*1 FAMILY TRUST, PESCHEL Respondent, Plaintiff and v. Individually MARK P. COLONNA, COLONNA, D.D.S., MARK P. P.C. Appellant,
Defendant v. individually HERBERT C. PESCHEL, Family as trustee of the Peschel Trust, Counterclaim Defendant. No. 02-730. 22,May
Submitted on Briefs
2003.
August
Decided
2003.
MT
For Sean S. Frampton, Morrison & Frampton, Whitefish.
JUSTICE WARNER Opinion delivered the of the Court. Respondent, Family Trust, Peschel “Trust”, sued the Appellants, Dr. Mark Colonna, “Colonna”, P. Colonna, Mark P. D.D.S., P.C., “Corporation”, for damages arising out of the breach of a lease. The District Court entered summary judgment that the Corporation breached the by vacating lease the leased building and *3 damages, fixed including attorney’s Then, fees. following non-jury a trial, the District judgment Court entered piercing corporate the veil and held personally Colonna liable for damages. those appeals Colonna from judgment ¶2 of the District Court. The Trust attorney’s demands appeal. fees on We affirm the District Court grant prayer the Trust’s appeal. for fees on following The ¶3 issues are raised: 1. Did the District Court err pierced
¶4 when it veil and held Colonna breaching liable for the lease with the Trust? 2. Is the Trust entitled attorney’s ¶5 to fees appeal? on
FACTUAL AND PROCEDURAL BACKGROUND Colonna, Dr. dentist, Mark a Colonna, D.D.S., formed Mark P. P.C., Corporation, to professional render dental services on 9,1993. September Laura, wife, Colonna and his former were named Corporation’s as the in directors the articles incorporation. Colonna president was also the and sole shareholder. Laura served as the vice- president, secretary and However, by-laws treasurer. the corporate signed only by were Colonna. He did not have a employment formal agreement Corporation wages; and did not receive nor did the Corporation issue him receiving salary, W-2 forms. Instead of
Colonna, time-to-time, on the loans payments received interest from ten and eleven. paragraphs discussed below formed, began Corporation time the was Colonna About the same building building by the Trust. The practicing dentistry owned Lilly. and Dr. Pam Dr. Peschel was shared with Dr. Herbert Peschel as the trustee for the Trust. also served resigned July 12, 1996, separated the Colonnas and Laura On Subsequently, respect Corporation. to the from her duties with the sole incorporation amended and Colonna became articles of were positions vice-president, Corporation. director of the He assumed formally resignation documented. secretary and treasurer. Laura’s the lease at issue Corporation entered September of equipment located space the Trust for dental office with would lease building. provided Corporation The lease that the Trust’s through equipment September and dental from property $1,700 Corporation’s The decision August 31, per month. in the records. enter into the lease was not documented building with executed, Colonna shared the After the lease was According to dentists, Peschel and Dr. Dale Bax. other Dr. two fall grown significantly testimony, his business property the entire letter. possession He demanded of 1998. then Colonna vacated the responded nor the Trust Neither Dr. Peschel vacate, 30,1998. Corporation’s decision building on November in the rent, formally documented paying was not and discontinue the lease The District Court determined Corporation’s records. conclusion has property, include the entire which was not intended to challenged appeal. on not been another time, personally purchased nearly At the same He caused the
building practice. he moved his landlord, on lease, tenant, himself as ten-year as a with enter into a property. rented the new 1,1998, whereby December $4,000 per beginning at graduated scale paid Rent was to be on liability payments to make assigned his month. Colonna made Colonna’s building Corporation. to the the new Again, no directly to the bank. property on that mortgage payments arrangement. authorized this formal resolution *4 $10,200.00 in Corporation that he loaned the Colonna testified security note or by promissory documented The loan was not $23,005.00 in Corporation also said he loaned agreement. Colonna $31,505.00 in 2000. Neither Corporation again loaned They records. were Corporation’s in the loans were documented trial, attempted At Colonna’s accountant upon demand. payable testimony client, correct the stating payment money his that the in repayment each case was a loan by Corporation, to Colonna rather than Corporation loans to the from Colonna. The District Court’s were, fact, indicate these transactions loans to the Corporation. $87,000.00 Colonna also loaned the at an interest 10%,
