Taszarek v. Lakeview Excavating , 2021 ND 237 ( 2021 )

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
DECEMBER 23, 2021
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2021 ND 237Eugene E. Taszarek, Marlys J. Taszarek,
Trina E. Schilling, Steven E. Taszarek,
and Michael E. Taszarek, Plaintiffs and Appellants
v.
Lakeview Excavating, Inc., German Township,
and Dickey County, Defendants
and
Brian Welken, Defendant and Appellee
No. 20210046
Appeal from the District Court of Dickey County, Southeast Judicial District,
the Honorable Daniel D. Narum, Judge.
AFFIRMED.
Opinion of the Court by Tufte, Justice, in which Chief Justice Jensen and
Justices VandeWalle and McEvers joined. Justice Crothers filed an opinion
concurring specially in which Chief Justice Jensen joined.
William C. Black, Bismarck, N.D., for plaintiffs and appellants; submitted on
brief.
Douglas W. Gigler, Fargo, N.D., for defendant and appellee; submitted on brief.
Taszarek v. Lakeview Excavating
No. 20210046
Tufte, Justice.
[¶1] Eugene Taszarek, Marlys Taszarek, Trina Schilling, Steven Taszarek,
and Michael Taszarek (“Taszareks”) appeal from a judgment finding Lakeview
Excavating, Inc., was not the alter ego of Brian Welken. The Taszareks argue
the district court abused its discretion by exceeding the scope of the remand,
and erred by finding Lakeview Excavating was not the alter ego of Welken. We
affirm.
I
[¶2] In 2012, German Township in Dickey County selected Lakeview
Excavating as a contractor for certain road construction projects. Welken was
Lakeview Excavating’s president and sole shareholder. While working on the
projects, Lakeview Excavating’s employees took fieldstones from a nearby
property owned by the Taszareks to use for the roads. The Taszareks sued
Lakeview Excavating and Welken for intentional trespass, conversion of
property, and unjust enrichment. The claims of trespass and conversion were
tried to a jury. The jury returned a verdict in the Taszareks’ favor, finding
Lakeview Excavating was the alter ego of Welken and holding both parties
liable for damages. In Taszarek v. Welken, 2016 ND 172, ¶ 26, 883 N.W.2d 880(“Taszarek I”), we reversed and remanded for a new trial, concluding the
district court inadequately instructed the jury on the alter ego doctrine.
[¶3] After a bench trial, the district court found Lakeview Excavating was the
alter ego of Welken and ordered the Taszareks could recover damages from
either Welken or Lakeview Excavating. In Taszarek v. Lakeview Excavating,
Inc., 2019 ND 168, ¶¶ 12-13, 930 N.W.2d 98 (“Taszarek II”), we reversed and
remanded, concluding the court’s findings relating to piercing Lakeview
Excavating’s corporate veil were inadequate to permit appellate review. On
remand, the court held an evidentiary hearing and found Lakeview Excavating
was not the alter ego of Welken.
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II
[¶4] The Taszareks argue the district court exceeded the scope of remand by
holding an evidentiary hearing instead of specifying findings of fact based on
evidence already in the record.
[¶5] “The mandate rule requires the district court to follow the appellate
court’s pronouncements on legal issues in subsequent proceedings in the case
and to carry the appellate court’s mandate into effect according to its terms.”
Pennington v. Cont’l Res., Inc., 2021 ND 105, ¶ 10, 961 N.W.2d 264. We retain
“the authority to decide whether the district court scrupulously and fully
carried out the mandate’s terms.” Id. We have “repeatedly held that, when we
remand for redetermination of an issue without specifying the procedure to be
followed, the district court may decide the issue based on the evidence already
before it or may take additional evidence.” Sorenson v. Slater, 2011 ND 216,
¶ 9, 806 N.W.2d 183. “The decision whether to take additional evidence is
within the district court’s discretion, and its determination will be reversed on
appeal only for an abuse of discretion.” Id.[¶6] In Taszarek II, we did not specify an exact procedure to be followed by
the district court on remand. Instead, we remanded “for further findings on the
Hilzendager-Jablonsky factors and whether Lakeview Excavating was the
alter ego of Brian Welken.” Taszarek II, 2019 ND 168, ¶ 13. We did not limit
the court to making findings of fact on evidence already in the record. Thus,
the decision whether to take additional evidence was within the court’s
discretion. The court did not abuse its discretion by holding an evidentiary
hearing on the Hilzendager-Jablonsky factors concerning piercing the
corporate veil.
