Guava LLC, Judgment Debtors, Paul Hansmeier v. Spencer Merkel, Qwest Communications Corporation, Judgment Creditors, John Doe 173.19.225.244 ( 2015 )

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2014).
STATE OF MINNESOTA
IN COURT OF APPEALS
A15-0254
Guava LLC, et al.,
Judgment Debtors,
Paul Hansmeier,
Appellant,
vs.
Spencer Merkel,
Defendant,
Qwest Communications Corporation, et al.,
Judgment Creditors,
John Doe 173.19.225.244, et al.,
Respondents.
Filed August 17, 2015
Affirmed
Cleary, Chief Judge
Hennepin County District Court
File No. 27-CV-12-20976
Paul Hansmeier, Minneapolis, Minnesota (attorney pro se)
Edward Sheu, Ashleigh Leitch, Best & Flanagan LLP, Minneapolis, Minnesota (for
respondents Best & Flanagan LLP and John Doe 173.19.225.244)
Considered and decided by Rodenberg, Presiding Judge; Cleary, Chief Judge;
and Klaphake, Judge.

Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant
to Minn. Const. art. VI, § 10.
UNPUBLISHED OPINION
CLEARY, Chief Judge
Appellant Paul Hansmeier challenges the district court’s decision to pierce the
corporate veil of Alpha Law Firm, LLC (Alpha), and to add Hansmeier as an
additional judgment debtor liable for Alpha’s judgment debt. Because the district
court had the authority to enforce its judgment against Alpha and did not err in
piercing the corporate veil, we affirm.
FACTS
In October 2012, Guava, LLC filed a complaint against respondent Spencer
Merkel, alleging violations of Minn. Stat. § 626A.02 (2014) and a civil conspiracy.
The complaint described Guava as “a limited liability company that owns and
operates protected computer systems, including computer systems accessible
throughout Minnesota.” Michael K. Dugas, signing for Alpha, appeared on behalf of
Guava. Alpha was a limited liability company (LLC) in which Hansmeier was the
only member. Hansmeier noticed his appearance as “of counsel” for Guava. Merkel
also received communications from Prenda Law, Inc., another of Hansmeier’s law
firms. No representative of Guava ever appeared before the district court, even
despite a later court order to do so, and this court’s previous decision noted that it
was “unclear . . . whether Guava even exists.” Guava LLC v. Merkel, No. A13-2064,
2014 WL 3800492, at *1 (Minn. App. Aug. 4, 2014). Dugas and Hansmeier
arranged for Merkel’s counsel to represent Merkel in Minnesota on a pro bono basis.
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Soon after filing the complaint, Guava moved for an order permitting it to
subpoena more than 300 internet service providers (ISPs), for disclosure of customer
names and addresses. The district court denied the motion, finding that there was no
indication that the information sought was relevant and material to the action and that
the request was broad and excessive. Guava filed a renewed subpoena motion on 17
ISPs, which the court granted on the condition that the recipients would have the
opportunity to move to quash the subpoenas.
In December 2012, several of the ISPs and their customers (John Does)
moved to quash Guava’s subpoenas, for a protective order, and for dismissal of
Guava’s action. The district court held a hearing on the matter on January 25, 2013.
Dugas, John Steele, and Hansmeier appeared at the hearing on behalf of Guava.
Before the district court had an opportunity to rule on the John Does’ motions, Guava
and Merkel filed a stipulation in which Guava agreed to dismiss all claims with
prejudice. The district court later concluded that the lawsuit was merely an attempt
to “harass and burden Non-Parties through obtaining IP addresses to pursue possible
settlement rather than proceed with potentially embarrassing litigation regarding
downloading pornographic movies.”
On March 6, 2013, the district court ordered Guava and Dugas to show cause
why the court should not award attorney fees and costs to the non-party John Does.
On August 7, 2013, the district court issued an order concluding that “Guava LLC
and its counsel Michael K. Dugas of Alpha Law Firm LLC acted in bad faith and
without a basis in law and fact to initiate this action.” As a sanction, the court
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awarded attorney fees to the John Does and ISPs, for which Guava, Dugas, and
Alpha were jointly and severally liable. The sanction award was reduced to
judgment on September 20, 2013.
