Commercial Leasing Corp. v. Junbo Enterprises, Inc.

7 Va. Cir. 20, 1980 Va. Cir. LEXIS 41

• Court: Richmond County Circuit Court
• Decided: July 28, 1980
• Docket: Case No. LC-270
• Status: Published

Opinion

By JUDGE WILLARD I. WALKER

This case is before the court on a motion for summary judgment in which the plaintiff, Commercial Leasing Corporation (Commercial) claims a debt of $76,050.90 owed by Junbo Enterprises, Inc. (Junbo) under a leasing agreement. Junbo and the other defendants, guarantors of the lease, have answered that Commercial should be estopped from proceeding against them, at least until arbitration between Junbo and Golden Skillet Corporation (Golden Skillet), a 50% shareholder of Commercial, is complete since actions of Golden Skillet have led to Junbo’s failure to make payment under the leasing agreement.

The issue in this case is whether the corporate entity of Commercial should be ignored based upon its close affiliation with Golden Skillet and the alleged misrepresentation of this relationship to Junbo. I find that summary judgment should be entered for the plaintiff against the defendants since the leasing agreement is a separate obligation unaffected by the Commercial-Golden Skillet relationship and unrelated to the defendants’ obligations and agreements with Golden Skillet.

Commercial is a corporation formed by Golden Skillet and United Leasing Corporation (United), each incorporated in Virginia and having 50% shareholder interests in Commercial. Commercial’s board of directors is comprised of five directors who are officers, directors or shareholders in Golden Skillet and one director who is the owner of United. Commercial entered into a management agreement with United through which United managed day-to-day operational decisions for Commercial. For this service, United received 5% of the original equipment cost as its fee for placing a loan with a financial institution and 5% monthly lease payment for its handling of all business associated with collecting and processing the lease.

Commercial was formed, at the suggestion of Edward H. Shield, owner of United, to provide financing through leasing agreements for the equipment necessary for a Golden Skillet franchisee to run his business. The franchisee selects his own equipment and supplier. Approximately 25% of the franchisees use this service, with the other 75% arranging their own financing and purchase of equipment.

Junbo chose to use the services of Commercial to finance its selection of equipment. Subsequent difficulties with some of the equipment patented by Golden Skillet allegedly caused Junbo a loss of revenue, as well as expenditures to alleviate operational problems.

The separation of a corporation from its owners will be recognized unless it can be shown that the corporation was formed for some fraudulent purpose or is a mere instrumentality of its owner and that some injury has resulted from a transaction with a corporation so formed. Brown v. Magrande Compania Naviera, 281 F. Supp. 1004 (E.D. Va. 1968). The depositions and exhibits do not reveal such circumstances.

The stated purpose for forming Commercial was to provide another service to franchisees and thereby strengthen Golden Skillet's competitive power. Commercial had dual ownership and control by Golden Skillet and United. Although the board of directors was heavily weighted in Golden Skillet's favor, United's management agreement balanced the power. From the information available, neither fraud nor control is clear.

Even if one of these elements was present, there has been no showing that it would have resulted in the injury to Junbo, that of inability to make its payments under the lease agreement Junbo had a choice as to where it would finance the equipment. The failure of the patented Golden Skillet equipment to function properly, causing a loss in revenues, could have resulted in a failure to make payments to any creditor, not just Commercial.

Commercial and Golden Skillet are two separate and distinct corporations. Therefore, no obligation may be imposed upon Commercial to submit to arbitration for the dispute concerning its lease financing agreement with Junbo. Nor can Commercial be required to wait until the arbitration between Junbo and Golden Skillet is complete. Junbo’s dispute with Golden Skillet is no factor in the determination of this case.

Summary judgment will be entered against defendants for the amount of $76,050.90.