III
[¶7] The Taszareks contend Lakeview Excavating was the alter ego of
Welken, allowing them to pierce the corporate veil.
[¶8] Generally, a corporation’s officers and directors are not liable for the
ordinary debts of the corporation. Hilzendager v. Skwarok, 335 N.W.2d 768,
774 (N.D. 1983). The general rule may be disregarded, and the corporate veil
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pierced, when the corporation is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Id. The party attempting to pierce the
corporate veil has the burden of proof. Taszarek II, 2019 ND 168, ¶ 8. “Piercing
the corporate veil is heavily fact-specific and is within the district court’s sound
discretion.” Id. “The court’s findings of fact are presumed to be correct and will
be set aside on appeal only if they are clearly erroneous.” Id. 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.
[¶9] A court must consider the Hilzendager-Jablonsky factors when deciding
whether 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.
Coughlin Constr. Co. v. Nu-Tec Indus., Inc., 2008 ND 163, ¶ 20, 755 N.W.2d
867 (quoting Hilzendager, 335 N.W.2d at 774). In addition, “an element of
injustice, inequity or fundamental unfairness must be present before a court
may properly pierce the corporate veil.” Coughlin Constr., at ¶ 20 (quoting
Jablonsky v. Klemm, 377 N.W.2d 560, 564 (N.D. 1985)).
[¶10] Under the “alter ego” approach to piercing the corporate veil, “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.” Taszarek I,
2016 ND 172, ¶ 10. This approach analyzes whether a corporation is merely an
instrumentality or alter ego of its owner, and requires examination of the
Hilzendager-Jablonsky factors, including the “injustice, inequity or
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fundamental unfairness” element. Id. at ¶¶ 10, 12. “Courts should exercise
caution in applying the alter ego doctrine.” Taszarek II, 2019 ND 168, ¶ 7.
[¶11] The district court found all of the Hilzendager-Jablonsky factors weighed
against piercing the corporate veil, except the “nonpayment of dividends”
factor, which it found was irrelevant in this context. The Taszareks do not
challenge the district court’s findings on two of the factors: nonpayment of
dividends and the existence of the corporation as merely a facade for individual
dealings.
A
[¶12] The Taszareks argue the district court erred in finding Lakeview
Excavating was sufficiently capitalized for the purposes of the corporate
undertaking.
[¶13] “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.” Axtmann, 2007 ND 179, ¶ 14. The
Court has recognized “there is a continuing obligation to provide adequate risk
capital from incorporation throughout the corporation’s existence.” Coughlin
Constr., 2008 ND 163, ¶ 28.
[¶14] The district court found Lakeview Excavating was an excavation
contractor incorporated in May 2010, and was capitalized with a line of credit
from Bank Forward for $375,000, which was shared with another company
owned by Welken, Lakeview Trucking, Inc. The line of credit was secured by
the assets of Lakeview Excavating and Lakeview Trucking, a personal
guaranty from Welken, an assignment of Welken’s life insurance policy, a
personal guaranty from Welken’s father, and a guarantee from the Bank of
North Dakota, which in turn was guaranteed by Welken.
[¶15] The district court made findings on Lakeview Excavating’s finances
during its years of operation (May 2010 to December 2014). In 2010, Lakeview
Excavating had construction income of $288,003 with construction costs
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totaling $233,891, leaving a gross profit of $54,112. After expenses, it had a net
income of $30,613.
[¶16] In 2011, the company’s gross receipts totaled $894,612, and its gross
profit was $532,596. After expenses, it had a net operating income of $46,533
and retained earnings of $77,167 going into 2012 for reinvestment into the
company or to pay debt.
