Opinion
No. A-12-844
08-20-2013
E & A CONSULTING GROUP, INC., APPELLANT, v. WORLD BASEBALL VILLAGE MANAGEMENT, LLC, ET AL., APPELLEES.
Heather Voegele-Andersen and Brenda K. Smith, of Koley Jessen, P.C, L.L.O., for appellant. W. Eric Wood, of Downing, Alexander & Wood, for appellees.
MEMORANDUM OPINION AND JUDGMENT ON APPEAL
NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION
AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).
Appeal from the District Court for Sarpy County: MAX KELCH, Judge. Affirmed.
Heather Voegele-Andersen and Brenda K. Smith, of Koley Jessen, P.C, L.L.O., for appellant.
W. Eric Wood, of Downing, Alexander & Wood, for appellees.
PIRTLE and RIEDMANN, Judges, and MULLEN, District Judge, Retired.
PIRTLE, Judge.
INTRODUCTION
E & A Consulting Group, Inc. (E&A), filed an action against World Baseball Village Management, LLC, formerly known as World Baseball Village, LLC (WB Management); World Baseball Village of Utah, LLC (WB Utah); World Baseball Village Holdings, LLC (WB Holdings); 4 DAS, LLC; and Rhett Andersen, seeking to pierce WB Management's corporate veil in an effort to recover a judgment against WB Management. The district court for Sarpy County granted summary judgment in favor of WB Utah and WB Holdings, and subsequently granted summary judgment in favor of Andersen. Default judgment was entered against WB Management and 4 DAS, and they are not part of this appeal. E&A appeals the trial court's orders granting summary judgment in favor of WB Utah, WB Holdings, and Andersen. Because we find there are no genuine issues of material fact, we affirm.
BACKGROUND
In November 2009, the district court for Sarpy County entered a judgment, pursuant to a jury verdict, against WB Management and in favor of E&A in the amount of $83,505.17, plus interest and court costs. The judgment was based on E&A's claims that WB Management had breached agreements between the parties regarding the development of a baseball/sports complex, now known as The Cat Osterman Experience, by failing to pay amounts due for consulting services performed by E&A.
On July 1, 2011, E&A filed a complaint against WB Management, WB Utah, WB Holdings, 4 DAS, and Andersen alleging two causes of action. The first cause of action alleged fraudulent misrepresentation against WB Management. E&A alleged that representatives of WB Management made fraudulent representations to E&A, including that WB Management was a properly established entity, that it was a capitalized entity, and that it could remit payment in full for the services E&A provided pursuant to agreements between the parties.
The second cause of action in the complaint requested that the court "pierce the corporate veil" of WB Management and determine that WB Utah, WB Holdings, and Andersen are jointly and severally liable for the payment of E&A's judgment against WB Management. E&A alleged that WB Management's capitalization was grossly inadequate; that once the judgment was entered in favor of E&A, WB Management's representatives determined that WB Management would become the management entity, while WB Utah would hold certain property associated with the baseball/sports complex; that the corporate structures of WB Management, WB Utah, and WB Holdings were related and were created without any regard to proper corporate structure; and that WB Holdings and Andersen diverted any potential assets from WB Management to WB Utah in an effort to evade WB Management's obligations to E&A. The complaint alleged that as a result of the above allegations, WB Utah and WB Holdings are responsible for any actions and liabilities of WB Management.
On September 26, 2011, WB Utah, WB Holdings, and Andersen filed an answer. WB Management and 4 DAS failed to file any response to E&A's complaint. E&A filed a motion for default judgment against WB Management and 4 DAS, which the trial court granted.
WB Utah and WB Holdings subsequently filed a motion for summary judgment asserting that they were entitled to judgment as a matter of law. A hearing was held on the motion. WB Utah and WB Holdings presented an affidavit of a manager of WB Holdings and presented E&A's answers to interrogatories. E&A offered an affidavit, with several attachments, of one of its attorneys, including testimony given by Andersen at a debtor's examination of WB Management.
The evidence established that the first services performed by E&A for which it sought payment from WB Management were rendered in October 2006. The last day of services for which E&A sought payment was July 17, 2007. WB Management was registered as a limited liability company in Nebraska on August 13, 2007, 27 days after the last work was performed by E&A.
WB Management's current and only member is WB Holdings, which was organized in Utah on September 14, 2009, and first capitalized on January 1, 2010. Andersen is a manager of WB Management, as well as a manager of WB Utah and WB Holdings.
WB Management has never been capitalized and has never owned any real estate, any personal property, or any assets. It has never had a bank account, employed any individuals, or filed any tax returns.
WB Utah was organized in Utah on May 16, 2007, and was capitalized 2 days later. In January 2010, WB Holdings became the only member of WB Utah. WB Utah owns the dormitories that are part of the baseball/sports complex. The city of Bellevue, Nebraska, owns the baseball diamonds, the barn, and the land that has been turned into the playing complex.
