Court Opinion

ID: 9891780
Source: CourtListenerOpinion
Date Created: 2023-10-19 17:06:03.577903+00
Date Added: 2024-06-11T13:59:42.015643
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                 AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                    IN THE
             ARIZONA COURT OF APPEALS
                                DIVISION ONE

                 MICHAEL BARBANO, Plaintiff/Appellant,

                                        v.

           WALTER L. BROWN, JR., et al., Defendants/Appellees.

                             No. 1 CA-CV 23-0091

           Appeal from the Superior Court in Maricopa County
                          No. CV2020-051724
             The Honorable Alison Bachus, Judge (Retired)

                                  AFFIRMED

                                   COUNSEL

Klauer & Curdie, Phoenix
By Brandon R. Curdie, Richard L. Klauer
Counsel for Plaintiff/Appellant

Fletcher Barnes Law PLC, Phoenix
By Don C. Fletcher, Timothy H. Barnes, Sheryl L. Andrew
Counsel for Defendants/Appellees
                        BARBANO v. BROWN, et al.
                          Decision of the Court

                      MEMORANDUM DECISION

Judge Daniel J. Kiley delivered the decision of the Court, in which Vice
Chief Judge Randall M. Howe and Judge Jennifer M. Perkins joined.

K I L E Y, Judge:

¶1             After Michael Barbano entrusted his 1963 Chevrolet Impala
to Brown’s Classic Autos LLC (“Classic”) to sell on consignment, the car
was stolen, and he never saw it again. When Barbano sued Classic for the
loss of his car, he also brought claims against its sole member and owner
Walter Brown Jr. and his spouse Ruth Rassel (collectively, the “Browns”)
on an “alter ego” theory of liability.

¶2           The superior court granted summary judgment in favor of the
Browns, and Barbano now appeals. Because the court did not err in
determining that Barbano failed to come forward with evidence sufficient
to withstand summary judgment on his alter ego claims, we affirm.

                 FACTS AND PROCEDURAL HISTORY

¶3            In June 2019, Barbano entered into a consignment agreement
under which, in exchange for a fee, Classic would market and sell his
Impala for $60,000. Sales representative Dustin Nickless represented Classic
in the consignment transaction.

¶4             Viewed in the light most favorable to Barbano as “the party
against whom summary judgment was granted,” see Doe v. Roman Cath.
Church of Diocese of Phx., 255 Ariz. 483, 486, ¶ 2 (App. 2023), the evidence
shows that in August 2019, Classic terminated Nickless and directed him to
remove the consigned vehicles he was marketing, including the Impala,
from Classic’s lot. Nickless later testified that when he arrived at Classic to
remove the vehicles, “the Impala was gone.” Nickless called Barbano to tell
him that his Impala was missing, and Barbano called the police and
reported it stolen. The car was never recovered.

¶5           In February 2020, Barbano sued Classic and the Browns for
conversion, breach of contract, and breach of the covenant of good faith and
fair dealing, later adding claims for promissory estoppel, unjust
enrichment, fraudulent misrepresentation, and consumer fraud. All of

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                          BARBANO v. BROWN, et al.
                            Decision of the Court

Barbano’s claims against the Browns rely on an “alter ego” theory of
liability.

¶6            The Browns moved for summary judgment as to all claims
against them. Noting that a “piercing the corporate veil” claim requires
proof both that the corporation is “the alter ego of one or a few individuals”
and that “observance of the corporate form would sanction a fraud or
promote injustice,” the Browns argued that Barbano had not presented
“any evidence” to establish “either” of those elements. The court granted
the motion, finding that Barbano failed to satisfy either prong of Arizona’s
“alter ego” test.

¶7            Barbano then moved for reconsideration. After further
briefing, the court determined that Barbano had presented facts
establishing that “a genuine issue of material fact exists” about “whether
there was sufficient commingling” of corporate and personal funds to
establish that Classic and the Browns had an “alter ego” relationship. The
court reaffirmed its prior determination, however, that Barbano failed to
satisfy the second prong of Arizona’s “alter ego” test because he did not
present evidence to show that “disregarding [Classic’s] corporate form is
necessary to prevent injustice or fraud.” The court therefore denied
Barbano’s motion for reconsideration. Barbano timely appealed. We have
jurisdiction under A.R.S. § 12-2101.

