Taszarek v. Lakeview Excavating, Inc.

968 N.W.2d 146

Eugene 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, DefendantsandBrian Welken, Defendant and Appellee

No. 20210046

Supreme Court of North Dakota.

FILED DECEMBER 23, 2021

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.

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.

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, 930 N.W.2d 98. 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 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, 930 N.W.2d 98. "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, 883 N.W.2d 880. 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 fundamental unfairness" element. Id. at ¶¶ 10, 12. "Courts should exercise caution in applying the alter ego doctrine." Taszarek II , 2019 ND 168, ¶ 7, 930 N.W.2d 98.

[¶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, 740 N.W.2d 838. 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, 755 N.W.2d 867.

[¶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 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...