in conduct that is an abuse of the corporate form,

summary judgment is appropriate.

IV. DISCUSSION

Defendant Arntz moves for summary judgment, claiming there are no facts to support

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ORDER, page 5

Plaintiffs’ claim that he is the alter ego of Veriscape. Plaintiffs oppose summary judgment,

claiming that the following factors raise a genuine issue as to whether Arntz was the alter ego of

Veriscape: 1) Arntz wielded day-by-day power, despite not being an Officer or Employee; 2)

Veriscape employees commingled funds and diverted corporate assets; 3) Veriscape was

undercapitalized; 4) Veriscape failed to follow corporate formalities; and 5) Veriscape is

perpetrating a “huge” fraud and Injustice on Plaintiffs. 

A. Respect Given to Separate Identity of Corporation

Before a court will impose alter ego liability, it must find “such unity of interest and

ownership that the separate personalities of the corporation and the individual no longer exist.”

 Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825, 837 (1962) citing

Automotriz etc. De California S. A. De C. V. v. Resnick, 47 Cal.2d 792, 796 (1957); see also RRX

Indus., Inc. v. Lab-Con Inc., 772 F.2d 543, 545 (9th Cir. 1985). Plaintiffs allege four types of

failure to respect the corporate identity: 1) domination and control by Arntz; 2) commingling of

funds and diversion of assets; 3) undercapitalization and loans from shareholders; and 4) failure

to follow corporate formalities.

1. Arntz Domination and Control Evidence

Plaintiffs assert that Arntz was “in control of the corporation” and wielded “day-by-day

power.” (Opp. at 6.) Although not entirely clear, Plaintiffs’ argument appears to be that Arntz

dominated the corporation by joining his shares with Defendant Wurtz’ shares. Arntz owns

2,200,000 shares, or 17.5% of the stock . (Exh. P.) Plaintiffs argue that Arntz’ 17.5%, when

combined with Wurtz’ 5,000,000, or 39.8% , is a control block because they are friends who

share the same spiritual beliefs. Plaintiffs also argue that “Wurtz and Arntz always voted with

each other.” (Opp. at 6.) However, Plaintiffs rely on deposition testimony from Defendant

Jacob that states it is “fair to assume that Artnz, when he owned stock, would have voted with

Wurtz.” (Jacob Depo at 39.) Thus, the evidence, at most, tends to show that Wurtz controlled or

dominated the corporation, an issue not before the court.

Plaintiffs next allege: “When Arntz wanted a 39.8% shareholder, board member and

president removed from the board, it happened.” (Opp. at 7.) Apparently, Plaintiffs are arguing

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 3The Tadlock deposition testimony is not competent evidence. Tadlock testified that Wurtz

told her that Artnz asked that she be terminated. (Tadlock Depo Tr. at 23.) This statement by

Tadlock of a statement by Wurtz of a statement by Arntz is hearsay. Accordingly, the court has

not considered this evidence. 

 4

Rygelis and Wurtz have lived together for six years. (Rygelis Depo. 55-56.)

ORDER, page 6

that Arntz orchestrated the removal of Dodd from the Board of Directors. Plaintiffs rely upon

the deposition testimony of Wurtz. The testimony, however, does not raise any genuine issue as

to Arntz’ domination or control of Veriscape. Wurtz testified that he found Dodd incompetent

on a variety of fronts and that Wurtz was the one who fired Dodd for trying to make a deal that

would have bankrupted the company. (Wurtz Depo Tr. at 24). Again, at most, this evidence

tends to show that Wurtz controlled the corporation.

Plaintiffs next assert: “When Arntz wanted C.O.O. Tadlock fired, it happened.” Plaintiffs

cite to Wurtz and Tadlock deposition transcripts.3

 Wurtz testified that when he asked Arntz to

loan Veriscape more money, Arntz said he would only loan the money if Tadlock were fired. 

(Wurtz Depo. Tr. 30.) Granting plaintiffs the benefit of every inference, the ability to condition

additional investment on the termination of the Chief Operating Officer is some evidence of

control over the company. 

Plaintiffs also assert: “When Arntz wanted Wurtz to step down as CEO, it happened.” 

Plaintiff relies on Wurtz’ deposition testimony. Wurtz testified that he was unwell and Arntz

asked him to voluntarily step down. (Wurtz Depo. at 21, 23, 130-131). Then Wurtz, Arntz, and

Dodd (as a director and secretary) had a phone call in which they unanimously voted to have

Rygelis become CEO in addition to her position as President. (Wurtz Depo at 130-131.) Thus,

the evidence shows that Wurtz voluntarily agreed to step down in favor of his long time

companion.4

 Again, granting Plaintiffs every reasonable inference, this is some evidence that

Arntz dominated or controlled the corporation.

