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holding the plaintiff failed to create a disputed issue of fact regarding capitalization where evidence showed the business had sufficient capital to operate for one year
Summary of this case from Minger Constr., Inc. v. Clark Farms, Ltd.Opinion
No. 5-969 / 05-1008
Filed February 1, 2006
Appeal from the Iowa District Court for Monona County, Richard J. Vipond, Judge.
The plaintiffs appeal from the summary judgment ruling that dismissed their claims against defendant Louis Sands. AFFIRMED.
Colin McCullough, Sac City, for appellant.
Michael Ellwanger, Sioux City, for appellee.
Heard by Zimmer, P.J., and Miller and Hecht, JJ.
Randy Cass, Robert Cass, Shirlee Cass, and Cass Motors, Inc. appeal from the district court summary judgment ruling that dismissed their claims against defendant Louis Sands. We affirm the district court.
I. Background Facts and Proceedings.
The summary judgment record reveals the following facts. Mike Fillmore and Don Rothrauff decided to create a high volume auto dealership. Rothrauff was to act as the dealer, while Fillmore would provide on-site management. Two outside investors were brought in — Louis Sands and Mark Ericsson. Miracle Automotive, Inc. was incorporated in May 1999 in order to effectuate the plan. It appears to be undisputed that Sands, Ericsson, and Rothrauff each received 33.33 shares of Miracle Automotive. During 1999 Sands invested $50,000 in Miracle Automotive, and Ericsson invested $60,000. Rothrauff did not make any capital investments in the corporation, but was expected to use his knowledge and experience in the start up and operation of the business. The corporation held one meeting of the board of directors, to elect the initial officers. Rothrauff was named president, secretary, and treasurer, with no other named officers. Rothrauff, Sands, and Ericsson were each named as directors.
Mike Ericsson's shares were in fact jointly held with Unice Ericsson, but for ease of reference we will refer to the Ericssons as a single person.
At or about the same time Miracle Chrysler, Plymouth, Dodge and Jeep, Inc. (Miracle Chrysler) was formed. Miracle Chrysler was wholly owned by Miracle Automotive. As with Miracle Automotive, Rothrauff was Miracle Chrysler's only officer, and Rothrauff, Sands, and Ericsson were named as directors. Miracle Chrysler was formed to effectuate the purchase of the assets of Cass Motors, Inc., an automobile dealership located in Onawa, Iowa, and for the operation of a new dealership in the same location.
In June 1999 Miracle Chrysler entered into an asset purchase agreement with Cass Motors, Inc. and stockholders Robert and Randy Cass. The agreement provided that Miracle Chrysler would pay $150,000 for equipment and intangibles, plus the value of the parts, new vehicle, and used vehicle inventories. Miracle Chrysler was to pay $50,000 plus the value of the inventories at the time of closing, an additional $25,000 on December 31, 1999, with the remaining $75,000 to be paid in forty-eight equal monthly installments. The agreement included a three-year triple net premises lease agreement, and provided that Miracle Chrysler would enter into a five-year employment contract with Randy Cass.
Miracle Chrysler paid the initial $50,000, the value of the inventories, and the subsequent $25,000 payment, and began making regular monthly payments on its remaining obligations. It also entered into an employment agreement with Cass. The dealership grew rapidly, and this rapid growth resulted in and/or corresponded to accounting, financing, and cash flow problems. In 2000 Sands loaned Miracle Automotive and Miracle Chrysler, at a minimum, an additional $225,000. The company's financial difficulties continued, however, and in March 2001 Miracle Chrysler ceased operation without ever showing a profit.
We note that the district court found Sands' "total additional investment was $625,000." Our number differs from the district court's because we consider only those payments that Sands specified related to the Onawa dealership.
In April 2001 Cass Motors, Inc., and shareholders Randy, Robert, and Shirlee Cass filed suit against Rothrauff, Fillmore, Sands, Ericsson, Miracle Chrysler, and Miracle Automotive. Relevant to this appeal are Counts I, III, IV, and VI. Count I alleged that the purchase agreement was obtained by fraudulent misrepresentations of the defendants. Count VI alleged that both the corporate and individual defendants "conducted themselves in a manner consistent with a conspiracy to defraud the [p]laintiffs." Count III alleged a breach of the asset purchase agreement entered into by Miracle Chrysler, and Count IV alleged breach of the employment contract between Miracle Chrysler and Randy Cass.
The plaintiffs also named as defendants Miracle One Holding Company and Miracle One Real Estate LLC. The former was created to purchase a separate dealership, and has no demonstrable involvement in any act alleged in the petition. The latter appears to be a company that was formed to effectuate an agreement for the purchase of the building and land comprising the dealership premises; it is presumably the "entity to be formed" noted on an offer to purchase real estate signed by Rothrauff. However, the claim based upon an alleged breach of this purchase agreement, made in Count V of the petition, does not involve Sands and is not at issue on appeal. Count II, which stated a claim for negligent misrepresentation, was dismissed upon Sand's motion.
