Unpublished Disposition, 872 F.2d 432 (9th Cir. 1985)

MEMORANDUM^* 

Defendants Everett and Nancy Hemphill appeal the district court's order entering judgment in the sum of $50,000 for the plaintiff, Wilcor Construction. The Hemphills argue first that the evidence below was insufficient to support the district court's finding that Hemphill fraudulently induced Wilcor to enter into a loan agreement, and second that they should not be personally liable for the judgment. We affirm.

In May of 1981, William Cordova, President of plaintiff Wilcor Construction, and defendant-appellant Everett Hemphill signed a contract which provided that Wilcor would loan Hemphill's Corporation¹  $50,000 to finance a tourist and recreation facility in Lake Havasu City, Arizona. At that time, Cordova turned over five $10,000 checks drawn on Wilcor's account, which Hemphill deposited into an Ives Corporation account. The loan was secured by seven antique gambling items owned by the Hemphills. The contract provided that if the project went forward successfully, the loan would be repaid in two years, and plaintiff would receive a $450,000 annual consulting fee. If the project did not work out, Wilcor was to take possession of the collateral.

The plaintiff contends that prior to the signing of the contract, Hemphill represented to Cordova that the antiques were worth at least $50,000, and that Hemphill had paid that much for them. Hemphill denies telling Cordova that he paid $50,000 for the items. Cordova examined the items, but did not have them appraised before he signed the contract. After the litigation began, an appraiser hired by Wilcor valued the items at approximately $3,100. Wilcor claims that Cordova relied upon the alleged misrepresentation, believing that, at worst, Wilcor would receive the value of its loan if the project failed.

When the parties entered into the contract, they were aware that the likelihood that the project would come to fruition was quite small. The Arizona State Parks Board had already denied approval for the project once, and Hemphill's legal interest in the land on which the project was to be built was in doubt. In the end, the project was never completed.

When it became clear to Cordova that the project would not come about, he wrote to Hemphill asking for the collateral. Hemphill responded with a letter demanding that Cordova sign a lengthy release enclosed by Hemphill. Cordova refused to sign Hemphill's release, instead preparing and signing a shorter release patterned from a sample release included in the original contract. Hemphill denies receipt of Cordova's release, and refuses to turn over the antiques, which are still in his possession.

Wilcor filed suit in March of 1984, setting forth two causes of action. First, it alleges that Hemphill's refusal to turn over the collateral is a breach of contract. Second, it claims that it was fraudulently induced to enter into the contract by Hemphill's misrepresentations involving the value of the antiques. Trial was held before U.S. District Judge Edward Rafeedie on May 7-8, 1985.

Applying Arizona law, the district court ruled in favor of the plaintiff on both counts. On July 31, 1985, judgment was entered against the individual defendants in the sum of $50,000, plus interest. The defendants filed a timely notice of appeal. We have jurisdiction under 28 U.S.C. § 1291.

We will set aside the court's finding of fact that Hemphill misrepresented the value paid for the antiques only if it is clearly erroneous. Cooling Systems and Flexibles, Inc. v. Stuart Radiator, Inc., 777 F.2d 485, 487 (9th Cir. 1985). The court's findings underlying its conclusion that the corporate shield of Ives is inadequate to protect the Hemphills from personal liability is also subject to review under the clearly erroneous standard. Bergen v. F/V St. Patrick, 816 F.2d 1345, 1352 (9th Cir. 1987); Laborers Clean-Up Contract Administration Trust Fund v. Uriarte Clean-Up Service, Inc., 736 F.2d 516, 523 (9th Cir. 1984).

Based on the testimony at trial, the court found that Hemphill breached the contract by failing to send the antiques to Cordova upon receipt of the release prepared by Cordova, and that the defendant was entitled to damages equal to the value of the antiques. The court concluded that it need not reach the issue of the value of the antiques, because it also found that Hemphill fraudulently induced Wilcor to enter into the contract by representing that he had paid more than $50,000 for the antiques. Because we find the latter ground sufficient to support the judgment, we do not address whether the breach of contract claim is supported by the evidence.

A. Sufficiency of the Evidence on the Fraud Claim

Because this is a diversity case, the district court was correct in applying Arizona substantive law. See Erie R.R. v. Tompkins, 304 U.S. 64 (1938). Under Arizona law, nine elements are necessary to establish a fraud claim: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) the speaker's intent that it be acted upon by the recipient in a manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; (8) the right to rely on it; (9) the plaintiff's consequent and proximate injury. Wagner v. Casteel, 136 Ariz. 29, 663 P.2d 1020, 1022 (Ariz.Ct.App.1983). The district court found that all nine elements were present in this case.

Appellants argue that Hemphill's statement was merely an expression of opinion, and therefore cannot constitute a basis for fraud. It is true that a statement as to the value of property, though false, is generally regarded as a statement of opinion, rather than a representation of fact supporting a fraud claim. See Ulan v. Richtars, 8 Ariz.App. 351, 446 P.2d 255 (1968). Under this standard, if Hemphill had merely stated that the goods were worth $50,000, there would be no fraud. However, viewing the testimony as a whole, the district judge found that "Hemphill, in an effort to convince Cordova to make the deal, told Cordova not only that the collateral was worth over $50,000, but that he (Hemphill) paid more than that for it." This is a factual representation rather than a statement of opinion, and is clearly sufficient to support a fraud claim if the remaining elements of the claim are established.