[¶17] In 2012, Lakeview Excavating’s total revenue was $2,447,003, and its
gross profit was $1,600,498. Its net operating income was $36,254, and its
retained earnings totaled $93,421 going into 2013. It was during the summer
of 2012 when Lakeview Excavating took fieldstones from the Taszareks’
property.
[¶18] In 2013, its total revenue was $2,531,244, and its gross profit was
$1,074,232. Its operating expenses totaled $2,279,647, which included
$1,192,457 in payroll expenses. As a result, Lakeview Excavating had a net
income loss of $1,243,591 upon completion of the 2013 construction season. The
district court attributed this financial downturn to the problems Lakeview
Excavating experienced 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.
Following its rigid funding process, FEMA delayed payment to Lakeview
Excavating until the project was complete. These complications caused
Lakeview Excavating to fall behind on other projects, including a North Dakota
Department of Transportation project. As a result, the NDDOT assessed
$165,000 in liquidated damages against Lakeview Excavating.
[¶19] The district court found Lakeview Excavating effectively ceased
operations in 2014. Its revenue was $163,683, and its operating expenses were
$216,875. The company sold its equipment at auction for $336,141. Its net loss
for the year was $9,469. The court found Lakeview Excavating was insolvent
by the end of 2014.
[¶20] The district court found Lakeview Excavating had procured liability
insurance for each operating year for potential tort liability to third parties as
5
a result of its operations, including the 2012 construction season when it
committed the torts against the Taszareks. Welken testified Lakeview
Excavating’s insurance carrier ultimately denied coverage, leaving the
company exposed to a judgment.
[¶21] 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. Cf. Coughlin Constr., 2008 ND 163, ¶ 22 (concluding district
court’s piercing of the corporate veil was not clearly erroneous, in part, because
the corporation’s downturn was largely attributable to the shareholders’
withdrawing of funds, not the operating losses it sustained in a project).
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.
This finding is not clearly erroneous.
B
[¶22] In considering the insolvency of the debtor corporation at the time of the
transaction in question, the parties disagree as to the “transaction in question.”
Welken contends the transaction in question is Excavating’s entry onto the
Taszareks’ property in the summer of 2012. The Taszareks assert insolvency is
measured at the time of judgment being originally entered against Lakeview
Excavating in 2015, citing to Axtmann and Coughlin Construction.
[¶23] In Axtmann, the district court pierced the corporate veil and found the
debtor corporation “insolvent at the time of the [creditors’] judgment and for
years [before] because it was unable to pay its normal debts and relied upon
[the sole shareholder’s] personal credit to operate.” 2007 ND 179, ¶ 18. This
Court affirmed the district court’s decision to pierce the corporate veil. Id. at
¶ 24. In Coughlin Construction, we upheld the district court’s decision to pierce
the corporate veil. 2008 ND 163, ¶ 30. On insolvency, the district court found
the debtor corporation “is essentially insolvent and unable to pay the judgment
which will be entered against it in this case” because it “currently owns no real
estate, very little equipment and few ‘hard’ assets—and its cash position is only
6
a shadow of what it was before this situation . . . came about.” Id. at ¶ 24. In
neither Axtmann nor Coughlin Construction did we specify that insolvency
must be measured at the time of judgment.
[¶24] In Jablonsky, condominium owners, on theories of negligence and breach
of warranty, sued the corporate developer of the condominium project and its
president to recover damages for a defective retaining wall. 377 N.W.2d at 561.
The district court held the corporate developer negligently designed and
constructed the retaining wall, which was the proximate cause of the wall’s
failure, and was also liable under the implied warranty theory. Id. The court
pierced the corporate veil and held the president personally liable for the
damages. Id. at 562. The court found that the corporate developer was
insolvent for the “vast majority of its existence” and “that at the time the
retaining wall, which was one of the last items of construction, was built, [the
corporate developer] had no capital, was insolvent, and as a result, ‘the
Plaintiffs got a cheap and grossly inadequate wall.’” Id. at 566. We concluded
the court’s finding on the insolvency factor was not clearly erroneous, and
affirmed its decision to pierce the corporate veil. Id. at 566-67.