Following an answer denying the claims in the petition, Sands moved for summary judgment dismissing the claims against him. The district court granted the motion and dismissed with prejudice all claims against Sands. The court determined the plaintiffs had presented no evidence tending to show that Sands made any fraudulent misrepresentations or participated in a conspiracy to defraud, nor had the plaintiffs presented evidence sufficient to support piercing the corporate veil and holding Sands liable for any corporate contract breach. The plaintiffs appeal. II. Scope and Standards of Review.
The claims against Ericsson were dismissed after Ericsson moved for summary judgment and the plaintiffs failed to resist his request. A default was entered against Rothrauff and the corporate defendants for failure to comply with court orders. Following an evidentiary hearing on damages, the district court entered substantial judgments against Rothrauff and the corporate defendants. The plaintiffs then filed a notice of appeal. The record does not indicate any disposition of the claims against Fillmore.
We review the district court's summary judgment ruling for the correction of errors at law. Iowa R. App. P. 6.4; Grinnell Mut. Reins. Co. v. Jungling, 654 N.W.2d 530, 535 (Iowa 2002). Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show there is no genuine issue of material fact, and the moving party is entitled to a judgment as a matter of law. Iowa R. Civ. P. 1.981(3); Grinnell Mut. Reins. Co., 654 N.W.2d at 535. However, a party resisting a properly supported summary judgment motion may not simply rely upon the pleadings, but must "set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered." Iowa R. Civ. P. 1.981(5).
III. Counts I and VI: Fraud-Based Claims.
It has long been the law in Iowa that corporate officers and directors can be liable for their torts even when committed in their corporate capacity. See Estate of Countryman v. Farmers Co-op. Ass'n, 679 N.W.2d 598, 603 (Iowa 2004). However, the record in this case is completely void of evidence that Sands performed, participated in, or agreed to any act that could support a claim of fraudulent misrepresentation or conspiracy to commit fraud. See Midwest Home Distrib., Inc. v. Domco Indus. Ltd., 585 N.W.2d 735, 738 (Iowa 1998) (defining fraudulent misrepresentation); Adam v. Mt. Pleasant Bank Trust Co., 387 N.W.2d 771, 773 (Iowa 1986) (defining conspiracy to defraud).
While Sands invested money in the corporations and was a named director of Miracle Automotive and Miracle Chrysler, he did not actively participate in any aspect of corporate operations. His contact with the plaintiffs was limited to a brief, one-time introduction and involved no acts of deceit or misrepresentation. Sands had no involvement in any negotiations or transactions; they were not discussed with him and he was not provided with copies of the relevant agreements.
The plaintiffs assert that fraud can be inferred from the fact that,
"[i]n the short term of less than 18 months, the defendants totally eliminated the good will of the plaintiffs, sold and liquidated all assets of their corporate structures and ceased doing business and defaulted on all of their obligations owed to the plaintiffs."
We must afford the plaintiffs every reasonable inference the record will bear. Smith v. Shagnasty's Inc., 688 N.W.2d 67, 71 (Iowa 2004). However, the only evidence in the summary judgment record regarding the basis for the dealership's failure was offered by the defendants, and indicated that the dealership experienced accounting, financing, and cash flow difficulties that ultimately led to the termination of the business.
Inferring fraud from the dealership's failure under such a record is an impermissible inference based upon no more than speculation and conjecture. See id. Moreover, even if such an inference were reasonable, it would be insufficient to create a disputed issue of material fact as to whether Sands committed fraudulent misrepresentation or conspiracy to defraud, where there is no evidence Sands was aware of or involved in the alleged fraudulent acts. The district court properly dismissed these claims.
IV. Counts III and IV: Breach of Contract.
As previously noted, Sands had no involvement in either the asset purchase agreement or the employment contract; both were executed by another individual on behalf of Miracle Chrysler. A key precept of corporate law is that a corporation is an entity separate and distinct from its owners. Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 809 (Iowa 1978). This ordinarily allows shareholders, such as Sands, to limit personal liability to the extent of their investment. Id. However, the corporate veil will be pierced under exceptional circumstances, such as "where the corporation is a mere shell, serving no legitimate business purpose. . . ." Id. at 810. Courts "will set aside the corporate fiction if there is 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 v. Richardson, 537 N.W.2d 748, 761 (Iowa 1995) (citations omitted).
