Co-Ex Plastics, Inc. v. AlaPak, Inc.

536 So. 2d 37 (1988)

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Co-Ex Plastics, Inc. v. AlaPak, Inc.

Alabama Supreme Court
536 So. 2d 37 (1988)

  • Written by Steven Pacht, JD

Facts

Greg Gantt (defendant) was the founder of AlaPak, Inc. (defendant), which he incorporated as a successor to his sole proprietorship, Alabama Packaging and Supply. Gantt was AlaPak’s sole shareholder. Co-Ex Plastics, Inc. (Co-Ex) (plaintiff) was a supplier to AlaPak. When AlaPak fell behind in paying Co-Ex, Co-Ex sued AlaPak and Gantt, seeking payment of $35,000. Co-Ex alleged that Gantt was personally liable for AlaPak’s debt under a corporate-veil-piercing theory. At trial, Co-Ex presented evidence that Gantt (1) could not produce a stock certificate for AlaPak, (2) used the sole proprietorship’s bank account for AlaPak’s business, (3) used the sole proprietorship’s checks, (4) did not sign checks in a representative capacity, and (5) used varying names for the corporation, including names that were similar to the sole proprietorship’s name. Additionally, Co-Ex argued that AlaPak’s corporate veil should be pierced because AlaPak was undercapitalized. Gantt responded that Co-Ex knew or should have known that AlaPak was a corporation and thus that AlaPak’s nonobservance of certain corporate formalities could not have defrauded Co-Ex. Gantt further argued that (1) AlaPak’s capitalization was typical of one-person corporations, (2) Co-Ex did not rely on any representations regarding AlaPak’s financial condition, (3) Co-Ex inadequately investigated AlaPak’s financial condition (i.e., because Co-Ex conducted only a bank credit check), and (4) AlaPak’s assets exceeded its liabilities when AlaPak was incorporated. The trial court entered judgment for Co-Ex against AlaPak but rejected Co-Ex’s veil-piercing claim regarding Gantt. Co-Ex appealed.

Rule of Law

Issue

Holding and Reasoning (Adams, J.)

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Casebooks

Advanced Business Associations

Key Terms

  • Corporate FormalitiesThe practice of a company of keeping its accounts in order, maintaining up-to-date bylaws, holding regular Board of Director meetings, and other such things the company does to show that it is its own entity. 
  • Piercing the Corporate VeilAn exception to the general rule that a shareholder has no personal liability for debts or obligations of the corporation. A court may pierce the corporate veil by setting aside the principle of limited liability and disregarding the corporate entity, if the corporate form has been abused in such a way that recognizing limited liability would work unfair harm or injustice.
  • Alter-Ego DoctrineA theory under which a plaintiff may pierce the corporate veil and hold individual or corporate shareholders or a corporate affiliate personally liable for corporate debts. A claim under the alter-ego theory alleges that a shareholder or affiliated entity used the corporation as a mere tool, business conduit, or façade to cover the shareholder's personal dealings. In the context of labor law, the doctrine is invoked when a unionized employer seeks to evade collective-bargaining responsibilities through the formation of an open shop that is substantially the same company.
  • UndercapitalizeTo create a business and operate it without sufficient funds to be able to pay bills or satisfy judgments.
  • GuarantyAlso referred to as guarantee, an agreement, collateral to a principal agreement, in which the guarantor promises to satisfy an obligation of a promisor under the principal agreement in the event that such promisor fails to perform.
  • RepresentationAn assertion of fact communicated for the purpose of influencing the acts or decisions of another.
  • Sole ProprietorshipA business model in which the owner is personally responsible for all the debts or losses of his or her business.
  • Instrumentality DoctrineThe rule that if one corporation dominates or controls another corporation, the dominant corporation becomes liable for the debts of the subservient corporation.
  • CreditorSomeone to whom a debt is owed.

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