[¶25] In Jablonsky, the time of judgment is not mentioned by the Court.
Instead, we upheld the district court’s insolvency finding in which the court
emphasized the corporate developer was insolvent at the time the retaining
wall was built. Thus, Jablonsky supports the argument that the transaction in
question refers to the tort committed. Here, the district court found Lakeview
Excavating was solvent in 2012 when the fieldstones were taken and became
insolvent during 2014, before judgment was initially entered on the fieldstones
claim. 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. Cf. Trustees of Nat’l
Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk, 332 F.3d 188,
195 (3d Cir. 2003) (reasoning that because limiting liability to the capital
invested is the purpose of incorporation, insolvency alone does not justify
piercing the corporate veil but can invite scrutiny of actions that otherwise
would be appropriate). It was not clearly erroneous to consider Lakeview
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Excavating’s insolvency at the time of the “transaction in question” by
reference to the entry on the Taszareks’ property.
C
[¶26] The Taszareks argue the district court erred in finding Lakeview
Excavating observed corporate formalities, maintained corporate records, and
installed functioning officers.
[¶27] 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. We conclude the court did not err in finding Lakeview
Excavating observed corporate formalities and maintained corporate records.
[¶28] The Taszareks assert Lakeview Excavating “shared” the following with
Lakeview Trucking: equipment, employees, jobs, timesheets, credit cards,
offices, and a line of credit. The Taszareks cite no authority concluding a
corporation fails to observe corporate formalities because it “shared” resources
with another legal entity. Further, the record 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. Welken
testified Lakeview Trucking would work on the same jobsite as Lakeview
Excavating when Lakeview Trucking was a subcontractor on the project.
Lakeview Excavating’s bookkeeper, Lisa Amundson, testified Lakeview
8
Excavating and Lakeview Trucking had separate timesheets. Amundson
testified that when employees used the incorrect timesheet, she would correct
the company header accordingly. Anthony Ernst, a former employee of
Lakeview Excavating, testified he used a credit card labeled “Lakeview
Trucking” for expenses of Lakeview Excavating. However, he acknowledged he
did not perform the bookkeeping services. The record indicates the parties
shared an office building, and the district court found they shared a line of
credit. The district court did not find it unusual for two corporations having
the same owner and several of the same employees to share the same building.
As noted above, the court found Bank Forward provided Lakeview Excavating
a $375,000 line of credit, which it shared with Lakeview Trucking. The court
found the line of credit was secured by assets of both Lakeview Excavating and
Lakeview Trucking.
[¶29] The Taszareks contend the district court erred by finding Lakeview
Excavating installed functioning corporate officers. The court found Welken
was the sole shareholder, president, and chairperson of the board of directors
and was in charge of the company’s day-to-day operations; Welken’s wife,
Georgia Welken, was the vice-president of Lakeview Excavating; and Welken’s
sister, Lisa Amundson, was the secretary/treasurer. The court found Georgia
Welken and Lisa Amundson functioned as corporate officers by attending
meetings and participating in decisions involving the company, even though
neither was involved in the day-to-day operations. Additionally, Lisa
Amundson filed documents on the company’s behalf, prepared the meeting
minutes, and managed the finances. The court did not err in finding Lakeview
Excavating installed functioning corporate officers.
D
[¶30] The district court found no credible evidence of Welken siphoning off
assets or funds from Lakeview Excavating for his own personal benefit. The
court noted Welken had personally guaranteed the Bank Forward line of credit,
and Bank Forward required financial statements from Welken, Georgia
Welken, Lakeview Excavating, Lakeview Trucking, and Lakeview Aviation,
which were prepared by an independent accountant.
