Summary
affirming imposition of liability on individual where entity "was undercapitalized at its moment of incorporation"
Summary of this case from Algreen v. Timothy Gardner & Gardner Crop Ins., Inc.Opinion
No. 5-430 / 03-1496
Filed October 26, 2005
Appeal from the Iowa District Court for Muscatine County, Patrick J. Madden, Judge.
Gregory Gilleard, Mainline Telecommunications Construction Company, and Anderson, Gablemann, Lower Whitlow, P.C., appeal from a district court ruling that pierced the corporate veil of Mainline Telecommunications Construction Company. AFFIRMED.
Rex Ridenour of Dircks, Ridenour Macek, Davenport, for appellants.
Patrick O'Bryan, Des Moines, and Gregory Johnston, Muscatine, for appellees.
Heard by Huitink, P.J., Zimmer, J., and Brown, S.J.
Senior Judge assigned by order pursuant to Iowa Code section 602.9206 (2005).
Gregory Gilleard and Mainline Telecommunications Construction Company appeal from a district court ruling that allowed Gilleard's judgment creditor to pierce the corporate veil of Mainline Telecommunications Construction Company (Mainline), a company incorporated by Gilleard. We affirm the district court.
Appellant Gilleard asserts that the accounting firm of Anderson, Gablemann, Lower, and Whitlow, P.C, is also an appellant. The appellees assert the accounting firm is not a party. We find it unnecessary to address this dispute to resolve the issue presented by this appeal.
I. Background Facts Proceedings
In 1997 Greg Gilleard persuaded twenty-one-year-old Georgia resident Daniel Parker to invest his inheritance in Gilleard's Georgia business. The business failed, and Gilleard filed for bankruptcy. Parker sued Gilleard for fraud, and in April of 1999, the United States Bankruptcy Court for the Northern District of Georgia entered a nondischargeable judgment on Parker's complaint against Gilleard in the amount of $50,000. Gilleard left Georgia without paying the judgment he owed Parker and eventually relocated to Iowa.
The bankruptcy court ruled that Gilleard obtained money from Parker through fraud knowingly committed with the intent to deceive.
In the summer of 1999, Gilleard approached Muscatine resident Tim Nelson, a principal in Nelson Electric, Inc., with a business proposal. In September or October of 1999, Nelson and Gilleard began a joint business venture. They contracted with Muscatine Power and Water (MPW) to install Internet cable hookups for customers in Muscatine. The business venture experienced some initial success, but the relationship between Nelson and Gilleard soon deteriorated.
Gilleard and Nelson went into business without the benefit of a written business agreement. Gilleard did not inform Nelson of his failed business in Georgia.
Nelson and Gilleard discontinued their business relationship on July 31, 2000. Nelson withdrew from the joint venture, and Gilleard continued to provide some services to MPW.
On August 25, 2000, Gilleard incorporated Mainline as a successor to his joint venture with Nelson to continue providing services to MPW. Gilleard allocated seventy-five percent of the corporation's shares to himself and twenty-five percent to his wife, Judith. On November 8, 2000, Nelson and Gilleard reached a partial agreement regarding issues relating to the termination of their joint venture. MPW terminated the services of Mainline on January 21, 2001. Mainline was, for all practical purposes, out of business after that date.
Nelson and Gilleard became embroiled in litigation regarding the ownership and division of their business property. Nelson and Gilleard eventually settled their lawsuit on July 25, 2002. Their agreement provided that each would receive certain assets, Nelson would retain all of the cash and receivables, and Nelson would pay Gilleard $60,356.76.
Gilleard filed suit against Nelson in March of 2001.
On July 30, 2002, Parker and his assignee, attorney Gregory Johnston, filed an affidavit and notice of filing foreign judgment in Iowa and a petition for attachment. The notice of levy of writ of attachment was served on July 31, 2002, on Nelson Electric. Parker and Johnston levied against the payment that Nelson was to make to Gilleard pursuant to their settlement agreement.
On August 10, 2002, Gilleard, who by then was incarcerated on a variety of criminal charges, granted confessions of judgments to his accountant, his then criminal defense attorney, and others. Parker then sought to intervene in the Gilleard/Nelson litigation.
On August 29, 2002, the court consolidated the Gilleard/Nelson and the Parker/Gilleard cases and entered an order which provided that funds being held by MPW in the amount of $143,358.97 should be disbursed as follows: $60,356.76 to the clerk of court to be held in escrow pending the resolution of pending litigation and $83,002.21 to Nelson Electric, Inc.
After some additional legal wrangling, the hearing which gave rise to this appeal commenced on July 30, 2003. At that hearing, the district court was asked to determine how the proceeds being held by the Muscatine County Clerk of Court pursuant to a prior court order should be distributed. The contested issue before the court was whether the corporate veil of Gregory Gilleard's corporation, Mainline, should be pierced.
The trial court identified the participants in the hearing in the following manner "The Plaintiffs in this case, Daniel Parker, a $50,000 judgment holder against Gilleard pursuant to nondischargeability of his listed debt due to fraud in Gilleard's bankruptcy proceedings, and Gregory A. Johnston, as Parker's assignee of that judgment are represented by attorney Gregory A. Johnston. Gilleard, the defendant, is represented by attorney, Rex Ridenour."
At the conclusion of the trial, the parties agreed that if the court pierced Mainline's corporate veil, Dircks, Ridenour and Macek, the law firm of Gilleard's lawyer, would receive $35,000 and "Daniel Parker and his assignee, Gregory Johnston" would receive the remaining $24,917.84. They further agreed that if the court declined to pierce the veil, all of the funds would be paid to Mainline and Gilleard subject to the attorney's lien for $35,000 and a perfected claim for approximately $8,800 by Anderson, Gobelmann, Lower, Whitlow, P.C., Gilleard's accountants. There was no agreement regarding how the remaining funds would be distributed if the court determined Mainline's corporate veil should not be pierced.