rate of by promissory which was documented note dated December 1998. Colonna loaned the an additional $60,185.81, 15%, May 31, at an interest rate of 2001. The note provided that paid by May 30, the loan would full 2006. The two payable loans were upon demand as cash permitted. flow The Corporation’s money decisions to borrow from Colonna were never through documented formal corporate minutes or resolutions. Corporation’s records indicate that there only were three corporate meetings nine-year in its existence. No documentation indicates that the decisions to enter into and subsequently breach the lease with the Trust were made formal resolution. Nor is there documentation to indicate that the decision to lease Colonna’s property new through was arrived at a formal resolution. However, Colonna asserts that he made the decisions as the Corporation’s president, not as an individual. There is evidence lease on a pickup truck used Colonna paid, part, by at least in the Corporation. The doctor testified that Corporation only paid for the use of the vehicle to the extent
it was Yet, related to his business travel. he also claimed that Corporation sponsored professional his bowling career and he used the pickup for travel to tournaments. The sponsor decision to bowling formally was not documented records. complaint amended against both Colonna and the Corporation alleges they and, thus, were one and the same both breached the lease of the property. Trust’s The Corporation filed a counterclaim in they raised numerous alleged affirmative defenses and they damaged been the Trust relinquish refused to full possession building the leased pursuant to the lease. Colonna filed a summary judgment motion for in which he
maintained that the Trust allege failed to sufficient facts to corporate veil. The Trust filed a summary judgment motion for requested the court to conclude that the undisputed facts established that Colonna had breached the lease. The District Court denied granted Colonna’s motion and summary the Trust’s motion for judgment. It concluded that Colonna and the not were
132 property they and that possession of the Trust entitled to sole paying they property stopped the lease when vacated breached rent. 2002, the District Court two-day After a bench trial June of
¶18 and the ego that Colonna was the alter of concluded found that it under the lease. The court further party real interest use the as inequitable permit Colonna to would be justify wrong. convenience or subterfuge public to defeat was held pierced veil and Colonna Consequently, arising from the damages the Trust for the personally responsible to attorneys fees. plus breach
STANDARD OF REVIEW fact to determine findings a district court’s of This court reviews Boustead, Leasing, Inc. v. erroneous. Ace they clearly are whether 371, determining 285, 16, 16. In MT 311 Mont. 55 P.3d ¶ ¶ ¶ erroneous, we examine findings clearly are will whether a court’s (1) by credible findings supported are substantial whether: (2) misapprehended the effect evidence; whether the district court (3) firm are left a definite and evidence; and whether we with Boedecker committed. Berlin v. conviction that a mistake has been a matter 444, 455-56, 1187. It is not (1994), 887 P.2d 268 Mont. findings and agrees the district court’s whether this Court with findings, when considers whether those conclusions. Our review supported prevailing party, are light most favorable to the viewed Stromberg v. Seaton Ranch Co. credible evidence. by substantial (1972), 293, 306, 41, 48. 502 P.2d they if of law to determine a district court’s conclusions We review Leasing, Ace are correct. ¶
DISCUSSION ISSUE veil and pierced it District Court err when Did the Trust? breaching for the lease personally liable held it Court was incorrect the District Colonna contends breaching the for be held liable concluded that he should incorrectly the court Trust. He maintains lease with the of the case when the law to the facts interpreted applied In the Corporation. the alter concluded that he was it concluded incorrect when alternative, he that the court was contends otherwise or used for a fraudulent had been wrongful purpose. We note the conclusions of law from which Colonna appeals were
mischaracterized
the District Court. Those conclusions of
are
law
accurately
Therefore,
more
characterized as
of fact.
review of
pursuant
these issues
to the clear error
appropriate
standard is more
than the
initially
conclusions of law standard
invoked
Colonna.
developed
This Court has
a two-prong
test
to determine
whether
the circumstances of a
appropriate
piercing
case are
First,
veil.
the trier of fact must find that the defendant was
the alter ego,
instrumentality,
an
agent
corporation.
or an
Berlin,
Second,
trier
of fact
must find
corporate entity
evidence that the
“subterfuge
was used as a
convenience,
to defeat public
.’’Berlin,
justify wrong
perpetrate
fraud
*6
(citation omitted).
458,
1. Whether the shareholder owns all or most corporation’s of the stock.
2. Whether the shareholder is a director president and/or corporation.
3. Whether the shareholder corporate makes all the decisions consulting without the other directors or officers. shareholder,
4. Whether the officers and/or directors fail comply statutory requirements regarding operation of the corporation.
5. Whether the personal shareholder’s funds commingled are with corporation’s the funds.
6. Whether the personal shareholder’s credit corporation’s and credit are used interchangeably to obtain personal corporate and loans.