While the proceedings above were ongoing, Hansmeier took steps to defund
and dissolve Alpha. Less than two weeks after the January 25, 2013 hearing on the
motions to quash, Hansmeier transferred $65,970 from Alpha to Class Action Justice
Institute, LLC, of which Hansmeier is the sole member. One week after the order to
show cause, Hansmeier transferred $80,000 from Alpha to his personal account.
Two weeks after the order granting sanctions against Alpha, Hansmeier dissolved
Alpha. In the articles of termination, Hansmeier certified that Alpha did not have any
known debts, liabilities, or pending proceedings against it. Hansmeier later claimed
he did not have notice of the orders to show cause or the sanctions award against
Alpha.
Guava, Dugas, and Alpha appealed from the attorney-fee order on October 30,
2013. They also filed a motion to stay judgment pending the appeal, and requested to
deposit the judgment amount by cashier’s check with this court as collateral in lieu of
a supersedeas bond. This court denied the motion and ordered the judgment debtors
to comply with post-judgment discovery.
On January 8, 2014, John Doe 173 moved to add Hansmeier as a judgment
debtor, alleging that Hansmeier dissolved Alpha to avoid paying the ordered
sanctions. John Doe 173 also sought sanctions against Alpha for failure to comply
with post-judgment discovery. The district court granted discovery sanctions but
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declined to add Hansmeier as a judgment debtor, noting that to do so would alter the
factual findings in the order, which were matters that were intertwined with the then-
pending appeal.
At the request of one of the judgment creditors, the district court ordered an
examination of debtors. Two examinations took place, on June 16 and July 2, 2014,
at which Dugas appeared on behalf of himself and Hansmeier appeared on behalf of
Alpha. Hansmeier and Dugas testified at the debtors’ examinations that Dugas was
never employed by Alpha and merely signed in the Alpha signature block as a matter
of convenience for mailing purposes. For the first time at the debtors’ examinations,
Hansmeier testified that he did not “believe that Alpha Law Firm represented
Guava.” Hansmeier also testified as to Alpha’s finances and affairs.
On August 4, 2014, this court issued a decision substantially affirming the
district court’s judgment. Guava, 2014 WL 3800492. Afterward, a judgment
creditor moved to add Hansmeier as a judgment debtor. The district court granted
the motion, citing the district court’s jurisdiction to enforce a judgment during and
after appeals, and highlighting the new evidence that came to light in the debtors’
examinations showing that (1) Hansmeier had intentionally defunded Alpha and had
disregarded the corporate form, (2) Hansmeier’s testimony to the court had been
inconsistent, and (3) Hansmeier had failed to provide responsive information
throughout the proceedings. The district court concluded that it was proper to pierce
the corporate veil and hold Hansmeier jointly and severally liable, along with Guava,
Dugas, and Alpha, for the sanctions. Hansmeier appeals.
5
DECISION
I.
Hansmeier argues that the district court did not have subject-matter
jurisdiction to add him as a judgment debtor. Subject-matter jurisdiction includes
“not only authority to hear and determine a particular class of actions, but authority
to hear and determine the particular questions the court assumes to decide.”
Cochrane v. Tudor Oaks Condo. Project, 529 N.W.2d 429, 432 (Minn. App. 1995)
(quotation omitted). “Whether subject-matter jurisdiction exists presents a question
of law, which we review de novo.” Anderson v. Cnty. of Lyon, 784 N.W.2d 77, 80
(Minn. App. 2010) (citing Tischer v. Hous. & Redev. Auth., 693 N.W.2d 426, 428
(Minn. 2005)), review denied (Minn. Aug. 24, 2010).
