West Dakota Oil v. Kathrein Trucking , 2022 ND 111 ( 2022 )

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
MAY 26, 2022
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2022 ND 111West Dakota Oil, Inc., Plaintiff and Appellee
v.
Kathrein Trucking, LLC and Lee Kathrein, Defendants and Appellants
No. 20210326
Appeal from the District Court of Hettinger County, Southwest Judicial
District, the Honorable James D. Gion, Judge.
REVERSED.
Opinion of the Court by Crothers, Justice.
Jon Bogner, Dickinson, ND, for plaintiff and appellee; submitted on brief.
Mark C. Sherer, Dickinson, ND, for defendants and appellants; submitted on
brief.
West Dakota Oil v. Kathrein Trucking, et al.
No. 20210326
Crothers, Justice.
[¶1] Lee Kathrein appeals from a judgment piercing the veil of Kathrein
Trucking, LLC. Kathrein argues the district court erred in finding him
personally liable for the debts of his company. We reverse.
I
[¶2] In May 2020, West Dakota Oil, Inc. sued Kathrein Trucking, LLC and its
owner, Kathrein, for failing to pay for fuel West Dakota provided. West Dakota
amended its complaint in January 2021 and alleged breach of contract, unjust
enrichment and quantum meruit. It requested the principal amount of
$51,380.26 plus interest, costs, expenses and attorney’s fees.
[¶3] A bench trial took place in June 2021. In September 2021, the district
court issued a memorandum opinion finding in favor of West Dakota. The court
issued its findings of fact and judgment, ordering Kathrein Trucking and
Kathrein to pay $63,412.35, jointly and severally.
[¶4] In deciding to pierce the veil of Kathrein Trucking, the district court
found Kathrein disregarded the formalities required of limited liability
companies, provided West Dakota title to a trailer Kathrein personally owned
as security for the company’s debt, charged items at West Dakota that
Kathrein personally used, and utilized company assets for personal use. The
court found Kathrein operated his company as an alter ego based on a totality
of the circumstances and the rubric for factors used to pierce a veil.
II
[¶5] Kathrein argues evidence does not support the district court’s decision to
pierce Kathrein Trucking’s veil.
[¶6] The district court’s findings when resolving whether to pierce a
company’s veil are presumed correct, and this Court will reverse only if the
findings are clearly erroneous. Coughlin Constr. Co. v. Nu-Tec Indus., 2008 ND
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163, ¶ 21, 755 N.W.2d 867. “A finding of fact is clearly erroneous if it is induced
by an erroneous view of the law, if no evidence exists to support the finding, or
if, on the entire record, a reviewing court is left with a definite and firm
conviction a mistake has been made.” Axtmann v. Chillemi, 2007 ND 179, ¶ 15,
740 N.W.2d 838.
III
[¶7] A member, manager, or governor of a limited liability company generally
is not liable for the company’s debts, obligations, or other liabilities. N.D.C.C.
§ 10-32.1-26(1). However, circumstances under which a corporate veil may be
pierced also apply to limited liability companies. N.D.C.C. § 10-32.1-26(3).
Factors considered in determining whether to pierce the veil 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.”
Coughlin Constr. Co., 2008 ND 163, ¶ 20. An element of “injustice, inequity or
fundamental unfairness” also must be present. Id.[¶8] Additionally, the alter ego approach to piercing a company’s veil may be
applied by demonstrating such a unity of interest between the company and
its owner that separate personalities do not exist. Taszarek v. Lakeview
Excavating, Inc., 2019 ND 168, ¶ 6, 930 N.W.2d 98. The party asserting the
claim must demonstrate an inequitable result if liability is on the company
alone. Id. “Courts should exercise caution in applying the alter ego doctrine.”
Id. at ¶ 7.
[¶9] The burden of proving the factors necessary to pierce the veil rests on
the party asserting the claim. Taszarek, 2019 ND 168, ¶ 8. Piercing the veil is
“heavily fact-specific and is within the district court’s sound discretion.” Id.2
Because the decision is so fact-specific, district courts must “sufficiently
address the . . . factors and explain how they do or do not apply.” Id. at ¶ 10.