7. Whether the personal shareholder’s business records are not kept separate corporation’s from the business records.
8. Whether the corporation engage shareholder and in the same type of business.
9. Whether the corporation shareholder and have the same address which is the address of shareholder’s residence. 10. Whether the shareholder parties admits to third the shareholder and are one the same.
11. Whether the corporation’s profits earnings and are distributed through means other than dividends.
12. Whether is undercapitalized.
134 subsidiary name. parent
13. Whether and have same parent subsidiary and have the same directors 14. Whether and officers. Minerals,
Meridian Minerals Co. v. Nicor Inc. (1987), 274, 228 Mont. 284, 456, 742 P.2d list, required to is not an exclusive and a court is not above find all of the factors have been satisfied conclude adhere to party
shareholder is the real in interest. Nor does this Court Rather, any particular they fashion. are factors to above factors along the other evidence and circumstances of each be considered with case. individual Management Toenyes v. (1984), 336, ECA Environ. In 208 Mont. 213, subsidiary of a
679 P.2d
this Court considered whether
veil
ECA,
liability
parent
corporation,
pierced
assign
could be
percent
MMI
corporation, MMI. The record showed that
owned
ECA;
formality
abandoned;
capital
stock in
had been
MMI
meetings;
no minutes from
or shareholder
there were
accounts;
routinely transferred
ECA funds to its own
ECA was
money;
significant
MMI a
amount of
undercapitalized
and owed
Toenyes,
Mont. at
operations were financed MMI.
ECA’s
factors established sufficient control
was the alter
Inc.,
Roil,
The record indicated that
was not
pierced.
veil be
*7
shareholder,
majority
the
an officer
sufficiently capitalized; White was
corporate
controlled all
corporation;
a director of the
White
and
directors;
used
consulting the other officers and
White
activity without
debts;
corporate
and
formalities
personal
pay corporate
his
funds to
Therefore,
court and
we affirmed the district
not adhered to.
were
prong
that the first
ego
the alter
of Roil and
concluded that White was
Drilcon, Inc.,
corporate
the
veil had been satisfied.
required to
176-77,
on the fact that he did not follow argues defy require common sense to the sole would shareholder, director, professional corporation of a officer every transaction and decision made on behalf of document solely recognize corporation that the in this case was corporation. We make Colonna, only person he authorized to owned and run corporate decisions, and that some deviation from traditional corporate though no election was made to formality might permitted, even statutory close under the Montana make the However, 35-9-101, Act, seq, et MCA. Close § formalities, even when must adhere to fundamental individual, exclusively by one or the line between individual controlled here. corporation evaporates, as was the case give substantial the District Court’s discretion to It was within findings. This is not a formality in its weight corporate to the lack of formality-Colonna abandoned corporate case ofminor deviations from Moreover, formality. the abandonment almost all finding that supporting the formality only is one factor alongside the ego. placed When Corporation’s alter Colonna was payments Corporation made direct further money from its debts, and borrowed undercapitalized it was many of his gain from Colonna realized inception, and virtually no finding dealings Corporation, significant. more kept records were becomes *8 136 The District Court’s finding that Colonna ego was the alter of the
Corporation is supported by Therefore, substantial evidence. we affirm judgment District Court’s that Colonna party was the true in ego interest and the Corporation. alter B. corporate entity Was the used as a subterfuge public to defeat convenience,justify wrong perpetrate or fraud? Colonna maintains that the District Court was incorrect concluded that he used a subterfuge as to defeat public .convenience, justify wrong perpetrate fraud. He contends that there is no credible evidence to the court’s conclusions on this issue. The District Court’s findings regard conclusions with prong
second inquiry of its are conclusory. However, careful review of its judgment light of the record on appeal fully justifies the District Court’s decision. corporate may pierced veil not be simply because an
individual is the
alter
of a
party
and true
in interest.
There must be substantial evidence
may
from which the trier of fact
find that the corporate entity
“subterfuge
was used as a
to defeat
public convenience, justify wrong or perpetrate
Berlin,
fraud.”
(citation
omitted).
