Baatz v. Arrow Bar

Brief Fact Summary.

Kenny and Peggy Baatz (Baatz) attempt to pierce the corporate veil of Arrow Bar, Inc., to hold the individual shareholders, Defendants, Edmond and LaVella Neuroth personally liable for their injuries.

Synopsis of Rule of Law.

A summary judgment motion will be granted only there exists no genuine issues of material fact. A corporation is considered a separate legal entity until there is a sufficient reason to indicate that the corporate veil should be pierced.

Facts.

The Baatz were riding a motorcycle when they were struck by an automobile driven by Roland McBride, who was intoxicated at the time. Baatz alleges that Defendant, Arrow Bar, Inc., is contributory negligent because it served alcoholic beverages to McBride prior to the accident despite the fact that he was already intoxicated.
Arrow Bar Inc., was formed in May 1980 by Edmond and LaVella. Edmond and LaVella contributed $50,000 to the corporation pursuant to a stock subscription agreement. In June 1980, the corporation purchased the Arrow Bar for $155,000 with a $5,000 down payment from Edmond and LaVella. They personally guaranteed the remaining $150,000 note. In 1983, the corporation obtained financing from a bank to pay off the $145,000 purchase agreement, which Edmond and LaVella again personally guaranteed.
Edmond is the president of the corporation and Defendant, Jacquette Neuroth, serves as the manager of the business. The corporation did not have dram shop liability at the time of the Baatz accident.
In 1987, the trial entered summary judgment in favor of Defendants. Baatz appeal and this court reversed and remanded to the trial court. Shortly before the new trial, Edmond, LaVella and Jacquette moved for and obtained summary judgment dismissing them as individual defendants.
Baatz claims that the corporate veil should be pierced in this instance, making Edmond and LaVella individually liable as shareholders of the corporation. Baatz relies on several arguments to support this claim: (1) Edmond and LaVella personally guaranteed corporate obligations; (2) the corporation is their alter ego; (3) the corporation is undercapitalized, (4) the corporation failed to observe corporate formalities.

Issue.

Whether there is a genuine issue of material fact based on the above four arguments that supports that the corporate veil should be pierced making Edmond and LaVella personally liable to Baatz?

Held.

No. The trial court’s grant of summary judgment to dismiss the individual defendants is affirmed because there are no facts to support that the corporate veil should be pierced based on the four arguments above.

Dissent.

The corporation is an instrumentality of “three shareholders, officers, and employees.” Thus, the “corporation has no separate existence,” but was incorporated as a “shield against individual liability.”

Discussion.

Factors that courts will consider to determine whether to pierce the corporate veil are: “1) fraudulent representation by corporation directors; 2) undercapitalization; 3) failure to observe corporate formalities; 4) absence of corporate records, 5) payment by the corporation of individual obligations; or 6) use of the corporation to promote fraud, injustice, or illegalities.”
A personal guarantee that imposes individual liability for a corporate obligation supports the recognition of a corporate entity. Further, the personal guarantee of a loan is a contractual agreement and cannot be used to impose tort liability.

Baatz fails to demonstrate how the corporation is Edmond and LaVella’s alter ego because he fails to show how the corporation was “an instrumentality through which [they were] conducting [their] personal business.”

Baatz fails to show that the corporation was undercapitalized because he offers no evidence that the corporation’s capital was inadequate for the operation of the business.

The corporation did not fail to adhere to corporate formalities simply for its failure to indicate that it was a corporation on its signs and advertising. It is sufficient that the corporate name includes the abbreviation of incorporated.

There is no evidence in the record to support factors 1), 4), or 6) above.