Woodruff Construction, LLC v. K.W. \"Casey\" Clark ( 2018 )

IN THE COURT OF APPEALS OF IOWA
No. 17-1422
Filed August 15, 2018
WOODRUFF CONSTRUCTION, LLC,
Plaintiff-Appellant,
vs.
K.W. "CASEY" CLARK,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Chickasaw County, James C. Bauch,
Judge.
Plaintiff appeals the district court decision against piercing the corporate veil
to enforce a judgment debt. REVERSED AND REMANDED.
Andrew B. Howie of Shindler, Anderson, Goplerud & Weese, PC, West Des
Moines, for appellant.
Ronald C. Martin and Mark H. Rettig of Day Rettig Martin, PC, Cedar
Rapids, for appellee.
Considered by Vogel, P.J., and Doyle and Bower, JJ.
2
BOWER, Judge.
Woodruff Construction, LLC (Woodruff), appeals the district court’s decision
not to pierce the corporate veil of Clark Farms, Ltd. (Clark Farms) and enforce a
judgment debt against K.W. Clark (Clark). We reverse.
I. Background Facts and Proceedings
Clark Farms is an Iowa corporation, with articles of incorporation filed in
1997, then reincorporated in 2001 following an administrative dissolution.1 Clark
Farms is in the business of biosolids management. Clark Farms has also done
business under the name Clark Contract Services but never registered the name
with the Iowa Secretary of State. Clark is the president, secretary, and treasurer
of the corporation. He is also the sole owner and director of the corporation. Clark
owns and operates two other entities, Casey Clark Farms and White Pines Farm,
which are sole proprietorships.
Woodruff is a commercial industrial construction company. In 2009,
Woodruff contracted with the city of Leon, Iowa, to act as general contractor during
the construction of a wastewater treatment facility. In April 2010, Woodruff
contracted with Clark Farms for lagoon sludge removal. Clark Farms began work,
then in 2011 abandoned the project when Clark determined he had underbid the
contract, leaving the work incomplete. In July 2012, Woodruff brought a breach of
contract action against Clark Farms. In September 2014, Woodruff obtained a
1
Prior to being called Clark Farms, Ltd., the company had existed first as Stuart Menlo
Pit and Lagoon and then as a partnership run by Clark and a friend, whom he bought out
in 1996.
3
judgment against Clark Farms for $410,066.83 plus interest.2 The court ruled on
a motion to amend and enlarge filed by Clark on January 15, 2015.
Clark Farms failed to pay the judgment. In June 2015, Woodruff brought
suit to pierce the corporate veil of Clark Farms and recover personally from Clark,
and impose a constructive trust and equitable lien on all assets of Clark Farms. In
a deposition that July, Clark stated Clark Farms still existed but was not bidding
any projects and no longer had any employees aside from the bookkeeper. By the
time of trial, Clark Farms had no employees.
In April 2017, the court held a bench trial. The court issued its ruling in
August, denying Woodruff’s request to pierce the corporate veil and denying the
request to impose a constructive trust and equitable lien on the assets of Clark
Farms. Woodruff appeals only the piercing the corporate veil issue.3
II. Standard of Review
The parties in this case do not agree on the appropriate standard of review.
Woodruff argues piercing the corporate veil is to be reviewed de novo. Clark
identifies the standard of review as for correction of errors at law—that the question
is one at law to be decided by the trier of fact.
Piercing the corporate veil has roots in both courts of equity and law. Int’l
Fin. Servs. Corp. v. Chromas Techs. Can., Inc., 356 F.3d 731, 736 (7th Cir. 2004).
Under our rules of appellate procedure, cases tried in equity will be reviewed de
2
The judgment included the cost to have another contractor finish the work and a
liquidated damages penalty on Woodruff’s contract with Leon. Clark Farms did not receive
any payment for work completed. The court found any misunderstanding as to the
project’s scope or expense were Clark’s fault.
3
As Clark Farms was not party to the suit, the court could not have imposed the
requested relief of the trust and lien.
4
novo, while cases tried at law are reviewed for correction of errors at law. Iowa R.