Mont. at
Seaton for alleged a real estate Brown that the required circumstances the court to Seaton Ranch’s Dorothy veil and damages. hold Seaton liable for his held Ms. Seaton hable. We veil and pierced court district on the direct finding of bad faith based the district court’s affirmed *9 directly negotiated indicating that Seaton circumstantial evidence closing fees. paying Brown’s buyer in order to avoid case, the direct Stromberg, 307-08, 502 at 49. In this Mont. at acted inference that Colonna permits an and circumstantial evidence caused the lease the Trust and faith he breached the with bad when with himself. ten-year enter into a lease Corporation to Drilcon, the record contained sufficient concluded that In we ¶39 finding that Mr. White the district court’s support evidence to credible that Mr. White: justify wrong. We stated corporate entity to used successful. The well and if the oil well was hoped gain to drilling with an hopes to avoid the cost dry and White now that jury was entitled to conclude uncapitalized corporation. the loss in unjust for Drilcon to bear inequitable it would be this case.
Drilcon, Inc., 177, at 230 Mont. Drilcon, appears that Colonna Similar to the circumstances personally profit it too. He seeks to
wanted to have his cake eat Corporation and at the same time renting property from his to liability undercapitalized corporation. As protect himself from with Court, inequitable. result would noted the District such a case, supports the In the substantial credible evidence Corporation that used the as a District Court’s conclusion wrong. subterfuge public justify to defeat convenience or The record suspect corporate transactions from which Colonna discloses numerous not contest that his received benefit. Colonna does complete control, corporation, over which he exercised breached Trust. The entered the lease for new lease with the building. By immediately after it left the Trust’s space with Colonna charge his using corporate entity, Colonna was able to sliding scale, in turn building he owned himself on rent for him have sufficient to make sure his would never enabled Also, the nature of the loans he satisfy judgment. assets to the Trust’s not have sufficient assets to made ensured that the would the District Court’s satisfy judgment. clearly supports The evidence wrong. justify to that Colonna used the determination court’s support to a district Where there is sufficient evidence conclusions, province question that it is not this Court’s light in a most favorable to the the evidence is viewed judgment. When Trust, that there is sufficient evidence we conclude corporate veil and hold Colonna Court’s decision to District breaching liable for the lease with the Trust. ISSUE Is the Trust entitled attorneys fees on appeal? Having prevailed appeal, on the Trust requests attorney’s fees. The Trust maintains prevailing that as the party, it is entitled attorneys reasonable appeal fees on to Eschenbacher v. pursuant Anderson, 206, 51,306 2001 MT 321, 51, Mont. 34 P.3d ¶ 51. In ¶ ¶ response, Dr. Colonna attorney’s contends fees are not appropriate agreement because the lease did provide attorneys not appeal. fees on An appeal award of fees Transaction on is not automatic. Wellington
Network v. Inc., Tech. 2000 MT 301 Mont. 7 P.2d 409, we restated the proposition attorneys arising fees out of a contract dispute appeal are only appropriate when the contract contemplated attorneys charged by fees would be prevailing party on appeal. That case Diehl and Assoc. v. heavily upon relied Houtchens Diehl, (1979), 588 P.2d granted 1014. In we *10 attorneys appeal fees on following language: based on the “Tn case of contract, such action on this agree pay I... to such additional sum as court, the both trial and appellate, may adjudge attorney reasonable as Diehl, fees.’” attorneys provision fees of the lease in question provides:
9. by COSTS AND ATTORNEYS If any FEES. reason of default on the part of the LESSEE it necessary becomes for the LESSOR to an employ attorney or in case bring LESSOR shall suit to any recover rent hereunder, due or any for the breach of provisions Lease, of this or to recover possession of the leased premises, recovery any or for the damages by occasioned omission, LESSEES’ any obligation [sic] acts of or for of the arising LESSEE Agreement by law, under the [sic] then the hereby LESSEE agrees pay to all in LESSOR the costs including, to, connection therewith but not limited reasonable attorneys any action, fees and costs of [sic] whether of not the proceed judgment. action or actions to Transaction provision Similar to the contract at in issue Network, attorney’s where fees appeal, were awarded on provides action,” lease that “all the costs” in “any connection with Network, See Transaction including attorneys paid. fees will be 39. ¶ Thus, the contemplated attorneys lease that fees would be awarded party the successful appeal. on judgment of the District Court is affirmed. This is matter of the reasonable for a determination to the District Court
remanded judgment. to the shall be added attorney's appeal fees on concur. REGNIER, and COTTER LEAPHART JUSTICES dissenting. JUSTICE RICE result, the Court has equitable an I In its zeal to reach dissent. apply the law. properly