Plaintiffs also assert that Arntz was “very involved in day-to-day activities.” As proof,

they point to Arntz taking responsibility from Whitney for negotiations for the sale of Intellecat

to a company called E-plus. (Whitney Decl. ¶¶ 3-6, Exh 19-4). Plaintiffs argue that Arntz’ 

assumption of responsibility for negotiation for the sale of the company’s only product is proof

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ORDER, page 7

that Arntz exercised control over “day-to-day” activities. Sale of the sole product, however, is

not a day-to-day activity. Nonetheless, again granting all inferences for Plaintiffs, it is evidence

that Arntz was involved in important corporate matters.

Plaintiffs argue that the day-to-day involvement persisted from 2002-2004. Plaintiffs

offer the following evidence. First, a memo from Whitney to Rygelis citing Board involvement

in day-to-day activities. (Exh. 14-1) Whitney claims he was referring to Arntz, but was afraid to

mention him by name and that he was getting orders from Arntz that contradicted information he

got from Wurtz or Rygelis. (Whitney Decl. ¶ 8). Whitney does not provide any information as

to any orders he received from Artnz. Second, Whitney was instructed to provide to Arntz

(among other people) copies of emails to his “personnel reports” advising them that no employee

may make any offer or contract to any other employee or outside party without getting approval

from legal, Wurtz, and Rygelis. (Exh. 14-2). Third, the board of directors, of which Arntz was a

member, received sales reports. (Exh. 14-7). Fourth, Artnz received a copy of an email about

what terms in what documents constitute a binding contract. (Exh. 14-5-6). Fifth, Arntz wanted

to be involved in “reseller model creation”, which Plaintiffs characterize as how to put together a

certain sale. (Exh. 14-4, Whitney Decl. ¶ 9). Finally, Rygelis sent an e-mail to Whitney that

says “We are being slightly micro-managed at the moment and Chuck thought it best to have

Will [Arntz] review John’s comments.” (Exh. 43.) Rygelis testified at her deposition that John

was responsible for “managing third parties” and Arntz had experience in that area and “we

wanted to make sure we talked to Will [Arntz], and Will may have expressed interest in that

subject matter.” (Rygelis Depo. 110-111.)

Summarizing all of the above facts, and granting Plaintiffs every reasonable inference,

Plaintiffs have provided evidence that: 1) Arntz conditioned additional investment on the

removal of C.O.O. Tadlock; 2) upon Artnz’ suggestion, Wurtz voluntarily resigned for health

reasons, to be replaced by Wurtz’ long time companion; 3) Whitney complained about board

involvement, when he meant Arntz involvement; 4) Arntz took over negotiations for the sale of

Intellecat and wanted input in how to put another sale together; 5) Arntz received copies of

documents in his capacity as a member of the Board of Directors; and 6) Rygelis and Wurtz

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ORDER, page 8

wanted Arntz involved in discussions about management of third parties. Even giving Plaintiffs

the benefit of every reasonable inference, the evidence presented could not lead a reasonable jury

to conclude that Arntz dominated or controlled Veriscape.

2. Commingling of Funds/Diversion of Corporate Assets

Plaintiffs assert that a question as to diversion of corporate assets is raised by the fact that

Tadlock invoiced “four to seven” customers, but she could only name two: Bank of America and

Engelhard. (Tadlock Depo Tr. at 58-59.) Tadlock testified that she was not involved in sales,

only invoicing and that “I really have no idea” how many invoices. When pressed, she estimated

it was “more like four or five, six or seven, but not twenty.” (Id.) Plaintiffs’ evidence of

commingling is that sales documents produced by Veriscape do not show any sales to Englehard

or the other two to five other sales by Tadlock. However, this does not raise a genuine issue as

to commingling or diversion, because there is no evidence that any money was received in

response to the invoices, if indeed there were more than two invoices sent. Moreover, Plaintiffs

have produced no evidence that raises any question as to diversion of assets by Arntz. Plaintiffs

assert that they can probe the issue at trial, since discovery is closed. However, Plaintiffs must

produce sufficient evidence now to avoid summary judgment, not speculation of evidence that

might be developed at trial. 

