dissenting:
I respectfully dissent.
I.
The facts stated by the majority are correct. However, there are inferences to be drawn from the condition of the parties which may provide a different perspective. Nash, who did business as Ware Properties, Inc., was a person of long and varied experience in dealing with real estate and the financing thereof. Mrs. Ward lived in a modest home worth about $36,000. She owed Utah Mortgage Co., on a first mortgage, some $14,000 and was delinquent in several house payments of $135.00 per month. She concluded that she would sell and have the benefit of her equity of some $22,000. She went to a broker, Susan Wood, now deceased, who introduced her to Nash. They agreed on a sale for $36,000 nominally to Ware Properties, Inc. The purchaser was to pay $8,000 cash (from which would be paid the real estate commission, the delinquencies and late charges), assume the Utah mortgage of $14,000, and give Mrs. Ward a note for $14,000 payable in monthly installments over 15 years secured by a second mortgage. An escrow was set up from which Mrs. Ward received $1,000 with which she moved from the house to an apartment.
Thereafter, Nash induced Mrs. Ward to sign altered escrow documents which pro*32vided Ware with authority to borrow $18,-000 which could be secured by a lien on the Ward property superior to her second mortgage. Ware Properties, Inc. then wrote a note and mortgage to Nash for which no consideration was furnished. This note was admitted by Nash to have been written to evade usury laws. The note and mortgage were assigned to Palo Verde for the sum of $16,000 which was received by Nash.
The result of these machinations was that Mrs. Ward received cash of about $6,000 and credits for delinquent mortgage payments and a real estate commission totaling about $2,000; in all, close to $8,000. Of the $16,000 received from Palo Verde, Nash retained about $8,500. As to Mrs. Ward’s remaining equity in the property which was to have been secured by a $14,-000 second lien behind a first of $14,000, it now ran behind $14,000 plus $18,000 or a total of $32,000. For all practical purposes, when she signed the amended escrow documents she gratuitously signed away her equity in the property.
II.
There was no consideration for the note from Ware Properties, Inc. to Nash. There was not even a contemporaneous record of the transaction.
Ware Properties, Inc. was the alter ego of Nash in that the separate identities had merged prior to the execution of the note and trust deed. Thus, Ware Properties, Inc. and Nash were incapable of contracting with each other, and the promissory note and trust deed were void and unas-signable.
The evidence before the Bankruptcy Court was virtually undisputed that Ware Properties, Inc. was the alter ego of Nash. The court stated that “[t]he constant commingling of corporate and personal funds certainly points in that direction.” Memo. Dec. at 13. In addition, the court found:
There can be no dispute debtors did not respect the status of Ware Properties as a separate legal entity, or that the corporation’s books are out of balance and incomplete. There likewise can be no credible argument that $18,500 in cash actually changed hands. Debtors admit they treated corporate and personal accounts as one and the same as early as 1981. Transcript, at 49-58, 97.
The majority relies heavily on Chapman v. Field, 124 Ariz. 100, 602 P.2d 481 (1979), for the proposition that fraud is required to pierce the corporate veil. The correct test, however, is excessive disregard of and commingling of corporate and individual identities, coupled with fraud or injustice. There is substantial Arizona authority holding that injustice is a factor that activates application of the alter ego doctrine. This rule was first enunciated in Phoenix Safety Inv. Co. v. James, 28 Ariz. 514, 237 P. 958 (1925), where the Supreme Court of Arizona, adopting the language of a California court, stated that a corporate veil can be pierced where “the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.” (Emphasis supplied.) The Supreme Court of Arizona reaffirmed this test in Home Builders & Suppliers v. Timberman, 75 Ariz. 337, 256 P.2d 716, 721 (1953), and added:
Before a court is entitled to disregard the corporate entity there must be a resulting injustice in addition to a situation that justifies a finding that the corporation is the alter ego of the individual.
(Emphasis supplied.)
Accord, Honeywell, Inc. v. Arnold Constr. Co., Inc., 134 Ariz. 153, 654 P.2d 301, 307 (1982); Youngren v. Rezzonico, 25 Ariz. App. 304, 543 P.2d 142, 144 (1975); Dietel v. Day, 16 Ariz.App. 206, 492 P.2d 455, 457 (1972). See also Employer’s Liability Assurance Corp. v. Lunt, 82 Ariz. 320, 313 P.2d 393, 395 (1957).
Here, Ward is not seeking to pierce the corporate veil to pursue individuals but is *33using the alter ego theory to show that the identities of the parties had merged. Ware and Nash were a single entity and were incapable of forming a contract. The assignment of the note to Palo Verde was ineffective in conferring holder in due course status because there was nothing for them to purchase.
In summary, Nash executed a note with his company as a “straw man” and assigned it to Palo Verde for a much larger amount than he had actually invested in the property. The proceeds which did not go to the down payment went into the corporate savings account in which personal and corporate funds were commingled freely. No significant part of the additional money was reinvested in the property to upgrade Ward’s security interest to a realistic level even though Nash was aware that his business was losing money. The amount of the assigned note was 90% of the value of the property, less the first mortgage, and was sure to edge out Ward’s equity interest if Nash’s business went under. Nash’s scheme worked a grave injustice on Ward, who was aware only that a new loan was recorded prior to hers, but did not comprehend that her security interest would be rendered inconsequential thereby.
III.
Assuming arguendo that the facade of regularity erected by Nash nevertheless sufficed to create a negotiable instrument, Palo Verde did not act in good faith. An assignee will be disqualified from holder in due course status if it accepts the commercial paper with sufficient notice to question its validity. A.R.S. § 47-3304(A)(1); A.R.S. § 47-3302(A)(3). A holder cannot avoid notice by refusing to investigate suspicious circumstances. Stewart v. Thornton, 116 Ariz. 107, 568 P.2d 414, 417 (1977). The Bankruptcy Court held that Palo Verde had no actual notice that Nash was commingling personal and corporate assets and that no Arizona case was cited establishing a duty to investigate in a similar factual situation. Memo. Dec. at 16. •
However, Stewart v. -Thornton, supra, relied on by the court, did establish such a duty. The court held that a note purchased at discounted value was “sufficient to alert a prospective purchaser to a possible defense.” 568 P.2d at 417. That court found an inference of bad faith in the failure to investigate.
The facts were clear that Palo Verde paid $16,344 for the $18,500 note and “did not inquire concerning the $18,500 debt between Nash and Ware Properties, although Schulman (its principal) knew Mr. and Mrs. Nash were Ware’s only officers.” Memo. Dec. at 8. Mr. Schulman had been involved with Nash or Ware during 1980 to 1982 in 25 to 30 prior collateralized transactions. In purchasing the discounted note, Palo Verde had actual knowledge of facts which should have put it on notice of possible irregularities. An inference of bad faith is appropriate in this situation and defeats Palo Verde’s holder in due course status. Therefore, Palo Verde should be subject to the defenses of lack of consideration and lack of separate indentities.
This dissent is not intended to evaluate the bankruptcy court’s findings as erroneous. It is concerned with the conclusions derived from the facts as established.
For the foregoing reasons I would reverse and remand for restoration of Mrs. Ward to the secured position second only to the first mortgage as contemplated by the original agreement.