                                  DISCUSSION

¶8            Summary judgment is proper when there is “no genuine
dispute as to any material fact and the moving party is entitled to judgment
as a matter of law.” Ariz. R. Civ. P. 56(a). “We review de novo a grant of
summary judgment, viewing the facts and reasonable inferences in the light
most favorable to the non-prevailing party.” BMO Harris Bank, N.A. v.
Wildwood Creek Ranch, LLC, 236 Ariz. 363, 365, ¶ 7 (2015).

¶9            Barbano argues that the court erred in granting summary
judgment on his alter ego claims against the Browns, asserting that
“observing [Classic’s] corporate form here would result in confusion and
injustice because . . . it would frustrate [his] ‘efforts to protect his rights’ . . .
while allowing [the] Browns to ‘evade liability.’”

¶10             “The concept of a corporation as a separate entity is a legal
fact, not a fiction,” Deutsche Credit Corp. v. Case Power & Equip. Co., 179 Ariz.
155, 160 (App. 1994), and “corporate status will not be lightly disregarded,”
Chapman v. Field, 124 Ariz. 100, 102 (1979). “A corporate entity will be
disregarded, and the corporate veil pierced, only if there is sufficient

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                         BARBANO v. BROWN, et al.
                           Decision of the Court

evidence that 1) the corporation is the alter ego or business conduit of a
person, and 2) disregarding the corporation’s separate legal status is
necessary to prevent injustice or fraud.” Loiselle v. Cosas Mgmt. Grp., LLC,
224 Ariz. 207, 214, ¶ 30 (App. 2010) (cleaned up).

¶11           “Alter ego” status exists “when there is such unity of interest
and ownership that the separate personalities of the corporation and
owners cease to exist.” Dietel v. Day, 16 Ariz. App. 206, 208 (App. 1972).
Factors indicating that a corporation and its owner have an “alter ego”
relationship include the “commingling of personal and corporate funds”
and the failure to maintain corporate records or observe other “formalities
of separate corporate existence.” Deutsche Credit, 179 Ariz. at 160-61. Here,
the superior court determined that Barbano presented sufficient evidence
to withstand summary judgment on this prong of the “alter ego” test, and
that determination has not been appealed. We therefore need not consider
it further.

¶12            A plaintiff may establish the “injustice or fraud” prong of the
“alter ego” test in a variety of ways, including by presenting evidence that
the corporation was “formed for the purpose of perpetrating a fraud or
other illegal act,” Butler v. Am. Asphalt & Contracting Co., 25 Ariz. App. 26,
30 (App. 1975), that the corporation was undercapitalized when formed,
Norris Chem. Co. v. Ingram, 139 Ariz. 544, 547 (App. 1984), or that
“observance of the corporate form would confuse the opposing parties and
frustrate their efforts to protect their rights,” Keg Rests. Ariz., Inc. v. Jones,
240 Ariz. 64, 75, ¶ 38 (App. 2016). The requisite injustice may be found, for
example, if a corporation and its subsidiary operate under confusingly
similar names, leading customers, vendors, and other third parties to
“reasonably assume” that the two are “only one company.” Gatecliff v. Great
Republic Life Ins. Co., 170 Ariz. 34, 38 (1991).

¶13              By itself, however, a corporation’s inability to pay its debts is
insufficient to establish the injustice or fraud necessary to justify piercing
the corporate veil. See Norris Chem., 139 Ariz. at 546-47 (noting that “[a]
corporation that was adequately capitalized when formed but which
subsequently suffers financial reverses is not undercapitalized” so as to
“justif[y] . . . piercing the corporate veil”) (citation omitted); see also Perfect
10, Inc. v. Giganews, Inc., 847 F.3d 657, 677 (9th Cir. 2017) (“[M]ere difficulty
in enforcing a judgment or collecting a debt does not satisfy the injustice
standard for alter ego liability.”) (cleaned up). After all, “avoid[ing]
personal liability” is “a legitimate purpose of incorporation,” Dietel, 16 Ariz.
App. at 208, and imposing personal liability on a corporation’s owners
merely because the corporation cannot pay its debts “would often defeat

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                        BARBANO v. BROWN, et al.
                          Decision of the Court

the purpose of incorporation and tend to destroy the corporate form as a
method of doing business,” Emp.’s Liab. Assurance Corp. v. Lunt, 82 Ariz. 320,
323 (1957).