A. Finality of judgment
Hansmeier argues that the district court lacked subject-matter jurisdiction to
amend the judgment because it was final. Generally, the district court’s jurisdiction
to amend a judgment is terminated once a judgment becomes final. N. Star Int’l
Trucks, Inc. v. Navistar, Inc., 837 N.W.2d 320, 323 (Minn. App. 2013). Finality
occurs when appellate review is exhausted or the time to appeal a case expires. See
Marzitelli v. City of Little Canada, 582 N.W.2d 904, 906 (Minn. 1998) (“If the time
for appeal from an order expires without appeal having been taken, then the order
becomes final and the district court’s jurisdiction to amend the order is terminated.”);
City of Waite Park v. Minn. Office of Admin. Hearings, 758 N.W.2d 347, 354 (Minn.
6
App. 2008) (holding that any claims remaining to be decided are “extinguished by
operation of the appellate court’s decision.”).
Even after a decision is final, however, a district court retains jurisdiction to
take actions to enforce a judgment. Johns v. Harborage I, Ltd., 664 N.W.2d 291, 296
(Minn. 2003). Enforcement jurisdiction over final judgments is justified because
“enforcement is independent of the underlying appellate decision and would not
modify the underlying appellate decision in any way.” Id. at 296 (quotation omitted).
Contrary to Hansmeier’s assertions that all amendments are foreclosed after a
judgment is final, certain amendments are an appropriate use of the court’s
enforcement jurisdiction.
Enforcement jurisdiction allows a court to add a judgment debtor to an action
to determine whether equity requires holding the new party liable for the judgment
debt. Id. at 296. In Johns, the judgment creditor was unable to collect against
judgment debtor Harborage, because Harborage’s assets had been liquidated and
transferred to an entity named Jillians. Id. at 293. The supreme court upheld the
amendment of the complaint to add Jillians as a judgment debtor, because collection
of the judgment from a successor party for equitable reasons was an appropriate
enforcement action on a final judgment. Id. at 299-300.
The addition of Hansmeier as a judgment debtor is analogous to the
enforcement action taken in Johns. Here, as in Johns, the judgment is uncollectible
against the judgment debtor because the judgment debtor has been defunded and
dissolved. Also, as in Johns, the judgment creditor seeks to collect the judgment
7
from a related third party for equitable reasons. Therefore, amendment of the
judgment to add Hansmeier as a judgment debtor appears to be an appropriate
exercise of the court’s enforcement jurisdiction.
The cases that Hansmeier relies upon regarding the finality of judgment do not
bear upon the question of whether a court may add a judgment debtor to enforce a
judgment. Marzitelli “stands only for the proposition that a district court does not
retain jurisdiction to amend an order while an appeal from that order is pending.”
Johns, 664 N.W.2d at 296. Mattson v. Underwriters at Lloyds of London, 414
N.W.2d 717 (Minn. 1987), “merely states that a district court has no jurisdiction to
reopen a judgment to allow a party to argue alternative grounds to challenge it after
affirmance on appeal.” Id. at 296. City of Waite Park held that a party could not
move for additional relief after a matter had been “finally concluded” on appeal. 758
N.W.2d at 351. Here, John Doe did not seek to argue alternative grounds for relief or
move for additional relief after the judgment was affirmed on appeal. Rather, John
Doe sought to enforce the judgment against Alpha by adding Hansmeier as a
judgment debtor, liable for payment of Alpha’s judgment debt. We conclude that the
district court’s enforcement jurisdiction permitted the district court to add Hansmeier
as a judgment debtor.
B. Whether veil piercing must be brought in a new complaint
Second, Hansmeier argues that the district court did not have subject-matter
jurisdiction to consider whether to pierce Alpha’s corporate veil because veil piercing
8
is not part of a district court’s post-judgment enforcement jurisdiction and must be
brought in a separate action and complaint.
Minnesota law grants the district court broad discretion to grant relief to
creditors of LLCs. Minn. Stat. § 322B.833, subd. 1(3)(i) (2014) authorizes the court
to grant “any equitable relief it considers just and reasonable in the circumstances” in
an action by a creditor of an LLC when the creditor’s claim has been reduced to
judgment and execution has been returned unsatisfied. Veil piercing is an equitable
remedy. Equity Trust Co. Custodian ex rel. Eisenmenger IRA v. Cole, 766 N.W.2d
334, 339 (Minn. App. 2009).