Appellants contend that no testimony supports the finding that Hemphill told Cordova that he had paid $50,000 for the items. Two excerpts of Cordova's testimony are particularly relevant. The first exchange was as follows:

Q. Now, this meeting at Mr. Hemphill's home in 1981, you discussed the collateral items, the gambling items?

A. Yes, we did.

Q. And what did Mr. Hemphill tell you regarding those?

A. He said that they were specialty antiques, they were from the 18th century and that he had paid the value of over $50,000. Reporter's Transcript (RT) vol. II, at 31 (emphasis added).

Appellants argue that this testimony merely reflects Hemphill's view that the value of the antiques, for which he claims he paid $18,000 twenty years earlier, would now be over $50,000 due to inflation and appreciation.

The second exchange occurred during cross-examination:

Q. Did you think they [the antiques] were worth $60,000?

A. Yes.

Q. Why did you think they were worth $60,000?

A. Because I was told they were bought for over $50,000, and I know Everett had a lot of antiques in his house, and I thought that he knew what antiques were worth.

RT vol. II, at 53.

The appellants contend that Cordova did not state that Hemphill was the person who told him that the antiques were purchased for $50,000. Thus, they contend that no testimony actually links Hemphill to a statement regarding the purchase price of the antiques.

It is true that there is some ambiguity in the testimony. However, taken as a whole, the testimony fairly supports the district court's finding. Appellants' argument that the first bit of testimony shows merely that Hemphill stated his belief as to the value of the antiques is inconsistent with the cross examination statement that Cordova was told that they were bought for over $50,000. Appellants are simply trying to read too much into Cordova's choice of words. When the latter testimony is taken into account, it seems likely that "paid the value of," is simply a wordy phrase synonymous with "paid."

Appellants' argument that Cordova does not say who told him that the antiques were bought for over $50,000 is not persuasive. Cordova's earlier testimony indicated that the representations as to the value of the antiques were made by Hemphill. Also, appellants offer no plausible alternative source of information. Who else would have told Cordova that Hemphill paid over $50,000 for the antiques?

In short, the appellants' semantic objections to Cordova's testimony do not undermine the district court's findings. The district judge was in a good position to determine the meaning of Cordova's testimony. After reviewing that testimony, we are not convinced that the court erred in concluding that Hemphill represented that he paid more than $50,000 for the collateral.

Appellants do not challenge any other aspect of the fraud claim. All of the elements have been met. Hemphill's representation that he paid $50,000 for the antiques was false, and he knew it was false. It was material to Cordova's decision to enter into the agreement, and Cordova relied on it, as Hemphill should reasonably have contemplated that he would. The result was that Wilcor was undersecured, and suffered injury. The district court was correct in concluding that Wilcor was fraudulently induced to enter into the contract.

Appellants' second challenge to the judgment is that the district court erred in holding the Hemphills personally liable for the judgment. Where a corporation has been properly created, the assets of directors or stockholders cannot normally be reached to satisfy judgments arising from the corporation's transactions. In order to "pierce the corporate veil," two conditions must be met. First, the court must find that the corporation should be considered the "alter ego" of the individual whose property is sought. Second, circumstances must indicate that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. Honeywell, Inc. v. Arnold Construction Co., 134 Ariz. 153, 654 P.2d 301, 307 (Ariz.Ct.App.1982).

The mere fact that a corporation has only one or two shareholders is itself insufficient to warrant a finding that it is an alter ego of the dominant shareholder(s). More is required. No precise formula is available to determine when a court should disregard the corporate entity. However, a court will typically take into account a number of factors, including inadequate capitalization, failure to issue stock, failure to observe corporate formalities, insolvency of the corporation, nonfunctioning of officers or directors, absence of corporate records, or the fact that the corporation is merely a facade for the operations of the dominant stockholder or stockholders. 1 W. FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS Sec. 41.30 at 430 (rev. vol. 1983). Consideration can also be given to the holding out by the individual that he is personally liable for the debts of the corporation. 1 W. FLETCHER, PRIVATE CORPORATIONS (Supp.1988), at 170.

The district court found that the Ives Corporation was a mere shell, and that the corporate veil should be pierced. That finding is not clearly erroneous. As the district court noted, the fact that the Ives Corporation's charter was revoked suggests a failure to keep records and observe corporate formalities. The fact that Hemphill was required to use personal assets as collateral for a $50,000 loan suggests inadequate capitalization. Finally, the district court expressly found that Ives was merely a facade for Hemphill's operations. This finding is supported by the record.

Appellants' objections to the imposition of personal liability are without merit. They note that the plaintiff does not allege in the complaint facts supporting a finding that Ives was Hemphill's alter ego. However, it is not essential that alter ego be pleaded. 1 W. FLETCHER, PRIVATE CORPORATIONS, at 431. The issue was raised in Wilcor's trial papers, and explored during the trial. It was plainly before the district court throughout this litigation.

Appellants' only other objections are that federal courts are reluctant to pierce the corporate veil, and that lapse of corporate status has been viewed as insufficient to warrant piercing the veil. The former argument merely reflects the presumption against piercing the veil, which may be overcome by the proper showing. Such a showing has been made here. The latter argument is less than compelling because of the inherently flexible nature of the inquiry. Even if we accept Hemphill's argument that the lapse of status is itself insufficient to pierce the veil, it is certainly a relevant factor for the court's consideration. Reviewing the facts as a whole, we cannot say that the district court erred.

AFFIRMED