Arnold v. Browne

California Court of Appeal · 1972 · Corporations

27 Cal. App. 3d 386 (1972)

Updated August 22, 2026

CorporationsAlter egoAttorney's feespiercing the corporate veilundercapitalizationsubstantial evidenceunity of interestinequitable result

Facts

Arnold, Hench, and Scheetz sold all shares of Survey Copters to Browne under an agreement allowing Browne to assign the contract to Inter Helo Corporation and eliminating Browne's personal liability after assignment. After incorporation, Inter Helo Corporation executed a promissory note for the unpaid balance and pledged Survey Copters stock and assets as security, while Survey Copters guaranteed payment. The trial court found the individual defendants contributed cash, promotional efforts, and personally guaranteed substantial loans, that Inter Helo's affairs were conducted according to normal corporate practice, and that the individuals neither commingled funds nor committed fraud or bad faith. Inter Helo and Survey Copters later defaulted, leaving the sellers unpaid, and the sellers sought to pierce the corporate veil and also opposed the individual defendants' request for attorney's fees under the note.

Issue

Whether the evidence compelled disregarding Inter Helo Corporation's separate existence and imposing liability on the individual defendants under an alter ego theory. Also, whether individual defendants who were not parties to the promissory note could recover attorney's fees under Civil Code section 1717.

Rule

Alter ego requires both (1) such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) an inequitable result if the acts are treated as those of the corporation alone. The determination is primarily for the trial court and will not be disturbed on appeal if supported by substantial evidence; undercapitalization is only one factor and does not alone require veil piercing. Under Civil Code section 1717, attorney's fees are available to the prevailing party only when that party is a party to a contract containing an attorney-fee provision.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In San Diego, Maya Lin sold specialized survey equipment to Seabright Aero Services, a newly formed corporation. After default, Maya proved only that Seabright began operations with very little cash and soon became insolvent; there was no evidence that its shareholders commingled funds, diverted assets, ignored records, or acted in bad faith.

If Maya argues that the court was required to disregard Seabright's corporate form solely because the corporation was undercapitalized, which is the strongest response?

Explanation. The majority opinion states that alter ego requires both unity of interest and an inequitable result. It further emphasizes that inadequate capitalization is merely a factor for the trial court to consider and does not alone compel disregard of the corporate entity.