Plaintiffs next argue that Tadlock took loans from the company, and argue that even

though she paid the loans back, she co-mingled. Plaintiffs do not assert that Arntz was involved

in any way in these loans. Plaintiffs appear to argue that any wrongdoing by any board member

is evidence that Artnz is the alter-ego of Veriscape. However, as discussed above, the Plaintiffs

must show that Arntz participated in the conduct constituting the abuse of the corporate form. 

Accordingly, Plaintiffs have failed to raise any genuine dispute as to commingling or diversion

by Arntz.

3. Undercapitalization/Loans from Shareholders

a. There is no evidence of initial undercapitalization

Veriscape was incorporated in Delaware on May 5, 1999. (Kravitz Decl. Exh. E, Wurtz 

Depo. Tr. at 8.). Mr. Dodd initially invested at least $100,000 (Kravitz Decl. Exh. E, Wurtz

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Wurtz testified that Dodd purported to contribute and additional $100,000, but did not

actually provide the money.

ORDER, page 9

Depo. at 10.)5

 By June of 2000, Veriscape had raised just under a million dollars from 65

investors. (Id. at 13.) Additionally, Arntz invested $250,000 in February, 2001 and $350,000 in

August, 2001. (Id. at 12-19.) Moreover, in 2002, Veriscape obtained over $850,000 in loans. 

(Id. at 17-18.) Thus, Veriscape obtained $2.7 million during its first two years. 

Plaintiffs do not establish what amount of money would have been necessary for

adequate capitalization and do not submit any evidence showing that the initial funding was

inadequate. Plaintiffs submitted evidence of financial difficulties and lack of money, but not at

the inception of the business in 1999. See Exh 23 (November 2001 lack of money to repay

expenses); Exhs. 40, 41 (September 2002 requests for payment to Ariba); Exh. 44 (June, 2004 

notice of rent overdue on California office). When a corporation is adequately funded at the

outset, bad financial times later do not raise an inference of fraudulent intent. Seymour, at 605

F.2d at 1113. 

b. Shareholder loans 

Plaintiffs next argue that loans to the corporation from the shareholders is evidence of

unity between the corporation and the shareholder and evidence of an inequitable result if the

corporate form is respected. Plaintiffs cite Riddle v. Leuschner (1959) 51 Cal.2d 574, 581 and

Linco Servs. Inc. v. Dupont (1966) 239 Cal.App.2d 841, 844 in support of this proposition. 

Neither case stands for the extraordinary proposition that shareholder loans to a corporation,

absent special circumstances, are evidence to support alter ego liability. The Riddle court found

alter ego liability based on a pattern of treating the corporate assets as individual assets. The

Linco court reluctantly upheld the finding of the trial court of alter ego liability based on a loan

from the defendant. The defendant allowed an unsound company to resume business “clothed in

the appearance of financial stability” and then refused to advance the money as promised. Thus,

the court found it would be inequitable to allow the individual to escape liability for deals he

//

//

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 6To the extent that Linco can be read to hold that shareholder loans, absent special

circumstances, are proof of alter ego liability, the court declines to follow that holding. Indeed,

under this logic, Whitney could be held liable as the alter ego of Veriscape as he loaned the

corporation $10,000. (Whitney Decl. ¶ 20; Exh. 11.)

ORDER, page 10

induced the public to make with the corporation.6

 

In this case, however, there is no evidence that the loans to Veriscape were promised, but

not delivered, in order to induce people to deal with the company. Accordingly, the loans do not

raise a question as either unity of interest or inequitable result. 

4. Failure to Follow Corporate Formalities

Plaintiffs assert that Veriscape failed to follow corporate formalities because Veriscape:

1) Is not registered to do business in New Mexico or California and had its registration to

do business in Colorado revoked;

2) does not have an executed set of bylaws

3) did not have any annual shareholder meetings, as required by the bylaws; and 

4) failed to maintain minutes of board meetings as required by Delaware and New

Mexico law.

Arntz claims that these are either irrelevant or “carelessness” which does not rise to the

level necessary to disregard the corporate form. Audit Servs, Inc. v. Rolfson et al., 641 F.2d 757

(9th Cir. 1981). In Audit Services, the defendant “disregarded such corporate formalities as

shareholders' or directors' meetings” and “commingled his assets with those of the corporation.” 