App. P. 6.907. “Piercing the corporate veil . . . is not itself an action; it is merely a
procedural means of allowing liability on a substantive claim.” Int’l Fin. Servs.
Corp, 356 F.3d at 736. Some sources refer to the doctrine as an equitable one. 1
William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.29
(2017); 6 Matthew G. Doré, Iowa Practice Series, Business Organizations § 39:20
(“[A]lthough piercing the corporate veil is an equitable remedy, the Iowa courts
have held that factual questions related to piercing are for the jury.”). The
imposition of “liability on a shareholder for corporate obligations where there is no
basis for liability at law is necessarily an equitable remedy.” Minger Constr., Inc.
v. Clark Farms, Ltd., No. 14-1404, 2015 WL 7019046, at *6 (Iowa Ct. App. Nov.
12, 2015) (McDonald, J., concurring in part and dissenting in part); see also
Stacey-Rand, Inc. v. J.J. Holman, Inc., 527 N.E.2d 726, 728 (Ind. Ct. App. 1988)
(noting a request to pierce the corporate veil to be equitable by nature).
The issue before us is that of piercing the corporate veil, with no additional
claims at law requiring a different review. The only remedy requested is an
equitable remedy—to shift liability to the owner of the corporation for equitable
reasons. Woodruff filed the claim in equity. Clark made no attempt to move the
case to a court at law. We will treat the case as it was tried below, as a claim in
equity.4
4
Although some recent cases decided by this court were reviewed for correction of errors
at law, these cases were filed and tried at law. See, e.g., Laddie Nachazel Family Living
Trust v. JKLM, Inc., No. 16-2045, 2018 WL 739266, (Iowa Ct. App. Feb. 7, 2018) (“We
review actions tried at law for a correction of errors at law.”); Torstenson v. Birchwood
Estate, L.L.C., No. 16-0118, 2017 WL 1086222, at *3 (Iowa Ct. App. Mar. 22, 2017) (“Both
parties agree this case was filed and tried at law.”); see also Petition at Law, Minger
Constr., Inc. v. Clark Farms, Ltd., No. 03301LACV025440, 2012 WL 10703904, at *1 (Iowa
5
Our review of equitable proceedings is de novo. Iowa R. App. P. 6.907. We
may give weight to the court’s factual findings, but we are not bound by those
findings. Porter v. Harden, 891 N.W.2d 420, 424 (Iowa 2017). “We give respectful
consideration to the district court’s fact findings, especially when witness credibility
is an issue, but we are not bound by those facts.” Sun Valley Iowa Lake Ass’n v.
Anderson, 551 N.W.2d 621, 629 (Iowa 1996); Iowa R. App. P. 6.904(3)(g). We
have a duty to examine the entire record and adjudicate anew the issues properly
presented. Hensch v. Mysak, 902 N.W.2d 822, 824 (Iowa Ct. App. 2017).
III. Analysis
Woodruff seeks to have us pierce the corporate veil on Clark Farms, and
hold Clark personally liable for the judgment against Clark Farms.
The corporate veil is central to the concept of a corporation—separation
between the corporate entity and the stockholders, limiting their personal liability
to the extent of their investment. Ross v. Playle, 505 N.W.2d 515, 517 (Iowa Ct.
App. 1993); see also Iowa Code § 490.622(2) (2016) (“Unless otherwise provided
in the articles of incorporation, a shareholder of a corporation is not personally
liable for the acts or debts of the corporation.”). “But the corporate device cannot
in all cases insulate the owners from personal liability.” Ross v. Playle, 505 N.W.2d
at 517.
Where the corporation is “a mere shell, serving no legitimate business
purpose, and used primarily as an intermediary to perpetuate fraud or promote
Dist. Ct. Dec. 14, 2012) (bringing claims at law against Clark Farms and Clark). Cf.
Algreen v. Gardner, No. 17-0104, 2018 WL 3057438, at *2 (Iowa Ct. App. June 20, 2018)
(reviewing de novo a corporate-veil-piercing case tried in equity).
6
injustice[,]” the corporate veil may be pierced. Briggs Transp. Co. v. Starr Sales
Co., 262 N.W.2d 805, 810 (Iowa 1978). Plaintiffs must prove exceptional
circumstances exist to warrant piercing the corporate veil. C. Mac Chambers Co.
v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593, 597–98 (Iowa 1987).