Although the exact amount paid to the clerk was $60,356.76, the amount available for distribution was $59,917.84.
Following trial, the court pierced Mainline's corporate veil and entered judgment against Gilleard in favor of Parker and Johnston. Pursuant to the post-trial stipulation, the court directed the clerk of court to disburse $35,000 of the funds being held by the clerk to the law firm of Dircks, Ridenour and Macek and the remaining $24,917.84 to "Daniel Parker and his assignee, Gregory Johnston." This appeal followed.
II. Scope of Review
Our review of the district court's ruling is for the correction of errors at law, and we view the evidence in a light most favorable to sustaining the district court judgment. Iowa R. App. P. 6.4; Murray v. Conrad, 346 N.W.2d 814, 817 (Iowa 1984). We will not disturb the lower court's findings on appeal if they are supported by substantial evidence and are justified under the law. Ellefson v. Centech Corp., 606 N.W.2d 324, 330 (Iowa 2000); C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do, 412 N.W.2d 593, 596 (Iowa 1987); Carson v. Mulnix, 263 N.W.2d 701, 705 (Iowa 1978).
III. Discussion
Gilleard claims that the district court should not have pierced the corporate veil of Mainline to make it responsible for Gilleard's debts.
The law treats a corporation as a separate entity from its stockholders because this form of organization fosters convenience and justice. Benson v. Richardson, 537 N.W.2d 748, 761 (Iowa 1995). However, the law will not respect the corporate form if it is used to "subvert the ends of justice" or shield its shareholders from their personal, legal obligations. Id. Ultimately, the court will pierce a corporate veil to avoid a result fraught with injustice or fraud. Id. The corporate veil may be pierced if the court discovers "such unity of interest and ownership that the individuality of the corporation and its owners have ceased and the facts demonstrate observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice." Benson, 537 N.W.2d at 761 (citing Minich v. Gem State Developers, Inc., 591 P.2d 1078, 1084 (Idaho 1979)).
Courts usually use the alter ego doctrine to hold the shareholders of a corporation responsible for corporate liabilities, but courts have also employed this doctrine to reach corporate assets to satisfy the personal liabilities of the corporate owners. Central Nat'l Bank Trust Co. of Des Moines v. Wagener, 183 N.W.2d 678, 682 (Iowa 1971). When the owners of a corporation use it for purposes not within the objectives of the organization, the court will look beyond the fiction of the separate existence of the corporation and its shareholders to reach the true situation. Central Fibre Prods. Co. v. Lorenz, 246 Iowa 384, 389, 66 N.W.2d 30, 33 (1954).
The "corporate veil may be pierced under exceptional circumstances, for example, where the corporation is a mere shell." Briggs Transp. Co. v. Starr Sale Co., 262 N.W.2d 805, 810 (Iowa 1978). The burden is on the party seeking to pierce the corporate veil to show the exceptional circumstances required. In re Marriage of Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000). Factors which would support such a finding include:
(1) the corporation is undercapitalized, (2) without separate books, (3) its finances are not kept separate from individual finances, individual obligations are paid by the corporation, (4) the corporation is used to promote fraud or illegality, (5) corporate formalities are not followed or (6) the corporation is merely a sham.
Adam v. Mt. Pleasant Bank Trust Co., 355 N.W.2d 868, 872 (Iowa 1984).
Upon careful review of the record, we find no reason to disagree with the trial court's decision to pierce Mainline's corporate veil. Mainline was undercapitalized at its moment of incorporation because it did not receive any of the assets from the settlement arising out of the Nelson and Gilleard joint venture for more than two months after its incorporation. Banks records show the corporation was often unable to meet payroll and other obligations. MPW terminated Mainline's services, and the company effectively ceased to operate in January of 2001.
The Gilleards clearly mingled their personal finances with corporate finances. While Mainline was providing services to MPW, the Gilleards obtained no credit cards in the corporate name. Instead, they used personal credit cards for both personal and business expenses and then made no effort to separate these expenses when Mainline paid the credit card bills. The Gilleards used the corporate checking account to pay for a variety of personal expenses such as utilities, family dental bills, and loans to friends. They also used corporate funds to purchase motor vehicles and pay for accounting and legal services of a personal nature. Nothing in the company's records authorized any of these practices.
Gregory Gilleard did not testify at the trial because he was incarcerated in Oklahoma; however, Judith Gilleard, the company bookkeeper, admitted that "[a]nything that we did that was personal, was taken as a draw" from Mainline. The record makes clear that Judith did whatever her husband told her to do even if she did not agree with or understand his instructions.
Mainline "loaned" money to contractors retained to perform services. The corporation apparently treated all of its workers as independent contractors rather than employees. No payroll deductions of any kind were made for anyone who received remuneration from Mainline. It appears the Gilleards owe state and federal taxing authorities significant, but as yet undetermined, sums for the erroneous classification of employees as subcontractors. In addition, the record indicates that Judith and Gregory paid no income taxes on the amounts they withdrew from Mainline.
Based on this and other evidence, the trial court concluded that Gregory Gilleard incorporated and operated Mainline to avoid paying his personal obligations, including the judgment Parker obtained in Georgia. The court also concluded that Gilleard operated Mainline as a sole proprietorship rather than a corporation, and the corporation was in fact his alter ego. The court concluded that Mainline's "corporate veil must be pierced in this case to achieve a just and honest result." We agree.
We affirm the district court's judgment and its order for disbursement of the funds held by the Muscatine County Clerk of Court.
AFFIRMED.