WB Utah and WB Holdings have never contributed any capital to WB Management, have never transferred any assets to WB Management, have never received any assets or property of any nature from WB Management, have never conducted any business through WB Management, have never had any contract or business relationship with WB Management, have never received any funds or assets that were at any time the property to WB Management, and have never received or assumed any executory contract or contract interest from WB Management.
Following the hearing, the trial court granted summary judgment in favor of WB Utah and WB Holdings. The trial court found that neither WB Utah nor WB Holdings could be held liable for E&A's judgment against WB Management, even if WB Management's corporate veil was pierced, because they were not members of WB Management at the time that E&A's cause of action accrued.
Andersen also filed a motion for summary judgment and a hearing was held on his motion. Andersen offered a notice of deposition that was sent to E&A, an affidavit of Andersen, and a deposition, with attachments, of a representative of E&A, including the testimony given by Andersen at a debtor's examination of WB Management. E&A offered an affidavit, with attachments, of one of its attorneys.
The evidence showed that in 2006 and 2007, an individual named "Chad Jennings" was looking into the possibility of developing a youth baseball facility in the Omaha or Lincoln, Nebraska, metropolitan area. Jennings engaged the services of E&A in connection with exploring the possibilities for the facility. Andersen did not participate in any discussions between E&A and WB Management, and Jennings had minimal contact with E&A.
Andersen was not involved in looking for real estate for the facility, but was involved in research and development of the facility. He spent time evaluating different parcels of land that were being considered by Jennings and another individual, and spent time looking at projections for the project and what would be required to operate the facility.
When WB Management was created, Andersen and Jennings were unsure how the entity would be utilized. The decision was made in 2009 that the entity would become the management entity because the city of Bellevue wanted a local manager of the facility.
Andersen has never conducted any business activities as the manager of WB Management and has never acted as an employee, agent, or representative of WB Management, with the exception of ministerial acts that others requested he perform in 2009 in connection with making WB Management the management entity.
Andersen has never contributed any capital to WB Management, has never transferred any assets to or from WB Management, and has never received any assets, funds, or property of any nature from WB Management.
Following the hearing, the trial court granted summary judgment in favor of Andersen. The trial court found that he could not be held personally liable for the judgment because he was not a member of WB Management, but, rather, a manager. The trial court stated that Nebraska law was unclear as to whether a manager of a limited liability company could be held personally liable. The court went on to hold, however, that even if managers can be liable, Andersen could not be liable because he had never received any assets or property from WB Management and had not benefited from any transfer of property from WB Management.
ASSIGNMENTS OF ERROR
E&A assigns that the trial court erred in (1) granting summary judgment in favor of WB Utah and WB Holdings and (2) granting summary judgment in favor of Andersen.
STANDARD OF REVIEW
An appellate court will affirm a lower court's grant of summary judgment if the pleadings and admitted evidence show that there is no genuine issue as to any material facts or as to the ultimate inferences that may be drawn from the facts and that the moving party is entitled to judgment as a matter of law. Professional Mgmt. Midwest v. Lund Co., 284 Neb. 777, 826 N.W.2d 225 (2012).
In reviewing a summary judgment, an appellate court views the evidence in the light most favorable to the party against whom the judgment was granted, and gives that party the benefit of all reasonable inferences deducible from the evidence. Professional Mgmt. Midwest v. Lund Co., supra.
ANALYSIS
E&A assigns that the trial court erred in granting summary judgment in favor of WB Utah and WB Holdings and in granting summary judgment in favor of Andersen. In granting summary judgment in regard to all three defendants, the trial court dismissed both causes of action set forth in E&A's complaint. As previously stated, E&A's first cause of action alleged that representatives of WB Management caused E&A damages by fraudulent misrepresentation. The specific representatives of WB Management are not named within the first cause of action, but the prayer for relief requests that the court enter judgment against WB Management for fraudulent misrepresentation.
In its order regarding WB Utah and WB Holding's motion for summary judgment, the trial court found that E&A's first cause of action was solely against WB Management. The court found that because it had already entered default judgment against WB Management, summary judgment in favor of WB Utah and WB Holdings was appropriate on the first cause of action. Similarly, in its order regarding Andersen's motion for summary judgment, the trial court found that it was not necessary to address the first cause of action in the context of Andersen's summary judgment motion. E&A does not appear to contest the court's findings in regard to the first cause of action, and accordingly, we will not address it further.