[¶10] Here, each factor was not individually addressed. The district court
made conclusory findings that Kathrein disregarded formalities required of
companies to avoid personal liability, Kathrein charged items to Kathrein
Trucking that he used personally, and Kathrein utilized the company’s assets
for personal use. The only specific finding was that Kathrein provided West
Dakota with title for a trailer he owned individually as security for money owed
by Kathrein Trucking. The court ultimately found Kathrein operated Kathrein
Trucking as an alter ego.
A
[¶11] Evidence does not support a finding that Kathrein disregarded corporate
formalities. The findings do not specify the formalities Kathrein disregarded.
West Dakota asserts Kathrein failed to maintain separate expense accounts
and keep the business in good standing. At trial, Kathrein testified to failing
to keep Kathrein Trucking in good standing with the North Dakota Secretary
of State in 2020. However, after receiving a letter from the secretary of state,
he filed the appropriate paperwork and put the company back into good
standing. Regarding the expense account, West Dakota’s account ledger
showed Kathrein Trucking’s charges dating back to 2009. West Dakota argues
Kathrein commingled personal and company-related expenses because he used
the same account for his company as he used when he was a sole proprietor.
Kathrein testified to working under a trade name of Kathrein Trucking prior
to forming the limited liability company in 2013. However, there is no evidence
Kathrein used the company’s account to make personal purchases.
[¶12] Evidence does not support a finding that Kathrein charged items to the
company for his personal use. After reviewing the account ledger, the district
court stated: “While it is possible all of the items could have been used by
Kathrein Trucking, the Court finds it conceivable [Kathrein] diverted some of
the products purchased from West Dakota for personal use.” The evidence and
West Dakota’s burden of proof do not support this finding. To the contrary, the
record demonstrates purchases from West Dakota were used only for Kathrein
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Trucking business. West Dakota’s fuel deliverer testified to direct
communication with Kathrein about their fuel needs based on Kathrein
Trucking’s jobs:
“ – the only time we didn’t keep it full is if he called me and said,
‘You know what,’ you know, ‘We’re going to be done with a job here
in a couple weeks. Stop filling it. I’ll let you know when you can
start up again.’
“Or, usually in the fall, he’d call and say, ‘We’re done hauling.’
You know, ‘I’ll call you when I need it.’”
The fuel deliverer testified to filling Kathrein Trucking’s tanks since 2009,
when Kathrein began doing business with West Dakota. When asked whether
he was delivering to Kathrein individually or Kathrein Trucking, the deliverer
testified to delivering to the company.
[¶13] The only finding supported by evidence is that Kathrein provided West
Dakota with a certificate of title for a trailer he personally owned as security
for money Kathrein Trucking owed to West Dakota. The findings do not explain
which factor that fell under or how Kathrein pledging the trailer was different
than the common business practice of an individual being called on to
personally guarantee the debt of a company. Nor did the court find Kathrein
Trucking assets were used by Kathrein for personal purposes.
[¶14] The findings do not address factors such as insufficient capitalization,
insolvency at the time of the transaction, siphoning of funds, absence of
corporate records, or the existence of the company as a facade for individual
dealings. See Coughlin Constr. Co., 2008 ND 163, ¶ 20 (discussing the factors
to consider in deciding whether to pierce the veil). Nor do the findings address
the element of “injustice, inequity or fundamental unfairness” as required
when piercing the veil. Id.B
[¶15] The findings do not sufficiently address the factors for piercing a
company’s veil and explain how they do or do not apply to this case. Taszarek,
2019 ND 168, ¶ 10. In Taszarek, the district court made conclusory statements
4
on each factor and found the defendant operated his business as an alter ego.
Id. at ¶ 9. We remanded the case for adequate findings relating to the factors.
Id. at ¶ 12. We did not analyze the court’s findings for clear error.
[¶16] Here, in addition to not making findings on each factor, many of the
findings are not supported by evidence. After reviewing the record, we conclude
the evidence does not support findings under the applicable factors or a
conclusion the company’s veil should be pierced. The decision to pierce the veil
and hold Kathrein personally liable is reversed.
IV
[¶17] The judgment piercing the veil of Kathrein Trucking, LLC is reversed.
[¶18] Jon J. Jensen, C.J.
Gerald W. VandeWalle
Daniel J. Crothers
Lisa Fair McEvers
Jerod E. Tufte
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