In determining whether the corporate veil should be pierced, we consider whether the following circumstances exist:
1. The corporation is undercapitalized;
2. The corporation lacks separate books;
3. The corporation's finances are not kept separate from individual finances or individual obligations are paid by the corporation;
4. The corporation is used to promote fraud or illegalities;
5. The corporation formalities are not followed; or
6. The corporation is a mere sham.
Ross v. Playle, 505 N.W.2d 515, 517 (Iowa Ct.App. 1993).
Turning to these factors, we note there is no evidence Miracle Automotive and/or Miracle Chrysler failed to keep separate books. Rather, the record affirmatively indicates that, following the purchase of Cass Motors, Miracle Chrysler continued to maintain Cass Motors's books. Nor is there any evidence that corporate finances were not kept separate from individual finances, or that individual obligations were paid by the corporations.
Moreover, other than unsupported allegations in the petition, the summary judgment record contains no evidence, disputed or otherwise, that either Miracle Automotive or Miracle Chrysler was used to promote fraud or illegality. Again, we must disagree with the plaintiffs' assertion that the dealership's failure gives rise to a reasonable inference of fraud, when the record contains a number of legitimate and undisputed reasons for the failure.
The plaintiffs attempt to pin their claim on the first and fifth circumstances of the veil piercing test. They contend the corporation was capitalized with only $9,000 in the face of obligations exceeding $600,000, which is sufficient evidence of undercapitalization to warrant piercing the corporate veil. They also contend the fact that Miracle Automotive and/or Miracle Chrysler held only one directors' meeting, and Sands's lack of information regarding the corporations, demonstrate a lack of corporate formalities. We cannot credit either argument.
Although the plaintiffs contend the corporations were capitalized with only $9,000, the undisputed facts appearing in the summary judgment record demonstrate that at least $110,000 was invested in Miracle Automotive in 1999, and that these investments were made in connection with the Onawa dealership. Moreover, in asserting that a reasonable inference of undercapitalization was generated by the fact the capital investment was "paltry in light of known obligations exceeding $600,000," the plaintiffs are apparently taking into consideration long-term corporate obligations, such as monthly payments for the purchase of equipment and intangibles, Randy Cass's monthly salary, and a monthly lease payment. However, the pertinent question in considering the adequacy of capitalization is whether the corporation's capital is sufficient for the corporation to carry on its business. Obligations that come due over periods of time extending up to five years into the future are accordingly of limited relevance.
Notably, Miracle Chrysler's capitalization was sufficient to allow it to meet its obligations and carry on its business for over a year. Other than the ultimate failure of the business, the plaintiffs have not pointed to evidence that Miracle Chrysler and Miracle Automotive had inadequate capital to carry on its business. Like the district court, we conclude the plaintiffs have not created a disputed issue of material fact on the question of undercapitalization.
The plaintiffs also attempt to rely on a lack of corporate formalities to justify piercing the corporate veil. Although the absence of more than one directors meeting lends some support to the plaintiffs' position, Sands's ignorance of corporate details does not itself demonstrate a lack of corporate formalities. Rather, the record indicates that corporate formalities were followed in the formation of both Miracle Automotive and Miracle Chrysler, and the record is at worst silent as to the existence of other formalities, such as a corporate minute book or corporate balance sheets. Moreover, "[f]ailure to follow corporate formalities in the ordinary course of business does not necessarily justify piercing the corporate veil," particularly when the lack of corporate formalities is not attributable to the shareholder in question. See Tannahill v. Aunspach, 538 N.W.2d 871, 874 (Iowa Ct.App. 1995) (citing Ross, 505 N.W.2d at 517); see also C. Mac Chambers Co. v. Iowa Tae Kwon Do Acad., 412 N.W.2d 593, 598 (Iowa 1987) ("An abuse of the corporate privilege may justify piercing the corporate veil as to persons who actively participate in the conduct of corporate affairs and have provided inadequate capitalization." (quoting Briggs Transp. Co., 262 N.W.2d at 810)).
We note, but need not and do not reach, Sands's argument that affirmance of the district court's grant of summary judgment would also be proper based on this quoted language from C. Mac Chambers Co. and Briggs, together with the undisputed fact that Sands did not actively participate in the corporate affairs of the corporate entities involved in this case.
Based on the summary judgment record before the district court, the plaintiffs failed to demonstrate a disputed issue of material fact that would justify the exceptional circumstances necessary to pierce the corporate veil. Accordingly, there is no basis to hold Sands liable for any breach of the either the asset purchase agreement or the employment contract. The district properly dismissed these claims.
V. Conclusion.
The record does not contain any disputed issue of material fact that would support a claim against Sands for fraudulent misrepresentation or conspiracy to commit fraud. Nor does it contain any disputed issue of material fact that would justify piercing of the corporate veil of Miracle Chrysler and Miracle Automotive, and holding Sands liable for corporate obligations. The district court properly dismissed the claims against Sands, and its summary judgment ruling is affirmed.