By Nicholas Kaster, J.D.
Trial court’s finding of no unity of interest and ownership between two corporations owned by the same owner was affirmed on appeal.
An Arizona appellate court has upheld a trial court’s finding that a custom gun parts builder was not the alter ego of a company that performed titanium coating for the aerospace industry, in spite of both companies being owned by the same person, and that, consequently, a gunsmithing company employee, who was injured when a titanium-coated rifle he was test-firing exploded, could not collect damages from the titanium coating company in his products liability cause of action. In addition, the court of appeals determined that the trial court properly instructed the jury on assumption of risk (Ashford v. Accuwright Industries, Inc., February 27, 2020, Abramson, L.).
Accuwright Industries, Inc. was founded in 1998 and performs titanium coating for the aerospace industry. Accuwright’s owner later formed Gunwright, LLC in 2009 as a start-up hobby limited liability company that modifies and builds custom gun parts. The owner patented a process to coat rifle barrels with titanium and developed the first-ever rifle sold with a titanium-coated barrel.
An individual bought a rifle with a titanium coated barrel made by Gunright. An employee of the gun shop that sold the gun test fired the gun for the customer. Upon firing, the gun exploded, causing the employee to lose his left hand. The injured party sued Gunwright and Accuwright, alleging that the titanium coating applied to the rifle barrel was defective. He asserted that Accuwright was liable because Gunwright was its alter ego. A jury trial was held on product liability issues, while the issue of alter ego liability was tried at a bench trial. At the close of the trial, the jury found for the injured man and awarded him damages of $1.5 million. The jury found, among other defendants, that Gunwright was 5 percent at fault. However, the jury did not find Accuwright to be at fault. Thus, a judgment of $75,000 was awarded to the injured man and against Gunwright.
At the bench trial, the lower court heard evidence on the issue of alter-ego liability. Evidence showed Gunwright had not paid Accuwright any rent and had not paid Accuwright any of the money owed for the materials and equipment that Accuwright had provided to Gunwright. Accuwright also provided $15,000 to Gunwright for research and development. However, the owner of Accuwright—who also owns Gunwright—testified that the companies were separately incorporated, and he maintained separate bank accounts, invoicing, accounting records, and business licenses. The owner also testified that he intended that Gunwright pay Accuwright for the materials and equipment that Accuwright provided. Following the hearing, the trial court held that Gunwright was not the alter ego of Accuwright, and, therefore, it was not liable for the judgment awarded to the injured party.
The current appeal ensued.
Alter ego theory. One corporate entity generally is not liable for the obligations of another corporate entity absent an express agreement. However, a court may "pierce the corporate veil" and impose liability when sufficient reason to disregard the corporate form exists. To show alter-ego status, the injured man was required to demonstrate: (1) a "unity of interest and ownership" in the two corporations, and (2) that the observance of the corporate form would result in a fraud or injustice.
While Gunwright and Accuwright were formed and owned by the same individual, the court stated, the corporations themselves were very different in nature. Accuwright provides services for the aerospace industry, while Gunwright was formed to modify and build custom gun parts. The two corporations operated with different purposes and interests, as evidenced by the fact that the two operated under different types of licenses, kept separate accounting and invoices, and maintained separate financial records and filed separate tax returns.
Moreover, Accuwright had no stock ownership of Gunwright; and there was no significant evidence showing commingling of personal and corporate funds and no evidence showing Gunwright’s corporate property was diverted for Accuwright’s use or benefit. Also, no evidence indicated that the injured party was unaware of Gunwright’s separate existence, and nothing in the record indicates he believed Gunwright and Accuwright were the same entity. Thus, the appellate court found that the trial court did not err in finding no unity of interest and ownership between Gunwright and Accuwright.
The injured man next argued that Gunwright’s insolvency and lack of liability insurance was evidence of fraud and lead to injustice because it prevented him from collecting on his judgment. He contended that Gunwright was undercapitalized. However, the court said that while undercapitalization is an important factor in determining whether the doctrine of alter ego should be applied, in the absence of fraud or injustice, it is not an absolute ground for disregarding a corporate entity. The trial court found no evidence Gunwright was intentionally undercapitalized at the date of incorporation or was formed to evade liability. Accordingly, the trial court found, and the appellate court agreed, that the injured party did not show by a preponderance of the evidence that the financial setup of the corporation was only a sham and caused an injustice.
The appellate court concluded that there was no evidence of an intent to defraud, nor was there evidence that Accuwright was benefitting from Gunwright’s young enterprise while avoiding financial responsibility. Therefore, the appeals court affirmed the trial court’s alter-ego determination, which precluded the injured party from collecting the judgment against Accuwright.
Jury instructions. The injured man additionally argued that the trial court erred in instructing the jury on assumption of risk. The assumption of risk defense is based on an individual’s knowledge of a particular risk and his consent or agreement to accept that risk. The injured party held himself out as a "master gunsmith," he had over twenty years of experience, and had earned a degree in gunsmithing. At trial, he testified he was aware a barrel could fail if under too much pressure, and he testified he knew overpressure was a serious condition in a rifle that can cause the user severe injury. Notwithstanding this knowledge and experience, he proceeded to test-fire the rifle. Sufficient evidence showed that the injured party was acutely aware of the risks of firing a gun that may have been exhibiting signs of pressure in the barrel and that also was loaded with mixed powder cartridges, the court held. Therefore, the appellate court did not find that the trial court abused its discretion in giving the instruction.
Finally, the appeals court found that the jury instruction did not improperly take the issue of assumption of the risk away from the jury. Rather, the instruction was a conditional statement that required the jury to make an independent determination as to whether the injured man discovered or learned of the defect in the gun, and notwithstanding such discovery or knowledge, used the gun. In other words, the issue of assumption of risk was appropriately left for the jury to decide.
Sophisticated user. The appellate court further ruled that the trial court did not abuse its discretion by including an instruction on the sophisticated user defense. The injured man argued that the jury instruction on the sophisticated user defense was improper because (1) the sophisticated user defense only arises in "failure to warn" cases; and (2) he could not be considered a sophisticated user because of his unfamiliarity with titanium-coated barrels. The appellate court, however, ruled that there was sufficient evidence in the record to support the trial court’s inclusion of the instruction. Although the injured man argued that he had never used a titanium-coated barrel and it was "the first ever introduced into the public stream of commerce," he was a "master gunsmith," had gone to gunsmithing school, was military trained, and had about twenty years of gunsmithing experience. The evidence was sufficient to suggest that his expertise in guns generally equipped him to recognize potential dangers and problems with the titanium-coated gun barrel. The appellate court concluded that the jury instruction left the issue to the jury to decide whether the injured man was a sophisticated user; and, thus, the lower court did not abuse its discretion by including the sophisticated user instruction.
This case is No. 1 CA-CV 19-0160.
Attorneys: G. Lynn Shumway (Shumway Law PLLC) for Lynial Ashford. Michael A. Rossi (Elardo Bragg Rossi & Palumbo, PC) for Accuwright Industries, Inc. Gordon S. Bueler (Bueler Jones LLP) for Gunwright, LLC.
Companies: Accuwright Industries, Inc.; Gunwright, LLC
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