The burden is on the party seeking to pierce the corporate veil to
show the exceptional circumstances required. Factors that would
support such a finding include (1) the corporation is undercapitalized;
(2) it lacks separate books; (3) its 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 illegality;
(5) corporate formalities are not followed; and (6) the corporation is
a mere sham.
In re Marriage of Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000); see also Cemen
Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 6 (Iowa 2008). The six factor
list is not exhaustive, and we will pierce the corporate veil where necessary for
equitable purposes or to prevent injustice, fraud, or fundamental unfairness. Boyd
v. Boyd & Boyd, Inc., 386 N.W.2d 540, 544 (Iowa Ct. App. 1986).
Woodruff makes several claims but primarily asserts Clark Farms was
undercapitalized. Other factors claimed include failure to follow corporate
formalities, failure to keep separate books, commingled finances with Clark, and
that the corporation is a sham.
A. Undercapitalization
Undercapitalization occurs when the business’s capitalization is insufficient
to support the business considering its nature and the risks. Cmty. Care Ctrs., Inc.
v. Hamilton, 774 N.E.2d 559, 565 (Ind. Ct. App. 2002). The Iowa Supreme Court
has examined why undercapitalization of a corporation would allow the court to
reach the shareholder for corporate debts:
7
If a corporation is organized and carries on business without
substantial capital . . . [so] the corporation is likely to have no
sufficient assets available to meet its debts, it is inequitable that
shareholders should set up such a flimsy organization to escape
personal liability. The attempt to do corporate business without
providing any sufficient basis of financial responsibility to creditors is
an abuse of the separate entity and will be ineffectual to exempt the
shareholders from corporate debts.
Briggs Transp. Co., 262 N.W.2d at 810.
When determining if a corporation is undercapitalized, we first examine the
adequacy of the capital at the time of formation. See Algreen v. Gardner, No. 17-
0104, 2018 WL 3057438, at *5 (Iowa Ct. App. June 20, 2018). We agree with the
district court that Woodruff did not provide sufficient evidence to show
undercapitalization at the time of the corporation’s creation in 2001. The company
had assets and was profitable. Nor did Woodruff provide sufficient evidence to
show Clark Farms was undercapitalized at the time it entered the contract with
Woodruff.
However, the corporation’s initial adequate capitalization is not
determinative of adequate capitalization for the remainder of the corporation’s
existence. A corporation may later become undercapitalized for any number of
reasons. Id. Exceptions permitting examination of capitalization after formation
might include a change in nature of the business, an inadequately-capitalized
expansion, capital transfers to the controlling shareholder which renders the initial
adequacy irrelevant, or losses resulting from fraudulent manipulation of the
corporation. 1 Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.33;
see also Scott v. AZL Res., Inc., 753 P.2d 897, 901 (N.M. 1988). These exceptions
allow courts to disregard the corporate veil where the shareholder purposely
8
underfunds the business, while maintaining protections for a shareholder whose
business has suffered legitimate financial reversals.
No evidence presented indicates a change in the nature of the work done
by Clark Farms, or an inadequately-capitalized expansion. Whether Clark made
capital transfers to himself which rendered the initial adequacy irrelevant is unclear
from the record.
Conflicting testimony was presented that Clark Farms may have loaned
Clark hundreds of thousands of dollars after Woodruff brought its breach-of-
contract suit against Clark Farms in 2012, or that Clark loaned the money to Clark
Farms. While deposition testimony of the corporation’s bookkeeper clearly
indicates the corporation loaned the money to Clark, and Clark himself was not
clear which way the money went, we note the Clark Farms 2012 taxes show a loan
from Clark to Clark Farms for over $500,000.5 It appears from the record that the
loan never entered the Clark Farms account but likely was used to pay off bank
notes taken out by Clark, Casey Clark Farms, or notes otherwise guaranteed by
Clark personally.
Additionally, the bank records show Clark used Clark Farms funds to pay
the interest on all his notes—whether owed by the corporation or not. Clark also
testified in a deposition that he had started a new LLC in Iowa performing the same
work Clark Farms had previously done.
