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Alabama Supreme Court Reverses Judgment Against Subcontractor And Denies Request To Pierce The Corporate Veil Of Contractor

In Childs v. Pommer, the Supreme Court of Alabama reviewed two appeals from judgment in connection with a construction contract. 2021 WL 4022619, at *1. With respect to the first appeal, the Supreme Court analyzed whether a subcontractor could be liable under a breach-of-contract theory when he was not a party to the contract. Under the second appeal, the Supreme Court analyzed whether the Plaintiffs should be allowed to pierce the corporate veil of the contractor company to pursue a post-judgment course of action against its sole owner.

Plaintiffs Harry and Brenda Pommer (“Plaintiffs”) desired to build a garage on their property. Plaintiffs initially contacted Paul Childs (“Childs”) to build the garage. Childs expressed to the Plaintiffs that he was not a licensed contractor and would need to work under Daniel Granger (“Granger”), the sole owner of Granger Construction, LLC (“Granger Construction”). As a result, on December 11, 2014, Plaintiffs entered into a contract with Granger Construction.

During the construction process, the project experienced significant delays. When the Plaintiffs grew dissatisfied with the progression of the project, as well as some of the work performed, they stopped making payments to Granger Construction. Granger and Childs met with the Plaintiffs in an attempt to resolve the conflict. However, tension between the parties only grew, and the Plaintiffs ultimately hired another contractor to finish the garage.

Soon after the garage was complete, the Plaintiffs filed suit against Childs and Granger Construction for breach of contract, breach of express and implied warranty, and other common law tort claims in connection with the dispute. The Plaintiffs later amended their Complaint to include a request to pierce the corporate veil with regard to Granger Construction and to add Granger, in his individual capacity, as an additional defendant.

Following a bench trial, the Court entered a judgment against Granger Construction and Childs for compensatory damages and attorney’s fees. The trial court also reserved the right to make a final determination on the issue of piercing the corporate veil because Granger had died and the process to substitute him was underway. Childs appealed, but this appeal was ultimately denied as arising from a nonfinal judgment.

Once Granger’s wife had been properly substituted, the trial court conducted another bench trial on the issue of piercing the corporate veil. The trial court denied the Plaintiff’s request to pierce the corporate veil of Granger Construction, thereby rendering a final judgement. The Plaintiffs appealed this decision, and Childs renewed his appeal from the earlier judgment against him.

In his appeal, Childs argued that he is not liable under a breach-of-contract theory because he was a subcontractor and, therefore, never a signatory on the contract. To address this argument, the Alabama Supreme Court analyzed the contract between the Plaintiffs and Granger Construction. The Court noted that, when read in its entirety, the contract did not provide that a subcontractor owes any duty to the property owners. Instead, the contract stated that only the work performed by subcontractors will be subject to the provisions of the contract. The contract provided that the subcontractor is bound to the contractor and will only assume duties and obligations toward the contractor. Therefore, the Court reversed the trial court’s judgment against Childs because a finding of liability could not be supported under Plaintiff’s breach-of-contract theory.

In their appeal, the Plaintiffs argued that the trial court erroneously denied their request to pierce the corporate veil of Granger Construction. Upon reviewing the trial court’s decision, the Alabama Supreme Court analyzed the elements of piercing the corporate veil: whether the company was undercapitalized; whether the company did not observe the corporate form, including intermingling funds and not practicing formalities; whether the company was an instrumentality or alter ego of the shareholder; and whether there would be fraud or injustice in recognizing the corporate existence. The Court highlighted caselaw that made clear that the fact a corporation was comprised of only one man was not enough to pierce the corporate veil.

The Alabama Supreme Court reviewed several pieces of key evidence in its analysis. First, the Court noted that there was no evidence of inadequate financing to suggest that Granger Construction was undercapitalized. Second, the Court analyzed the operating agreement for Granger Construction, Granger Construction’s corporate bank account, as well as tax returns for Granger Construction and the Grangers, to determine that Granger observed the corporate form. Third, the Court recognized that Granger held himself out as doing business as Granger Construction, so the company was not an instrumentality or alter ego. Lastly, the Court emphasized that the Plaintiffs had not establish any fraud or injustice in recognizing the corporate existence. The Court held that the trial court was not wrong to deny the Plaintiff’s request to pierce the corporate veil of Granger Construction.