Preferred Product Placement Corp. v. Right Way Nutrition, LLC: Summary Judgment and Alter Ego Theory

Preferred Product Placement Corp. v. Right Way Nutrition, LLC, Case No: 2:11-cv-00496 (D. Utah Feb. 17, 2015) arose out of a breach of contract dispute between Preferred Product Placement Corporation (“PPPC”) and HCG Platinum, LLC (“Platinum”). In the dispute, PPPC brought counterclaims alleging breach of two contracts. PPPC then amended its counterclaims using the alter ego doctrine to bring claims against Right Way Nutrition, LLC, and its ownership group: Julie Mattingly; Ty Mattingly; Annette Wright; Kevin Wright, LLC; Primary Colors, LLC; and Weekes Holdings, LLC (collectively, the “Third-Party Defendants”). The Third-Party Defendants subsequently moved for summary judgment.

PPPC’s counterclaim alleged the Third-Party Defendants breached two separate contracts. One was subject to the law of Utah; the other the law of California.  The alter ego doctrine allows PPPC to pierce Platinum’s corporate veil and potentially obtain judgments against the Third-Party Defendants. 

The Third-Party Defendants’ moved for summary judgment. Summary judgment is granted when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Because one was governed by Utah law and the other by California law, the court analyzed the alter ego standard under the laws of both states.  The court noted, however, that an alter ego’s fact intensive and factor heavy analysis was “not often amenable to summary judgment.”

Under Utah law, an alter ego claim must meet formality and fairness requirements. To aid in this determination, the Utah Supreme Court adopted an eight-factor test. These factors include:

(1)  undercapitalization of a one-man corporation;

(2)  failure to observe corporate formalities;

(3)  nonpayment of dividends;

(4)  siphoning of corporate funds by the dominant stockholder;

(5)  nonfunctioning of other officers or directors;

(6)  absence of corporate records;

(7)  the use of the corporation as a façade for operations of the dominant stockholder or stockholders; and

(8)  the use of the corporate entity in promoting injustice or fraud.

To withstand summary judgment, “evidence of even one of the factors may be sufficient to suggest both elements of a party’s alter ego theory.” The court found PPPC’s evidence sufficient to create a genuine issue of material fact.  Allegations raised an issue of fact as to whether HCG Platinum and Right Way “had merged without observing corporate formalities.” In addition, a genuine issue of material fact excisted over the possible “siphoning of corporate funds by a dominant stockholder.”

Under California law, the corporate form could be disregarded where its affairs were conducted in a manner that made it “merely an instrumentality, agency, conduit, or adjunct of another corporation.” To make this determination, California courts used a non-exhaustive list of factors. The court did not engage in an exhaustive analysis of those factors and simply found that PPPC’s evidence created a genuine dispute of material fact involving more than one factor.

Accordingly, the court denied the Third-Party Defendant’s motion for summary judgment regarding both contracts.

The primary material for this case can be found on the DU Corporate Governance website.

Philip Nickerson