E&A's second cause of action alleged that the corporate veil of WB Management should be pierced and that WB Utah, WB Holdings, and Andersen should be held liable for the judgment previously entered against WB Management. Generally, a corporation is viewed as a complete and separate entity from its shareholders and officers, who are not, as a rule, liable for the debts and obligations of the corporation. Christian v. Smith, 276 Neb. 867, 759 N.W.2d 447 (2008). A court will disregard a corporation's identity only where the corporation has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act in contravention of the rights of another. Id. A corporation's identity as a separate legal entity will be preserved, as a general rule, until sufficient reason to the contrary appears. Id.
A plaintiff seeking to pierce the corporate veil must allege and prove that the corporation was under the actual control of the shareholder and that the shareholder exercised such control to commit a fraud or other wrong in contravention of the plaintiff's rights. Id. A plaintiff seeking to impose liability for a corporate debt on a shareholder has the burden to show by a preponderance of the evidence that the corporate identity must be disregarded to prevent fraud or injustice to the plaintiff. Id.
In the instant case, WB Management is not a corporation, but a limited liability company. However, like a corporation, the "corporate veil" of a limited liability company can also be pierced to prevent fraud or injustice. In Thomas & Thomas Court Reporters v. Switzer, 283 Neb. 19, 27-28, 810 N.W.2d 677, 685 (2012), the court held:
[T]he individual members and managers of a limited liability company are generally not liable for a debt, obligation, or liability of the company. And a court will disregard such a company's identity only where the company has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act in contravention of the rights of another. The company's identity as a separate legal entity will be preserved, as a general rule, until sufficient reason to the contrary appears. And a plaintiff seeking to impose liability on an individual member or manager has the burden of proving that the company's identity should be disregarded to prevent fraud or injustice to the plaintiff.
Some of the relevant factors in determining whether to disregard the corporate entity on the basis of fraud are (1) grossly inadequate capitalization, (2) insolvency of the debtor corporation at the time the debt is incurred, (3) diversion by the shareholder or shareholders of corporate funds or assets to their own or other improper uses, and (4) the fact that the corporation is a mere facade for the personal dealings of the shareholder and that the operations of the corporation are carried on by the shareholder in disregard of the corporate entity. Christian v. Smith, supra.
In regard to WB Utah and WB Holdings, the trial court did not address the factors used to determine whether the corporate entity of WB Management should be disregarded on the basis of fraud because it found that they could not be held liable for E&A's judgment against WB Management because they were not members of WB Management at the time that E&A's cause of action accrued. As stated above, in Thomas & Thomas Court Reporters v. Switzer, supra, the court held that individual members and managers of a limited liability company can be held liable for a debt, obligation, or liability of a company in the same way as a shareholder of a corporation, if the company has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act in contravention of the rights of another.
We agree with the trial court's finding that WB Utah and WB Holdings were not members of WB Management at the time E&A's cause of action accrued. E&A's corporate veil-piercing claim is based on a judgment entered against WB Management, which arose out of agreements between E&A and WB Management regarding the development of a baseball/sports complex. The evidence shows that the first services rendered by E&A for which payment was sought were in October 2006 and the last rendered services by E&A were July 17, 2007. Therefore, E&A's cause of action in regard to "piercing the corporate veil" of WB Management would have accrued no later than July 17, 2007.
WB Holdings was organized in Utah on September 14, 2009. Therefore, as the trial court found, WB Holdings could not have been a member, and in actual control, of WB Management during any period that E&A's cause of action against WB Management accrued, since it did not exist on July 17, 2007.
WB Utah was organized on May 16, 2007, and therefore, it was organized during the time that E&A's cause of action against WB Management accrued. However, WB Utah has never been a member of WB Management.
Accordingly, as the trial court found, even if the corporate veil of WB Management could be pierced, WB Utah and WB Holdings could not be held liable for E&A's judgment against WB Management because they were not members of WB Management at the time E&A's cause of action accrued.
In regard to Andersen, the trial court found that he could not be liable because he had never received any assets or property from WB Management and had not benefited from any transfer of property from WB Management. In other words, the court found that Andersen had not diverted any funds or assets of WB Management to his own use or other improper uses, one of the factors set forth above.
While we agree with the trial court's findings in regard to WB Utah, WB Holdings, and Andersen, we also analyze the factors used in determining whether to disregard a corporate or limited liability entity on the basis of fraud, as set forth above.
The first factor of the test is inadequate capitalization, which means capitalization very small in relation to the nature of the business of the corporation and the risks entailed. Christian v. Smith, 276 Neb. 867, 759 N.W.2d 447 (2008). Inadequate capitalization is measured at the time of incorporation. Id. Undercapitalization presents a question of fact that turns on the nature of the business of the particular corporation. Id.
In the instant case, the evidence at both summary judgment hearings showed that WB Management was not capitalized at the time the entity was created, and never has been. Further, Andersen testified at the debtor's examination that WB Management never had and has no intention of obtaining any assets. Thus, WB Management had inadequate capitalization at the time of incorporation.
