Unpublished Disposition, 872 F.2d 427 (9th Cir. 1989)

On appeal, we review a grant of summary judgment de novo. Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir. 1986). The non-moving party has the burden to show evidence of a genuine dispute of material fact such that "a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986).

A frequently cited quotation in the Arizona opinions setting the Arizona standard for piercing the corporate veil is the following quotation from Dietel v. Day, 492 P.2d 455, 457 (Ariz.App.1972):

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.

The Arizona Supreme Court has stated, however, that "corporate status will not be lightly disregarded." Chapman v. Field, 602 P.2d 481, 483 (Ariz.1979). The court continued:

[I]t must be noted that a legitimate purpose of incorporation is to avoid personal liability and if the corporate fiction is too easily ignored, ... then incorporation is discouraged. Stock ownership by a few persons does not mean necessarily that corporation debts should be imposed upon them. If there is no unification of interests and intermingling of funds, so that the corporation loses its separate identity, then the owners should not be personally liable.

Id. (quoting Dietel, 492 P.2d at 457). Furthermore, the court noted that there must be a showing that the observance of corporate form would sanction a fraud and that the fact that plaintiffs do not receive the benefit of their bargain is not sufficient to constitute fraudulent conduct. Id. at 484.

The district court analyzed the four specific grounds asserted by Krolak for piercing the corporate veil: (1) undercapitalization, (2) failure to follow corporate formalities, (3) use of corporate funds for personal reasons, and (4) that the corporation was in business to promote a fraud or injustice. We agree with the district court's analysis that, viewing the evidence in the light most favorable to Krolak, there was an insufficient showing to pierce the corporate veil.

Under Arizona law, in order for undercapitalization to be a basis for piercing the corporate veil, the plaintiff must demonstrate that the corporation was undercapitalized at the time the corporation was formed. Bischofshausen, etc. v. D.W. Jaquays Min., 700 P.2d 902, 907 (Ariz.App.1985). The district court found that Krolak provided no evidence that the corporation was undercapitalized at the time it was formed. The record of the district court proceedings indicates that Krolak did not contend either in its complaint or in answers to interrogatories that the corporation was undercapitalized at its inception. To the contrary, Krolak contended only that Triano's actions rendered TCG insolvent.

On appeal, Krolak points to corporate minutes indicating that the initial equity capital was $2,000 and contends this was adequate to show initial undercapitalization. However, even considering this contention at this late stage, it is inadequate to create a genuine issue of fact sufficient to justify piercing the corporate veil. The evidence shows that the manner in which the business was to be conducted was by simultaneous purchases and payments for the equipment. A line of credit with First Interstate Bank for $45,000 and later $200,000 that was guaranteed by Triano was provided. Without showing that this initial capitalization was inadequate to conduct the business in the manner intended by the incorporators, Krolak has not sufficiently substantiated this factor in order to survive a summary judgment under the standard announced by the Supreme Court in Anderson and Celotex.

Krolak points to a failure to follow corporate formalities as justification for piercing the corporate veil. Arizona law places little stress, however, on this factor. See Chapman, 602 P.2d at 484 (failure to follow corporate formalities insufficient where there was no showing of fraud on the part of the buyers, or that the sellers were misled); Bischofshausen, 700 P.2d at 907 ("The facts show no more than that the corporations were run in the same informal manner as is usually seen in closely held corporations."). TCG did maintain separate corporate bank accounts, filed corporate tax returns, maintained a separate office, and signed corporate leases. Krolak knew he was dealing with a corporation and had no dealings directly with Triano.

Krolak's main argument in the district court was that Triano used corporate funds for personal use. However, Krolak's vague conclusory allegations are insufficient to raise a genuine issue of fact under the Anderson and Celotex standard in light of the specific contrary evidence provided by Triano.

Lastly, the corporate entity can be disregarded where its recognition would result in perpetrating a fraud or result in manifest injustice. See Ize Nantan Bagowa, Ltd. v. Scalia, 577 P.2d 725, 728-29 (Ariz.App.1978). However, Krolak provided no evidence that the corporation was formed to perpetrate a fraud on creditors or otherwise cause manifest injustice. We conclude that the summary judgment was properly granted.

The decision of the district court that the parties shall bear their own attorneys' fees is AFFIRMED.