5
If Clark Farms did loan Clark over $500,000 either during the lawsuit or after a judgment
had been made against Clark Farms, without other assets adequate to pay the judgment,
it would be the sort of transfer that would render the initial adequacy irrelevant. A
corporation may not simply transfer its assets to the controlling shareholder to render itself
judgment proof—such actions would merit disregarding the corporate entity.
9
It is unclear whether Clark Farms is undercapitalized based on the records
provided. What is clear to us is that the corporation was not so obviously and
purposely undercapitalized by Clark so as to merit disregarding the corporate entity
on its own. Despite the loan, testimony indicates Clark Farms continues to own
equipment of value Woodruff may request a lien on. We find Woodruff has not
proven Clark Farms to be undercapitalized.
B. Commingled finances
Commingling of funds occurs when the same account is used to deposit
fees and pay for expenses for both personal and business use. See Iowa Supreme
Ct. Bd. of Prof’l Ethics & Conduct v. Sunleaf, 588 N.W.2d 126, 126 (Iowa 1999)
(discussing attorney trust account commingling). Activities such as using
corporate funds for personal purposes, mixing corporate and personal accounts,
and commingling assets are factors weighed under this element. See 1 Fletcher,
Fletcher Cyclopedia of the Law of Corporations § 41.50.
In C. Mac Chambers Co., 412, N.W.2d at 598, the court specifically noted
the facts that individual obligations of the family were routinely paid by the
corporation and that family finances were not separate from corporate accounts as
persuasive in finding the individual personally liable. In Briggs Transportation. Co.,
an owner failed to deposit proceeds into the corporate account and would use
corporate funds to pay personal expenses. 262 N.W.2d at 810 (“Corporate funds
were not segregated.”). “Single entities do not pay their left hand with their right
unless the exchange has little to no actual consequences . . . .” Tyson Fresh
Meats, Inc. v. Lauer Ltd., L.L.C., 918 F. Supp. 2d 835, 860 (N.D. Iowa 2013)
(applying Nebraska law). In another case, the use of the corporation to “juggle
10
assets and liabilities” and payments on personal debts by the corporation without
explanation were among the factors leading the court to conclude the defendant
“show[ed] a consistent pattern disregarding the corporate entity when it suited
[Defendant]’s convenience and use of the corporate entity when such use was
advantageous to him personally.” Cent. Nat’l Bank & Trust Co. v. Wagener, 183
N.W.2d 678, 682 (Iowa 1971).
Some elements the Eighth Circuit has examined as to commingling of
assets is the source of funds used to purchase equipment for other corporate
entities, lack of enforcement of promissory notes among the entities and individual,
advancing funds without accounting, failure to follow normal legal formalities, and
disposal of corporate assets without fair consideration. N.L.R.B. v. Bolivar-Tees,
Inc., 551 F.3d 722, 729–30 (8th Cir. 2008).
Testimony from both Clark and his bookkeeper, Karen Halverson, indicate
the bank account for Clark Farms was used by Clark for personal purposes and
his sole proprietorships. Clark testified, and the corporate ledgers and bank
statements produced show, money and revenues from Clark Farms, Casey Clark
Farms, and White Pines Farms all came into an account under Clark Farms. Bills
for each entity were paid out of the Clark Farms bank account, using Clark Farms
checks. The funds and expenses were identified and allocated to each entity per
Clark’s instructions to his bookkeeper, with book transfers via occasional
reconciliation entries. Likewise, the ledger for Casey Clark Farms shows deposits
for Clark Farms were deposited into Casey Clark Farms’s account, expenses paid,
and money transferred on paper. The bills paid and the notes held for all the
entities were tracked together. At any given time, the Clark Farms bank account
11
and the Casey Clark Farms account each held assets for Clark Farms, Casey Clark
Farms, White Pines Farms, and Clark personally, with only an internal
bookkeeping transfer done periodically.
The balance sheets for Clark Farms included a number of notes owed to
banks. Clark testified that some of those loans were to him personally, not to Clark
Farms, and that Clark Farms never had a loan from one of the banks that was
recorded in the Clark Farms books. However, the ledgers and balance sheets
show Clark Farms paid the interest on the loans, regardless of whether they were
the corporation’s loans or not.