As an equitable remedy, veil piercing plainly falls within the category of relief
authorized in Minn. Stat. § 322B.833, subd. 1(3)(i). The statutory use of the word
“any” further underscores the district court’s already-broad discretion in fashioning
equitable remedies. See Gabler v. Fedoruk, 756 N.W.2d 725, 730 (Minn. 2008)
(stating that courts generally have broad discretion in applying equitable remedies).
Furthermore, the language of Minn. Stat. § 322B.833, subd. 1(3)(i) specifically
authorizes the application of remedies “in an action by a creditor” after a claim has
been reduced to judgment and the execution was returned unsatisfied. Because the
statute refers to only one action, it authorizes the district court to apply the equitable
remedy in the same action in which the creditor’s claim was reduced to judgment
against an LLC. Therefore, Minn. Stat. § 322B.833, subd. 1(3)(i) authorizes the
district court to hear and determine whether to pierce the corporate veil in post-
judgment proceedings against an LLC.
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Although no published Minnesota case specifically holds that a district court
may pierce a corporate veil to reach a non-party in post-judgment proceedings, Johns
clarifies that a non-party may be added as a potential judgment debtor in post-
judgment proceedings for equitable reasons. See Johns, 664 N.W.2d at 295-96
(allowing post-judgment amendment of the pleadings to add a party and to determine
whether that party could be held liable as a successor to the judgment debtor).
In support of their respective positions, the parties cite to several cases from
foreign jurisdictions. However, these cases all interpret specific state laws or
precedent that define or restrict post-judgment proceedings. See Green v. Ziegelman,
767 N.W.2d 660, 667-68 (Mich. Ct. App. 2009) (interpreting Mich. Comp. Laws
§ 600.6104 as requiring veil piercing to be considered in a new action); Miner v.
Fashion Enter., 794 N.E.2d 902, 911-12 (Ill. App. Ct. 2003) (holding that post-
judgment proceedings only allow consideration of whether shareholders are holding
assets of the judgment-debtor corporation); Bollore S.A. v. Imp. Warehouse, Inc., 448
F.3d 317, 323 (5th Cir. 2006) (holding that a court could not pierce a corporate veil
in a proceeding pursuant to the Texas Turnover Statute; C-Staff, Inc. v. Liberty Mut.
Ins. Co., 571 S.E.2d 383, 384-85 (Ga. 2002) (holding that Ga. Code Ann. § 9-11-69does not vest district court with authority to hold non-parties liable through veil
piercing); cf. Farenbaugh & Son v. Belmont Construction, Inc., 240 Cal. Rptr. 78, 80
(Cal. Ct. App. 1987) (holding that section 187 of the California Code of Civil
Procedure grants district courts broad general enforcement power, which includes
veil piercing in post-judgment proceedings). The interpretation of these laws is
10
inapplicable to our determination of whether Minnesota law permits the district court
to take the action it did in this case.
Hansmeier also argues that, without bringing a separate action to pierce the
corporate veil, an individual would not have adequate procedural protections and due
process. However, the record in this case undermines rather than supports this
argument. Here, the record supports the district court’s finding that Hansmeier was
“afforded a full opportunity to present a defense to his personal liability.” Hansmeier
submitted thorough reply briefs in response to both motions to add him as a judgment
creditor. Hansmeier represented himself and Alpha very actively throughout post-
judgment discovery, including filing an opposition to respondents’ request for an
examination of debtors and submitting multiple letters and motions to the court on
Alpha’s behalf. In granting the debtors’ examinations, the district court found that
Hansmeier had adequate notice and time to prepare for the examinations. Hansmeier
appeared on behalf of Alpha at the two examinations, during which the court and
respondents’ attorneys gave Hansmeier multiple opportunities to explain and justify
how Alpha was funded and operated. The district court held a hearing, at which
Hansmeier appeared, on each of the motions to add Hansmeier as a judgment debtor.
As the district court concluded, Hansmeier was afforded due process and an adequate
opportunity to present a defense.
