Landowner sued contractor corporation and its principal for intentional trespass, conversion, and unjust enrichment where employees took material from owner’s land and used it on a road project without Owner’s authorization. After numerous trials and appeals, it was held that there was no basis for liability against the individual principal instead of just the corporation. The corporation was not undercapitalized either at time of formation or during its work; it observed corporate formalities and maintained corporate records; the principal didn’t siphon funds from the corporation; and there was no element of injustice, inequity, or fundamental unfairness that would permit piercing the corporate veil. The corporation was not the alter ego of the individual. Taszarek v. Lakeview Excavating, Inc., 968 N.W. 2d 146 (North Dakota 2021).
The plaintiffs argued that the corporation was the alter ego of the individual, and that this allowed them to pierce the corporate veil.
“[F]actors considered significant in determining whether or not to disregard the corporate entity include: insufficient capitalization for the purposes of the corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation at the time of the transaction in question, siphoning of funds by the dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and the existence of the corporation as merely a facade for individual dealings.”
Under the “alter ego” approach to piercing the corporate veil, the court explained that “there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist, and there must be an inequitable result if the acts in question are treated as those of the corporation alone.”
The plaintiffs argued that the district court erred in finding Lakeview Excavating was sufficiently capitalized for the purposes of the corporate undertaking. “In tort cases, particular significance is placed on whether a corporation is undercapitalized, which involves an added public policy consideration of whether individuals may transfer a risk of loss to the public in the name of a corporation that is marginally financed.” This capitalization requirement is an ongoing concern. The Court here recognized “there is a continuing obligation to provide adequate risk capital from incorporation throughout the corporation’s existence.”
In reviewing the financial condition of the corporation in this case, the trial court attributed its financial downturn to the problems the corporation had when working on the FEMA-sponsored German Township project, which involved raising roads because of ongoing flooding. The court found FEMA’s incomplete specifications caused Lakeview Excavating to purchase additional materials and provide additional labor and equipment. “The district court determined the problems with the German Township project led to Lakeview Excavating’s financial downturn, and thus it was the company’s operating losses, not insufficient capitalization, that caused it to become insolvent.”
Ultimately, the court found Lakeview Excavating was not undercapitalized at the time of formation and was adequately capitalized for its stated corporate undertaking as an excavation contractor, noting its profits from 2010 to 2012.
“Where, as is the case here, a corporation is solvent when it commits a tort and insolvent before judgment is entered against it on the tort, the district court properly focuses on whether siphoning or other improper actions of the individuals controlling the corporation led to insolvency.”
Ways the Corporation Satisfied Corporate Formalities
“The district court found Lakeview Excavating filed articles of incorporation with the North Dakota Secretary of State, held an organizational meeting, installed officers and directors, issued shares of stock, established a principal place of business, held a shareholders’ meeting in which the company elected to be taxed as a Subchapter S corporation, filed annual reports with the Secretary of State from 2011-2015, and held annual meetings from 2011-2015 during which it elected directors and ratified actions taken by the board of directors since the previous annual meeting. The court found Lakeview Excavating kept corporate minutes, documented resignations, and filed separate tax returns from other companies that Welken owned in whole or in part. The court found Lakeview Excavating documented loans from Welken’s father and Lakeview Trucking to Lakeview Excavating, and loans from Lakeview Excavating to Lakeview Aviation, Inc., which was a company owned by Welken and his wife.”
It must be noted that the plaintiffs also asserted that the corporation “shared” equipment, employees, jobs, timesheets, credit cards, offices, and a line of credit with Lakeview Trucking. But they cited no authority concluding a corporation fails to observe corporate formalities because it “shared” resources with another legal entity. Further, the record according to the court, “shows that exchanged equipment was documented through loan agreements. Although some employees worked for both Lakeview Excavating and Lakeview Trucking, the record supports a finding they performed work for only one company at any given time.”
The plaintiffs argued that certain loans and distributions of income showed the alter ego arrangement. Specifically, they argued that in 2013 Lakeview Excavating loaned $20,000 to Lakeview Aviation, and Welken took a distribution of $18,117 and received “officer wages” of $35,513.” But they cited no authority holding that a documented loan or relatively modest shareholder distributions and wages are akin to siphoning the company’s funds, nor do they identify in the record any evidence showing Lakeview Excavating or Welken took these actions in response to being sued by the [Plaintiffs].
Finally, the plaintiffs argued that there is an element of injustice, inequity, or fundamental unfairness because Welken would escape personal liability for doing business as a corporate entity. The court in response to that argument commented, “We have recognized organizing a corporation to avoid personal liability is a legitimate goal and is one of the primary advantages of doing business in the corporate form.”
For the foregoing reasons, the appellate court concluded that the district court was “not clearly erroneous” in its finding that the [Plaintiffs] had not established an essential element of injustice, inequity, or fundamental unfairness to permit piercing the corporate veil.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 3 (March 2022).
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