Halverson testified in deposition that Clark would often write a check on the
Clark Farms account to pay for things for Casey Clark Farms or for himself
personally, and the bookkeeper would then transfer the amount to an account
receivable under Clark’s name in the Clark Farms books. She explained, “It’s just
the way he did his business.” Halverson would determine which entity should pay
which invoice based on the type of expense. Clark would also deposit moneys
owed to Casey Clark Farms directly into the Clark Farms account to go toward a
receivable from personal funds. Halverson had to maintain a special file to track
the transfers between Clark’s personal and corporate accounts. According to
Halverson, at the end of 2013, Clark owed Clark Farms $665,422. She testified
that a signed promissory note exists in corporation records regarding Clark paying
back any expenses paid for him or that would be in the receivable account, but
that no dollar amount was specified. She also clearly testified that Clark owed
money to Clark Farms, that Clark Farms did not owe Clark.
12
In deposition, Clark agreed he owed money to Clark Farms and he would
repay “at some point in time.” Then in trial, Clark testified the account receivable
was money he personally owed the bank, not Clark Farms, then later testified it
was money Clark Farms owed him.
Clark testified that he was required to personally sign some corporate loans
as guarantor. For these loans, he sold Casey Clark Farms assets, including land
and cattle, and applied the income to Clark Farms and Clark debts. These
transactions were recorded in the corporation’s books as loans to the corporation
by Clark, despite Clark’s personal liability on the debts. From the balance sheet,
it appears several large bank notes were paid off around the time of Clark’s “loan”
to Clark Farms—but some of the debt paid off was held by a bank Clark testified
never held Clark Farms notes. Moreover, the notes’ payment was not recorded as
a loan from Clark in the balance sheet, but rather as a negative account receivable.
While we concluded above that Clark Farms owed the money to Clark
based on the tax returns, we note Clark Farms’ bookkeeper was uncertain which
direction money was flowing between Clark and Clark Farms. Even Clark did not
appear to know whether he owed money or was owed money, changing his story
from his deposition through his trial testimony. Moreover, Clark clearly testified at
trial he would not make any effort to pay back any debt he did owe Clark Farms
“Because the corporation is owned by me.” This indicates he did not see the
corporation as a separate entity from himself and did not view personal debts to
the corporation as real.
Separate finances are not merely the existence of an account with the
corporation’s name on it. Although the moneys may have been tracked, Clark
13
clearly used the accounts for Clark Farms and Casey Clark Farms
interchangeably, with no regard for which company should be providing money for
expenses or benefitting from deposits. Clark Farms assets were kept under the
name Clark Farms, but also under Casey Clark Farms. Not all assets or debts
kept under the name Clark Farms were assets or liabilities of Clark Farms. We
find Clark Farms finances were commingled with Clark’s personal and sole
proprietorship finances.
C. Separate books
Despite the commingling of assets and funds, the corporate books may still
be maintained separately. We examine evidence including the records of capital
transfers in and out of the company beyond a log book entry, promissory notes,
interest charged, recording personal purchases or sales on corporate books,
personal use of corporate assets, and failure to document corporate activities. See
Hystro Prods., Inc. v. MNP Corp., 18 F.3d 1384, 1389 (7th Cir. 1994) (applying
Illinois law); United States v. Walton, 909 F.2d 915, 928 (6th Cir. 1990). Cf. In re
Pohle, Bankr. No. 02-01327-rjh7, 2011 WL 1085787, at *3–4 (Bankr. S.D. Iowa
Mar. 21, 2011) (examining closely whether records were adequate to trace and
separate personal from corporate transactions in a bankruptcy discharge
determination).
Little specific evidence was presented regarding separate books kept for
Clark Farms. However, the testimony tended to indicate they were not separate.
For example, Clark testified at trial some of the notes payable appearing on his
Clark Farms corporate balance sheet were for his farming operation (Casey Clark
Farms) and signed personally by him; these loans were not associated with the
14
corporation, were not corporate notes payable. Numerous transactions for Casey
Clark Farms were tracked in the Clark Farms bookkeeping records. Clark testified
the books and balance statements for Clark Farms contained corporate debts and
personal notes because he was responsible for all of them. The records kept used
in the filing of taxes for the corporation included all the loans listed on the balance
sheets.