¶14           Barbano argues that the court erred in granting summary
judgment on his alter ego claims because, he contends, the only relief he
could obtain against Classic is “a judgment against a defunct LLC with zero
assets.” “After being served with the lawsuit,” Barbano explains, Classic
“closed its doors and ceased operation.” Because Classic “is no longer
conducting business or otherwise operational,” “allowing [the] Browns to
evade liability by hiding behind their defunct LLC would result in
injustice.” To support his argument, Barbano cites Nickless’s deposition
testimony that he has “heard” that Classic is “not in business” and a
printout of a Google search for Classic which contains the notation
“permanently closed.”

¶15           The Browns deny that Classic is defunct, citing the declaration
of Classic representative Kelly Gantner stating that Classic remains “an
active business” that has “simply moved its location.” They also challenge
the foundation for and admissibility of the evidence Barbano relies on to
show that Classic has shut its doors. In reply, Barbano argues that the
Browns waived their objections to the admissibility of Nickless’s testimony
and the Google printout by failing to object in the superior court.

¶16            Even accepting Barbano’s contention that Classic is closed
and judgment-proof, however, Classic’s current insolvency is insufficient,
as a matter of law, to establish the injustice necessary to pierce the corporate
veil. See Norris Chem., 139 Ariz. at 547-48; see also Ferrarell v. Robinson, 11
Ariz. App. 473, 476 (App. 1970) (holding that the fact “that plaintiffs did not
receive the benefit of their bargain . . . alone does not constitute any
evidence of fraudulent conduct and . . . is not sufficient to justify the
disregarding of the corporate entity”).

¶17          Barbano asserts that Walter Brown “us[ed] corporate funds to
pay” his personal credit card debts, explaining that Classic’s financial
records “indicate[] that between June 2018 and July 2020, [Classic] paid
almost $20,000 to two of Walter Brown’s personal credit card accounts.”
The mere fact that a corporate principal receives money from the
corporation, however, does not indicate wrongdoing. See Ize Nantan
Bogawa, Ltd. v. Scalia, 118 Ariz. 439, 442 n.3, 444 (App. 1978) (reversing
judgment imposing personal liability on corporate principal for insolvent
corporation’s debt and noting that, although principal received a $5,000

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                        BARBANO v. BROWN, et al.
                          Decision of the Court

monthly salary from corporation, “[t]here was no testimony” that salary
was “excessive”).

¶18             Even assuming arguendo that Walter Brown was not entitled
to the funds he received from Classic, evidence that a corporate principal
used corporate assets for his own benefit does not, by itself, satisfy the
“injustice or fraud” prong of Arizona’s “alter ego” test. See SPUS8 Dakota
LP v. KNR Contractors LLC, 641 F. Supp. 3d 682, 694 (D. Ariz. 2022) (noting
that, under Arizona law, “evidence of intermingling alone is
insufficient . . . to pierce the [corporate] veil”). Although evidence that a
corporate principal drained the corporation’s accounts after the corporation
incurred a debt to the plaintiff may establish the injustice required to pierce
the corporate veil, Barbano has neither alleged nor presented evidence to
show that the funds Classic disbursed to its principal over a two-year
period left Classic with insufficient operating capital to meet its obligations
under the consignment agreement. Cf. Ariz. Tile, L.L.C. v. Berger, 223 Ariz.
491, 493, 496, ¶¶ 5, 24 (App. 2010) (affirming judgment holding home
remodeling company’s principals personally liable for debt to supplier
because, after company “received payment from homeowners for
materials,” principals caused the company to “divert[]” those funds “to
other uses” when the company “should have . . . [held] those funds in trust
for [supplier’s] benefit”). The mere fact that Walter Brown received money
from the entity he owned does not establish that an injustice will result
unless he is held personally responsible for the entity’s debts. Cf. Thornton
v. Dutch Nats. Processing, LLC, 629 F. Supp. 3d 777, 803-04 (M.D. Tenn. 2022)
(piercing corporate veil to hold LLC manager personally liable for LLC’s
debt because manager caused LLC to enter purchase contract and then
“render[ed] the LLC unable to pay” by “transferring the funds” earmarked
for payment to his personal account).