C. Other jurisdictional arguments
Hansmeier argues that the district court did not have jurisdiction to grant relief
to parties who did not file or join motions seeking to add him as a judgment debtor,
11
because there was no justiciable controversy as to those third parties. Hansmeier also
states that part of the judgment had been satisfied before he was added as a judgment
debtor and asserts that adding him as a judgment debtor had the effect of renewing
the entire judgment amount, as if the original judgment had never been satisfied.
Hansmeier cites no law to support these assertions. We may decline to reach issues
that are inadequately briefed on appeal. State, Dep’t of Labor and Indus. v. Wintz
Parcel Drivers, Inc., 558 N.W.2d 480, 480 (Minn. 1997). We note, however, that the
addition of Hansmeier as a judgment debtor does not, as Hansmeier appears to assert,
entitle the judgment creditors to collect twice on the same judgment. See Gronquist
v. Olson, 242 Minn. 119, 127-28, 64 N.W.2d 159, 165 (1954) (stating that if an
injured party has accepted full satisfaction of a judgment, the law will not permit
double recovery).
II.
Hansmeier next challenges the district court’s decision to pierce on the merits.
“In certain circumstances, it is possible to ‘pierce the corporate veil’ and hold a
shareholder personally liable.” Gunderson v. Harrington, 632 N.W.2d 695, 705
(Minn. 2001) (Gilbert, J., dissenting) (citing Victoria Elevator Co. of Minneapolis v.
Meriden Grain Co., 283 N.W.2d 509, 512 (Minn. 1979)). Veil piercing applies to
LLCs as well as corporations. Minn. Stat. § 322B.303, subd. 2 (2014). A court may
pierce a corporate veil when there is fraud or when the shareholder is the “alter ego”
of the corporation. Gunderson, 632 N.W.2d at 705.
12
Veil piercing is an equitable remedy that may be applied to avoid an injustice
that would otherwise occur. Equity Trust, 766 N.W.2d at 339. “Granting equitable
relief is within the sound discretion of the [district] court. Only a clear abuse of that
discretion will result in reversal.” Nadeau v. Cnty. of Ramsey, 277 N.W.2d 520, 524
(Minn. 1979). A district court abuses its discretion if its decision is against the facts
in the record or it misapplies the law. State ex rel. Swan Lake Area Wildlife Ass’n v.
Nicollet Cnty. Bd. of Comm’rs, 799 N.W.2d 619, 625 (Minn. App. 2011).
The district court held Hansmeier liable for the sanctions based on its findings
that Hansmeier was Alpha’s alter ego and was using Alpha to perpetrate fraud on the
court. The alter ego theory of piercing the corporate veil has two prongs. Victoria
Elevator, 283 N.W.2d at 512. We evaluate each below.
A. Alter ego factors
The first prong of the Victoria Elevator test considers the individual’s
relationship to the corporation. Barton v. Moore, 558 N.W.2d 746, 749 (Minn.
1997). In determining whether the individual is an alter ego of the corporation,
courts are concerned with the reality, not form, of how the corporation operated.
Victoria Elevator, 283 N.W.2d at 512. The factors relevant to that determination
include:
insufficient capitalization for purposes of corporate
undertaking, failure to observe corporate formalities,
nonpayment of dividends, insolvency of debtor
corporation at time of transaction in question, siphoning
of funds by dominant shareholder, nonfunctioning of
other officers and directors, absence of corporate records,
13
and existence of corporation as merely facade for
individual dealings.
Id. A number of these factors must be present for an individual to be an alter ego of a
corporation. Id.
The district court found that nearly all of the factors were present here, and the
record supports these findings. The court found that (1) Alpha was primarily used
for Hansmeier’s personal purposes, (2) Hansmeier’s dealings with Alpha were “in
complete disregard for corporate formalities and the separation of personal and
business [transactions],” and (3) Alpha was “insufficiently capitalized and
deliberately undercapitalized.” To support these findings, the district court cited
Hansmeier’s failure to produce corporate or any other records for Alpha, other than
bank statements. The district court also cited Hansmeier’s testimony that (1) Alpha
was never insured, never had a client trust account, never had any fee agreement or
contract, and was “hardly, if at all, used as a law firm,” (2) Hansmeier transferred
$80,000 from Alpha’s account for a down payment on his home and transferred over
$300,000 from Alpha’s account to a limited liability company that oversaw a trust for
the benefit of his family, and (3) nearly all of Alpha’s funds came from entities
controlled by Hansmeier.