The court found that: “While the evidence showed that [defendant] was somewhat careless in

failing to observe the strict formalities of the corporate form, it fell far short of demonstrating

any deliberate misuse of the corporation or any fraudulent intent in forming it.” Id. at 764; see

also Seymour, 605 F.2d at 1112 (excusing “a degree of informality” in the absence of “more

serious forms of abuse” such as commingling); Ministry of Defense of the Islamic Republic of

Iran v. Gould, Inc., 969 F.2d 764, 769 (9th Cir. 1992) (isolated failures do not establish a genuine

issue as to corporate formality.)

a. Registration Problems

Arntz argues that Veriscape did not need to be registered in California, New Mexico, or

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ORDER, page 11

Colorado because a business need only register if it intends to conduct business in that state. 

Plaintiffs have not provided any evidence that Veriscape conducted business in Colorado. 

Accordingly, there is no evidence that the failure to register in Colorado was improper. Artnz

claims that Veriscape is registered to conduct business in New Mexico and provides a certificate

in good standing dated August, 2006. (Supp. Kravitz Decl. ¶ 3, Exh. W.) However, Plaintiffs

provide evidence of a problem with the New Mexico registration in 2005 (Weems Aff, Exh A to

Beck Decl.) Additionally, the presence of an office in California without registration is evidence

of failure to follow corporate formalities. Arntz argues that the lack of registration is minor,

citing Aronson v. Price, 644 N.E.2d 864 (Ind. 1994)(failure to file fictitious name certificate

insufficient to impose alter ego liability). Minor problem or not, the failure to properly register

is evidence of failure to respect the corporate form. 

b. Bylaws were Executed

Arntz argues that he produced a properly authenticated copy of Veriscape’s bylawas as

Exhibits N and O to his motion. Plaintiffs claim the bylaws are ineffective because page 6 is

missing and they are unsigned (Beck decl par 10, exh 29). A missing page in Plaintiffs’ copy is

irrelevant. Additionally, the Consent of Directors adopted the bylaws. (Exhibit N). Thus, the

bylaws provide no evidence of failure to follow corporate formality.

c. Shareholder Meetings

Plaintiffs provide evidence that shareholder meetings were not held. (Artnz Depo. At 48;

Tadlock Depo. At 21; Rygelis at 93-94). Arntz does not address this issue. Accordingly, the

lack of shareholder meetings is evidence of failure to follow corporate formalities.

d. Board Meetings Minutes

Plaintiffs argue that Veriscape did not keep minutes of Board Meetings and cite to

responses to requests for production. (Beck Decl. Exh. E.) However, the requests did not seek

Board Minutes; instead they sought any writings transmitted by any board member to any officer

relating to any plaintiff and any writings transmitted by any officer to any board member relating

to the sale or lease of Intellecat. Accordingly, the document request responses are not evidence

of failure to keep board minutes. Moreover, Arntz provided “notes” that Jacobs took at a March

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This argument appears to contradict Plaintiffs’ argument that Veriscape was underfunded. 

ORDER, page 12

19, 2003 Board Meeting. (Jacob decl ¶ 9, Exh. S) The notes, however, are not extensive. 

Accordingly, the most Plaintiffs have shown is that the minutes of the board of director’s

meetings may have been inadequate.

In summary, the evidence of lack of observing corporate formalities is: 1) not registered

in California (and at some point in New Mexico); 2) no shareholder meetings; and 3) inadequate

minutes of board meetings. Granting Plaintiffs the benefit of every doubt, these failures do not

amount to more than carelessness and do not raise a genuine dispute as to either the separate

identity of the corporation or any deliberate misuse of the corporate form.

B. Injustice to Litigants by Recognition of Corporate Format

Plaintiffs must show a genuine dispute as to whether they would suffer injustice from

respecting the corporate form. Plaintiffs argue “Veriscape is perpetrating a Huge Fraud and

Injustice” upon them. (Opp. At 15.) Plaintiff Whitney and Veriscape dispute the terms of

Whitney’s contract and Whitney’s authority to hire the other plaintiffs. Plaintiffs argue that

Veriscape is disputing the terms of Whitney’s employment contract in order to avoid paying him

money due and wrongfully terminated Whitney to avoid paying future commissions. Similarly,

Plaintiffs argue that Versicape is wrongfully repudiating the employment contracts of Hadley,

Brown and Brelle in order to avoid paying salary due. Plaintiffs also argue that Veriscape has

acted injustly in applying the terms of all of the Plaintiffs’ employment contracts. Plaintiffs’

contracts contained a clause stating that salary will begin “when corporate revenues are such

that Company deems it may provide a full time salary” See e.g., Exh. 2. Plaintiffs argue that the

company improperly failed to “deem” revenues sufficient because the financial statements show

current assets.7

 

Plaintiffs’ sole argument of injustice justifying piercing the corporate veil appears to be

that Veriscape is unjustly denying them due compensation. Fraud, or injustice, in the running of

the business is not sufficient to pierce the corporate veil. “Instead, the plaintiffs must show that

the ‘shareholder misused the corporate form to perpetrate the[ ] fraud.’” UA Local 343 United

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Arntz made many other evidentiary objections. Except as noted in this Order, all other

objections are overruled as either improper or irrelevant.