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[¶31] The Taszareks argue Lakeview Trucking loaned Welken $105,172 in
2011, and no evidence was submitted showing the loan had ever been paid
back. Because this is an alleged loan from Lakeview Trucking, not Lakeview
Excavating, the loan is irrelevant to whether Welken was siphoning Lakeview
Excavating’s funds. Additionally, the Taszareks contend that “a large number
of assets that were under the control of [Lakeview] Excavating and [Lakeview]
Trucking made their way to Southeast [Enterprises, Inc.]; a company owned
first by Welken’s father, and subsequently, by Welken’s wife.” The Taszareks
do not specify which Lakeview Excavating assets were transferred to
Southeast Enterprises. The district court found Lakeview Trucking was the
owner of these trucks and equipment, and Southeast Enterprises purchased
them for fair value.
[¶32] The Taszareks assert 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. The Taszareks do not cite any 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 Taszareks.
[¶33] In Coughlin Construction, the district court found the dominant
shareholder siphoned funds when the company paid him $124,518 in the form
of bonuses, dividends, and repayment of undocumented “loans” over the course
of ten months. 2008 ND 163, ¶ 25. The court found these transactions occurred
after the company was on notice of the claim against it and at a time when the
company was “experiencing significant financial losses.” Id. We concluded,
“The district court’s findings depict a dominant shareholder of a corporation
who, through the issuance of dividends and bonuses and the repayment of
undocumented ‘loans,’ attempted to bleed the corporation of assets so it would
not be able to satisfy a known corporate liability.” Id. at ¶ 30.
[¶34] In Coughlin Construction, the dominant shareholder deliberately took
funds to avoid payment of liabilities. Here, the record shows Welken’s “officer
wages” were owed to him as an officer of the company. Welken testified this
amount was the prorated portion of his salary and he stopped taking his
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salary in 2013 because of the company’s financial downturn. Although the
shareholder distribution of $18,117 may merit some scrutiny, the Taszareks
have not identified any evidence showing Lakeview Excavating or Welken
issued this distribution to Welken to avoid satisfying Lakeview Excavating’s
liability to the Taszareks. We conclude the district court did not err in finding
Welken did not siphon funds from Lakeview Excavating.
E
[¶35] The Taszareks argue there is an element of injustice, inequity, or
fundamental unfairness because Welken would escape personal liability for
doing business as a corporate entity. 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.” Axtmann, 2007
ND 179, ¶ 12. The district court found Lakeview Excavating operated
profitably from 2010 to 2012, and became insolvent owing to operating losses
derived from the German Township project. Under these facts and
circumstances, we conclude the district court was not clearly erroneous in its
finding that the Taszareks had not established an essential element of
injustice, inequity, or fundamental unfairness to permit piercing the corporate
veil.
IV
[¶36] We affirm the judgment, concluding the district court did not abuse its
discretion by holding an evidentiary hearing, or err in finding Lakeview
Excavating was not the alter ego of Welken.
[¶37] Jon J. Jensen, C.J.
Gerald W. VandeWalle
Lisa Fair McEvers
Jerod E. Tufte
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Crothers, Justice, concurring specially.
[¶38] I agree with the results in this case and with most of the majority’s
rationale supporting these results. I write separately to reiterate my
disagreement with this Court’s prior application of the “undercapitalization”
analysis used in corporate veil piercing cases, which we do not expressly
abandon here. See Axtmann v. Chillemi, 2007 ND 179, ¶¶ 40-41, 740 N.W.2d
838 (Crothers, J., concurring in part and dissenting in part). In prior cases, any
insolvent corporation was per se undercapitalized. While undercapitalization
at insolvency is true as a matter of fact, it is an unhelpful conclusion when
deciding whether to pierce a corporate veil because the adequacy of
capitalization and insolvency are separate legal inquiries.
[¶39] Here, the majority cites the rule for piercing a corporate veil, majority
opinion, ¶ 9, and the Axtmann case, but then correctly, I believe, examines the
debtor corporation’s capitalization at both formation and again if the scope of
business materially changed. See majority opinion, ¶¶ 14-21. Doing so it has
properly recognized the separation between inquiries into capitalization and
insolvency.
[¶40] Daniel J. Crothers
Jon J. Jensen, C.J.
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