The district court also found that Hansmeier was using Alpha as a facade to
perpetrate fraud on the court, citing the fact that Hansmeier and Dugas
misrepresented which of them was employed by Alpha and Hansmeier later
attempted to convince the court that Prenda Law, not Alpha, was the law firm of
14
record for Guava. The court discredited Hansmeier’s testimony as to these matters,
noting the inconsistencies in Hansmeier’s testimony and that Hansmeier had failed to
provide responsive information to the court. Based on all of the above, the district
court did not clearly err by finding that Hansmeier was Alpha’s alter ego.
B. Fundamental unfairness
The second prong of the alter ego theory examines the relationship of the veil-
piercer to the corporation. White v. Jorgenson, 322 N.W.2d 607, 608 (Minn. 1982).
It requires the veil-piercer to show that there was “an element of injustice or
fundamental unfairness” that would result from not piercing the corporate veil.
Victoria Elevator, 283 N.W.2d at 512. Injustice or unfairness is present if the
individual has used the corporate form to gain “an advantage he does not deserve.”
Id. “Proof of strict common law fraud is not required, but . . . evidence that the
corporate entity has been operated as a constructive fraud or in an unjust manner
must be presented.” Cole, 766 N.W.2d at 340 (quoting Groves v. Dakota Printing
Servs., Inc., 371 N.W.2d 59, 62-63 (Minn. App. 1985)).
Hansmeier argues that the second prong of the test “requires a finding that
Hansmeier used Alpha’s liability shield in dealings with John Doe.” He asserts that
there was absolutely no relationship between John Doe and Alpha or between John
Doe and Hansmeier, through Alpha, and therefore that Hansmeier could not have
used Alpha’s liability shield against John Doe. Hansmeier misinterprets the second
prong of the Victoria Elevator test, which does not require the district court to make
any finding of a particular kind of relationship between the veil-piercer and the
15
corporation or the shareholder. See Victoria Elevator, 283 N.W.2d at 512 (requiring
only a finding that the corporate entity was operated in an unjust manner or that some
injustice or fundamental unfairness would result from not piercing the corporate
veil).
Hansmeier also argues that there was no fundamental unfairness to John Doe
to support veil piercing. To support this argument, Hansmeier points out that, on
appeal, the judgment debtors moved to stay judgment enforcement pending appeal
and offered to post certified funds with the trial court administrator. Because John
Doe opposed the motion, Hansmeier concludes that John Doe’s inability to collect
from Alpha was “self-inflicted.” Hansmeier appears to argue that, by opposing the
motion to stay judgment and post certified funds, John Doe forfeited any claim that
Hansmeier had operated Alpha in an unjust manner.
The district court concluded that fundamental unfairness would result if it did
not pierce the corporate veil because Hansmeier’s actions had prevented the
judgment creditors from collecting their judgment against Alpha. The court pointed
out that “Hansmeier knew of the possibility of sanctions in this action, transferred
Alpha’s money away, and terminated Alpha to avoid paying the judgments in this
action.” The record supports those findings, which clearly show that Hansmeier
abused the corporate-liability shield to avoid paying sanctions in a bad-faith lawsuit
for which he was responsible. Neither the judgment debtors’ motion to post funds
nor John Doe’s opposition to that motion undermines the conclusion that Hansmeier
operated Alpha in an unjust manner. The district court did not clearly err by finding
16
that piercing the corporate veil was necessary to avoid fundamental unfairness.
Because both prongs of the Victoria Elevator test were satisfied here, the district
court did not abuse its discretion by piercing Alpha’s corporate veil to hold
Hansmeier liable as a judgment debtor.
Affirmed.
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