ORDER, page 13

Ass'n of Journeymen & Apprentices of Plumbing and Pipefitting Industry of U.S. and Canada,

AFL-CIO v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1476 (9th Cir. 1994) (citation omitted.) 

Plaintiffs do not address how recognition of the corporation format works any injustice on them

and have, therefore, failed to show a genuine issue on this element. 

Plaintiffs asserted a lack of funding and may have meant to argue that Veriscape owes

Plaintiffs money that they will be unable to collect if the veil is not pierced as to Arntz. A

plaintiff’s inability to collect a judgment from an insolvent defendant, by itself, does not

constitute an unjust result. Seymour, at 605 F.2d at 1113 (upholding District Court’s refusal to

pierce the veil). Moreover, Plaintiffs have not submitted any evidence of Veriscape’s present

inability to satisfy a judgment. Plaintiff has submitted balance sheets from 2002, 2003 and 2004

showing that Veriscape was increasingly insolvent in all three years. (Sealed Exh. 30-2.)

Plaintiffs, however, have submitted no evidence of current inability to pay.

Plaintiffs also argue that Wurtz said: 1) “Arntz had assured all employees would be paid

in full” and 2) Arntz “would match the amount of sales with investments of capital up to the

amount necessary to pay the salaries.” Whitney Decl. (¶ 23, Exh. 34-1.) To the extent that

Plaintiffs are arguing that it would be unjust to allow Arntz to make this promise and not to keep

it, this argument fails. Plaintiffs cite Whitney’s declaration as proof. The Whitney Declaration 

states that Wurtz said Arntz “had assured that all employees would be paid in full.” The

Whitney Declaration also states that Wurtz said that Arntz would match sales with investment up

to the amount necessary to pay salaries. Arntz properly objected to this part of the declaration

because it is hearsay. The statement of Wurtz can only be used as a party admission against

Wurtz, as the speaker. Fed. R. Evid. 801. Here, Plaintiffs are trying to use Wurtz’ retelling of

what Arntz said against Arntz. This is impermissible hearsay.8

 Plaintiffs also cite to an e-mail

from Wurtz. The email, however, does not state Arntz promised anything. Instead, it states:

“Veriscape has several high net worth individuals behind it. We have tried to avoid additional

investment to prevent our current shareholders from becoming highly diluted, but we are still

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ORDER, page 14

here.” Exh. 34-1). Thus, there is no admissible evidence as to any promise by Arntz to provide

money for salaries. Accordingly, Plaintiffs have failed to raise a genuine dispute as to any

injustice that would arise from recognition of the corporate form.

C. Fraudulent Intent of Incorporators

As discussed above, the Veriscape was not a mere shell corporation. The undisputed

evidence shows Veriscape raised just under a million dollars of capital in its first year and

obtained $2.7 million during its first two years. (Wurtz Depo. 12-19). Veriscape’s later

financial situation does not raise an inference of fraudulent intent. Seymour, at 605 F.2d at 1113. 

 Moreover, the company was actively engaged in selling Intellecat from 2001-2006. (Arntz

Decl. ¶ 19.) “The very fact of continuing to do business for a period of at least five years tends

to indicate a good faith use of the corporation to conduct a legitimate business enterprise.” 

Seymour, at 605 F.2d at 1113. Moreover, Arntz was not involved in any way in the formation of

Veriscape. (Artnz Depo. ¶¶ 3, 7-9). Thus, he can have had no fraudulent intent at incorporation.

Accordingly, Plaintiffs have failed to raise a genuine dispute over fraudulent intent at

incorporation sufficient to hold Arntz liable as the alter ego of Veriscape.

V. CONCLUSION

For the foregoing reasons, It Is Hereby Ordered that Arntz’ Motion for Summary

Judgment is GRANTED.

IT IS SO ORDERED 

Dated: June 1, 2007

____________________________

PATRICIA V. TRUMBULL

United States Magistrate Judge

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