The second factor used to determine whether a corporation's identity should be disregarded is whether the corporation was insolvent at the time the debt was incurred. Christian v. Smith, supra. A corporation is insolvent if it is unable to pay its debts as they become due in the usual course of its business, or if it has an excess of liabilities of the corporation over its assets at a fair valuation. Id. Whether a corporation is insolvent is usually a question of fact. Id.
E&A argues that because WB Management has never been capitalized, it was insolvent when it entered into the agreements with E&A that formed the basis of the judgment. WB Utah, WB Holdings, and Andersen argue that WB Management could not have been insolvent at the time the subject debt was incurred because WB Management did not yet exist at that time.
WB Management was organized on August 13, 2007. As previously stated, the first services rendered by E&A for which payment was sought were in October 2006 and the last services rendered by E&A were on July 17, 2007. Because WB Management was not organized as an entity between October 2006 and July 17, 2007, it could not have been insolvent at the time the debt to E&A was incurred.
The third factor used to determine whether the corporate veil should be pierced is evidence of a diversion by the shareholder or shareholders of corporate funds or assets to their own or other improper uses. When a principal shareholder appropriates and uses corporate funds and property for his personal purposes and thereby defrauds and causes damages to creditors, the shareholder can be held individually liable for corporate debt. Christian v. Smith, supra.
E&A acknowledges that because WB Management was never capitalized, there were no corporate funds or assets diverted for any member's personal use or other improper uses. E&A argues, however, that after it obtained the judgment against WB Management, WB Management, WB Utah, WB Holdings, and Andersen began creating a facade by diverting potential assets of WB Management away from WB Management in an attempt to protect these assets. E&A's assertion stems from the fact that WB Utah owns the dormitories that are part of the sports/baseball complex. However, as E&A acknowledges, this property was only a potential asset of WB Management. WB Utah never received any assets or property of any nature from WB Management. Based on the evidence presented at the summary judgment hearings, WB Utah, WB Holdings, and Andersen have not diverted any funds or assets from WB Holdings for personal use or other improper uses.
The fourth factor of the test is whether the corporation is a facade for the personal dealings of the shareholder and operations of the corporation are carried on by the shareholder in disregard of the corporate entity. If so, the shareholder may be individually liable for corporate debt. See Christian v. Smith, 276 Neb. 867, 759 N.W.2d 447 (2008). The separate entity concept of the corporation may be disregarded where the corporation is a mere shell, serving no legitimate business purpose, and is used as an intermediary to perpetuate fraud on the creditors. Id.
E&A argues that there is a genuine issue of material fact as to whether WB Management is a "mere shell" because it was never capitalized and was insolvent at the time the debt was incurred, it has never filed a tax return, it has never had a bank account, it does not own any real or personal property or any assets, it does not have insurance, it does not have any current or former employees, and it has not entered into agreements with any parties other than E&A and does not have any other additional creditors.
E&A also points to the evidence that WB Management was created for the sole purpose of developing a baseball/sports complex and that in 2009, its representatives determined WB Management would become a management entity, while WB Utah would hold certain property associated with the complex. Further, E&A contends that the entities involved in this case are related: WB Holdings is the only member of WB Management and WB Utah and Andersen is a manager of all three entities.
Despite the evidence cited by E&A, there is no evidence that WB Management was a "mere facade for the personal dealings" of any of the defendants or that it was used as an intermediary to perpetuate fraud on E&A. A court will disregard a company's identity only where the company has been used to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act. See Thomas & Thomas Court Reporters v. Switzer, 283 Neb. 19, 810 N.W.2d 677 (2012). The evidence in the present case does not create a genuine issue of fact as to whether WB Management was used by WB Utah, WB Holdings, or Andersen to commit fraud upon A&E.
WB Utah and WB Holdings were not involved in any discussions or agreements with E&A, and did not have any involvement in the transactions that resulted in the losses sustained by E&A. WB Utah has never been a member of WB Management, and WB Holdings is now a member of WB Management, but it did not exist at the time E&A's cause of action accrued.
Andersen had very minimal contact with E&A. Most of his involvement in regard to the baseball/sports complex was with Jennings. As previously stated, none of the defendants received or diverted any funds or assets from WB Management. In summary, there is no evidence of fraud or any wrongdoing by WB Utah, WB Holdings, or Andersen that would support a conclusion that they should be liable for the judgment against WB Management.
The trial court did not err in granting summary judgment in favor of WB Utah and WB Holdings, and did not err in granting summary judgment in favor of Andersen.
CONCLUSION
We conclude that there is no genuine issue of material fact in regard to whether WB Management was used to commit fraud upon E&A and that thus, the corporate veil of WB Management cannot be pierced. Therefore, the district court did not err in granting summary judgment in favor of WB Utah and WB Holdings, or in granting summary judgment in favor of Andersen.
AFFIRMED.