Both Clark and Halverson testified regarding the effort to identify and track
the revenues and expenses relating to Clark Farms in the commingled accounts.
However, nothing indicates any effort was made to track the loans and
corresponding interest payments to personal or corporate loans, with Clark
admitting both were tracked on the Clark Farms books. No specific records were
kept tracking loans between Clark Farms and Clark and his sole proprietorships.
It does not appear any promissory note was executed for loans from Clark to Clark
Farms. According to Halverson, Clark executed a single, ongoing promissory note
with no specific loan amount or date to cover all loans to him from Clark Farms.
No note exists for loans from Clark to Clark Farms. Halverson entered periodic
reconciliation entries into the Clark Farms books without further explanation to
transfer moneys to Clark’s other entities.
Based on the evidence presented, we find the Clark Farms books
inadequately distinguished, tracked, and recorded Clark Farms corporate activities
as a separate and distinct entity from Clark.
D. Corporate formalities not followed
Clark Farms was incorporated as a domestic profit corporation under Iowa
Code chapter 490 in 1997. Shares were issued, officers and directors appointed,
15
and bylaws adopted. Unsigned letters represented minutes for annual meetings
for 1997 through 2000, though two were dated in 1998, and two in 2000. The 1997
corporation was administratively dissolved by the Secretary of State as of
August 3, 1998, due to failure to file a biennial report. Clark did not apply to
reinstate that corporation, but instead refiled for incorporation.6 While it was
dissolved from 1998 to 2001, Clark Farms continued operations as if it were active.
The district court held the 2001 incorporation of Clark Farms was a
reinstatement of the 1997 corporation. The court found determinative the new
Articles of Incorporation statement that Clark Farms desired to reinstate the
corporation. Because the 2001 corporation related back to the 1997 corporation,
the corporate formalities performed for the 1997 corporation, including the issuing
of shares, appointment of officers and directors, and the adoption of bylaws,
applied to the 2001 corporation.
We find a new Clark Farms was incorporated in 2001. The reinstatement
of a corporation following an administrative dissolution is a statutorily-created
application process. Iowa Code § 490.1422(1). There is no statutory process to
reincorporate an administratively dissolved corporation. See Iowa Code
§§ 490.1420–.1423 (governing administrative dissolutions); see also L.A.D., Inc.
v. R & S Xpress, Ltd, No. 4:12-cv-00164-RAW, 2014 WL 12601081, at *8 n.10
(S.D. Iowa Feb. 7, 2014) (“Under the Iowa Business Corporation Act an
administratively dissolved corporation may apply to be ‘reinstated’ but there is no
such thing as a ‘reincorporation’ of a dissolved corporation.”).
6
Around the same time, Clark Farms also changed its tax status from a C corporation to
an S corporation.
16
Even if refiled articles of incorporation could be considered an application
for reinstatement, while Article XII of the 2001 articles of incorporation states an
intention to reinstate the prior Clark Farms, the statutory information requirements
for the application were not met. See Iowa Code § 490.1422(1). Moreover, even
if considered an application to reinstate the corporation, the filing was untimely, as
in 2001 a corporation had to apply for reinstatement within two years of the
effective date of the dissolution. See Iowa Code § 490.1422(1) (2001). Clark filed
the new articles of incorporation more than three years after the dissolution, on
August 27, 2001, creating a new corporation carrying the same name as his prior
corporation.
By statute, the filing of the articles of incorporation in 2001 “is conclusive
proof that the incorporators satisfied all conditions precedent to incorporation.”
Iowa Code § 490.203(2) (2016). The articles names Clark as officer and director,
appoints Clark as registered agent, and specifies the agent’s address.
Subsequent proof of lack of corporate formalities may include no corporate bylaws,
failure to maintain registered office and agent, failure to hold an annual meeting,
no board of directors or officer, failure to issue shares, lack of minute book or
balance sheets, failure to file tax returns, and similar corporate governance
actions. See Minger Constr., Inc., 2015 WL 7019046, at *11 (McDonald, J.,
concurring in part and dissenting in part); Cass v. Sands, No. 05-1008, 2006 WL
229033, at *4 (Iowa Ct. App. Feb. 1, 2006) (regarding minute book, balance
sheets).