failed to mention, finding of fact to, single cite or even The Court does not support of the conclusion by the District Court entered public “subterfuge to defeat entity here was used as v. Boedecker fraud,” Berlin convenience, wrong perpetuate justify 1180, 1188, prong of 444, 458, the second (1994), 268 Mont. (Issue IB). cannot do so because none The Court requirement the law’s Therefore, purports the Court by the District Court. were made (¶ 35), “suggestion” findings fact, upon which it bases render its own (¶ (¶ 38), reversing to avoid 36), order “appearances” “inference” erroneous, “[a]s and therefore conclusion because unsupported, an Court, inequitable.” a result would be ¶ noted the District such inequitable law so that an Failing duty correctly apply our rely inequitable is itself to all who law. result can be avoided agree properly District Court concluded I piercing first of the test corporation, the alter of the (Issue 1A). District Court Indeed, all of the entered ego” notably, the lack of prong, factual of the “alter provided (Finding #9), Colonna’s status meetings and minutes #5 #8), lack of shareholder, (Finding director and officer as sole the rental decision to terminate documentation of the obligations #9), keep corporate failure to agreement (Finding Colonna’s #11), obligations (Finding failure to document from separate status (Finding#12), failure to document Colonna’s corporate decisions #13), financial (Finding three employee as an arms-length transactions between suspected transactions #14), annual (Finding failure to document Colonna and the (Finding #15), total meetings shareholder and director *11 #16), and the (Finding that Colonna corporation control over #17), (Finding that in the same business corporation engaged (Finding #18), and that undercapitalized corporation was #20). Although Colonna (Finding of assets” corporation was “devoid I do not find findings appeal, on many of these aggressively contests on of review deferential standard them under our a to reverse basis questions. factual mentions, briefly note, the Court as important It is to the organized pursuant was not corporation professional Corporation Act,
Montana Close 35-9-101, seq., et MCA. That Act § authorizes corporation organized thereunder to operate without observing “the usual formalities requirements relating the exercise of corporate powers,” its directors, such as a board of bylaws and meetings, annual and the failure to observe such formalities ground “is not a for imposing personal liability on the shareholders for corporation.” 35-9-306, liabilities ofthe Section MCA. legal analysis, many and the effect of ofthe District Court’s above- findings referenced of fact regarding the absence of formalities, would much statutory different if a corporation close was at issue here. attempts Court to read support for the second prong of the fact,
test into the District Court’s erroneously. but does so Referencing finding the District Court’s corporation was undercapitalized, the Court comparison makes with ECA Management Services, Toenyes(1984), Environmental Inc. v. 336, 679 Toenyes, P.2d 213. In MMI, the trial court parent found that company to Environmental, ECA took the assets from ECA Environmental, and concluded that ECA Environmental had “been controlled and used MMI to avoid its contractual obligation with [Toenyes].” Toenyes, The Court “[t]his concludes therefrom that is similar to what
happened in incapable case-the is satisfying judgment against undercapitalized it because it was inception, from its suggesting that Colonna acted in bad faith.” 35. ¶ However, the Toeynes distinctions which make inapplicable are obvious from the Toenyes, Court’s own words. In ECA Environmental undercapitalized had not been inception,” rather, “from its but way by parent made that its company only Here, to avoid debt. there finding is no placed into a state of undercapitalization in order to contrary, avoid known debt. To the the District Court found that $190,000 Colonna had transferred into the corporation by way personal loans. Nonetheless, the Court finds that bad faith “suggested” merely is
because the undercapitalized inception.” “was If from its “bad faith” inception corporation undercapitalized means that a from its may
has incurred debt repay, not be able to then I suggest that the start-up young enterprises owners of countless acting are faith” surprised “bad and will be to learn that these expose circumstances could liability. Being them to “undercapitalized inception” from its is a common problem business and does necessarily improper not infer part motives *12 principals. corporation’s Stromberg In faith. to establish bad fact, requires more our law 41, also relied 293, 502 P.2d Co. (1972), 160 Mont. Seaton Ranch
v.
that the defendant
Court,
district court concluded
by the
upon
an
finding
she had “exhibited
first
only
faith
after
acted in bad
negotiations
further
Matt Brown from
design to exclude
intention and
Colony
purpose
for the
ranch to the Glacier
of the Seaton
for the sale
Stromberg,
....”
commission
of a real estate
avoiding
payment
therewith, we have also
Consistent
304,
support not contain facts Because the record does factfinding by this Court. I judgment, would reverse. necessary in the join GRAY and JUSTICE NELSON CHIEF JUSTICE dissent of JUSTICE RICE.