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Norhawk Investments Inc. v. Subway Sandwich Shops Inc.

April 15, 1991

NORHAWK INVESTMENTS, INC., APPELLANT
v.
SUBWAY SANDWICH SHOPS, INC., ET AL, DEFENDANTS, DOCTOR'S ASSOCIATES, INC., RESPONDENT



Grosse, C.j. Pekelis and Baker, JJ., concur.

Author: Grosse

Doctor's Associates, Inc. (DAI) is a franchisor of fast-food restaurants under the trade name "Subway". Subway Sandwich Shops, Inc. (SSS) is a separate corporation which leases commercial property and then

subleases the property to DAI's franchisees. Norhawk Investments, Inc. (Norhawk) brought this action against DAI after unsuccessful attempts to collect on a judgment it had obtained against SSS. Norhawk appeals from the trial court's judgment dismissing its complaint against DAI.

In 1967, Doctor's Associates, Inc., was incorporated in Connecticut. DAI is a franchisor of fast-food restaurants throughout the country under the trade name of "Subway". In 1983, SSS was incorporated in Connecticut. SSS leases commercial property and then subleases the property at cost to DAI's franchisees. SSS has no substantial assets, employees, or substantial bank account balances. It has a policy of not providing financial statements to anyone, including landlords, and will look elsewhere for a location if the landlord refuses to rent the premises without them. Frederick DeLuca and Peter Buck are the sole shareholders of DAI and SSS. DeLuca is an officer of both companies and makes ultimate management decisions for both. The employees of DAI are paid by DAI but act by specific assignment for SSS at DeLuca's direction.

On March 9, 1984, DAI entered into a franchise agreement with George Cappiello. On May 25, 1984, SSS leased commercial property at the Greenwood Plaza from Bantz, Trace & Associates (BTA) and then sublet the premises to Cappiello on June 20, 1984. Cappiello agreed to make the lease payments directly to BTA, the landlord.

In 1985 Norhawk Investments, Inc., a Washington corporation, purchased the Greenwood Plaza from BTA. The purchase agreement contained contingencies, including the right to approve the leases on the Plaza. Prior to the sale, Charles Hawk, Norhawk's representative, was introduced to Cappiello as the franchisee. The sublease agreement disclosed the fact that DAI was the franchisor. However, Hawk made no inquiries with respect to the franchisor. Rather, he assumed that because of the use of the trade name Subway, the franchisor and the lessee were one and the same company. The sale closed in June of 1985 and all the leases on the Plaza were assigned to Norhawk.

In October of 1985 Cappiello defaulted on the lease, making only partial payments through May of 1986, and abandoned the premises which was then "disidentified" as a Subway franchise by removal of all Subway nomenclature. In October of 1986, Norhawk brought an action against Cappiello and SSS for breach of the lease. On May 29, 1988, Norhawk was awarded a default judgment against SSS in the sum of $54,895.22. After unsuccessful attempts to collect on the judgment, Norhawk discovered that DAI was the franchisor, not SSS.

On August 8, 1988, the trial court denied Norhawk's motion to collect the judgment from DAI, and granted Norhawk leave to file an amended complaint. After a trial to the court, findings and conclusions were entered resulting in the dismissal of Norhawk's complaint against DAI. The trial court concluded that DAI was not the alter ego of SSS and that disregard of the corporate form of DAI was not necessary to prevent an unjustified loss to Norhawk. This appeal followed.

The issue presented is whether the trial court erred by determining that DAI was not liable to Norhawk based on a corporate disregard theory.

[1, 2] Norhawk urges this court to disregard the two corporate entities and hold DAI subject to liability for the judgment Norhawk obtained against SSS. "The question whether the corporate form should be disregarded is a question of fact." Truckweld Equip. Co. v. Olson, 26 Wash. App. 638, 643, 618 P.2d 1017 (1980). Here, the trial court resolved the issue favorably to DAI. That ruling must stand if it is supported by substantial evidence. Truckweld, at 643.

[3] The doctrine of corporate disregard was set forth in Morgan v. Burks, 93 Wash. 2d 580, 585, 611 P.2d 751 (1980). "The corporate entity is disregarded and liability assessed against shareholders in the corporation when the ...


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