No bylaws, corporate minutes book, or shareholder ledger were produced
for the 2001 Clark Farms. Shares of the 1997 corporation were issued at the initial
17
meeting in 1997, and Clark appears to have considered those shares as shares of
the reincorporated company in 2001. Similarly, bylaws were adopted in 1997, but
not officially readopted by the 2001 corporation. No transfer of assets occurred
between the two corporations. Clark testified no documentation of shareholder
meetings following 2001 existed—at most interoffice correspondence and
meetings with the bank, which Clark considered to be corporate meetings but
which did not need written documentation.
The Secretary of State administratively dissolved the new Clark Farms three
times for failure to submit the biennial report—in 2006, 2012, and 2014. Clark
Farms used the statutory procedure to apply for reinstatement each time (in 2006,
2013, and 2016), which was granted. Woodruff uses these dissolutions to allege
corporate formalities were not followed. However, the reinstatement statute
specifically provides that a reinstatement takes effect as of the date of the
dissolution “as if the administrative dissolution had never occurred.” Iowa Code
§ 490.1422(3).
Following the 2001 incorporation, Clark appears to have treated Clark
Farms in substantially the same way as his sole proprietorships. The only
corporate formalities observed following reincorporation appear to be the filing of
the biennial report, which was only done sporadically (but included a listing of the
current registered agent and officers and directors), and the filing of taxes. Failure
to follow corporate formalities, though one of the recognized factors, “does not
necessarily justify piercing the corporate veil.” Tannahill v. Aunspach, 538 N.W.2d
871, 874–75 (Iowa Ct. App. 1995). While the lack of corporate formalities in this
18
instance is not sufficient on its own to disregard the corporate entity, it lends weight
to other factors supporting Woodruff’s request.
E. Mere sham
Woodruff claims Clark Farms was a sham corporation but treats the factor
as a summary of claims regarding corporate formalities, separate books, and
separate finances. While the other factors may indicate a sham corporation, a
corporation can be found to be a sham even if the other factors are not met. A
sham is “a false pretense[;] . . . something that is not what it seems; a counterfeit.”
Sham, Black’s Law Dictionary (10th ed. 2014). A corporation is a sham when it
has no business or corporate purpose. See Nelson v. Adams USA, Inc., 529 U.S.
460, 471 (2000) (examining when to pierce the corporate veil on a one-person
corporation) (citing Gregory v. Helvering, 293 U.S. 465, 469 (1935)). A sham
corporation must be an “instrumentality of, or conduit for” the owner to justify
piercing the corporate veil. Team Cent., Inc. v. Teamco, Inc., 271 N.W.2d 914,
923 (Iowa 1978); see also In re C.G.C. Stores, Inc., No. 87-516-DJ, 1988 WL
1568187 (Bankr. S.D. Iowa, Aug. 30, 1988) (noting businesses were not mere
shams, but “created with the intent of conducting legitimate business[ ]”). The
district court correctly examined whether Clark Farms was a mere instrumentality
of or conduit for Clark. The evidence clearly shows Clark Farms was a real, if
failing, business. We agree with the district court the corporate entity was not a
sham.
Clark Farms successfully conducted business for a number of years,
employing workers and completing contracts. That business began to struggle
prior to 2010, and that struggle is not sufficient to pierce the corporate veil.
19
However, Clark egregiously used the corporate bank account for non-corporate
purposes, writing as many checks for his other businesses and for himself as for
Clark Farms using the corporate account. The only corporate formalities that
appear to have been followed after the 2001 incorporation are the filing of taxes,
occasional biennial reports, and the officers named on those filings. Clark’s and
Halverson’s testimony demonstrate the corporate books were not entirely separate
from Clark’s other finances. Clark’s testimony and actions indicate he did not
consider the business or its finances to be a separate entity from himself and his
other businesses. For these reasons, we determine the corporate veil should be
pierced. Therefore, we reverse the district court.
REVERSED AND REMANDED.