¶19            Barbano asserts that, based on his review of Classic’s
“financial records,” “[i]t is a certainty” that “once the dealership closed”
Classic’s “assets were moved or otherwise liquidated.” Although a
corporate principal’s transfer of the corporation’s assets to avoid the reach
of its creditors may justify piercing the corporate veil, Martin v. Freeman, 272
P.3d 1182, 1186, ¶ 16 (Colo. App. 2012), Barbano cites no evidence in the
record to support his allegation that Classic concealed assets to defeat his
claims. He points to no bank records, for example, reflecting that Classic’s
bank account was emptied after Classic entered into the consignment
agreement in June 2019 or after Barbano filed suit in February 2020. What
Barbano labels “a certainty” is, in fact, simply an assumption he would have
us make. As a matter of law, assumptions are insufficient to defeat
summary judgment. McCleary v. Tripodi, 243 Ariz. 197, 201, ¶ 21 (App. 2017)

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                         BARBANO v. BROWN, et al.
                           Decision of the Court

(holding that “unproven assertions of facts are insufficient” to defeat
summary judgment); Ochoa v. City of Mesa, 26 F.4th 1050, 1058 n.1 (9th Cir.
2022) (noting that assumptions not supported by evidence cannot create
genuine issue of material fact).

¶20             Evidence that, at the outset, the Browns established Classic on
an unsound financial footing that left the entity unable to meet its
anticipated obligations might establish the injustice needed to justify
disregarding the corporate form. See Norris Chem., 139 Ariz. at 547 (noting
that “stockholders” should not “escape personal liability” if they form
corporation without “capital reasonably adequate for its prospective
liabilities”) (citation omitted). Likewise, evidence that Classic lacked the
intent or financial wherewithal to comply with its obligations under the
consignment agreement at the time it entered that agreement might establish
the requisite injustice. See Dietel, 16 Ariz. App. at 208 (observing that
corporate statute “should be disregarded” if corporation made a “promise
to do a future act with the present intent not to perform”). But Barbano does
not argue that either of those circumstances is present here. Instead, he
simply asserts that Classic paid its principal almost $20,000 over a two-year
period both before and after entering the consignment agreement and that
Classic is now closed and judgment-proof. Accepting these assertions as
true, they are insufficient, as a matter of law, to justify holding the Browns
liable on an “alter ego” theory of liability.

¶21            To be sure, “under some circumstances a corporate officer or
director” may be directly liable for corporate torts in which “the officer or
director personally participates.” Warne Invs., Ltd. v. Higgins, 219 Ariz. 186,
197, ¶ 51 (App. 2008); see also Jabczenski v. S. Pac. Mem’l Hosps., Inc., 119 Ariz.
15, 20 (App. 1978) (noting that “[c]orporate directors” may be “personally
liable for conversion committed by the corporation” if they “participate” in
the wrongdoing, “have knowledge amounting to acquiescence,” or are
“guilty of negligence in the management and supervision of the corporate
affairs causing or contributing to the injury”). Because Barbano asserts no
direct liability claims against the Browns, we need not address this
alternative theory of liability. We hold that the superior court did not abuse
its discretion in granting summary judgment in favor of the Browns on
Barbano’s alter ego claims.

                                CONCLUSION

¶22            For the foregoing reasons, we affirm.

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                       BARBANO v. BROWN, et al.
                         Decision of the Court

¶23          The Browns request an award of reasonable attorney fees and
costs under A.R.S. §§ 12-341 and -341.01. In the exercise of our discretion,
we deny their request for fees. As the successful parties on appeal, the
Browns may recover costs upon compliance with ARCAP 21.

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