Winchel v. Craig

Jesse R. WINCHEL, et al. v. Robert CRAIG

CA 95-998                                          ___ S.W.2d ___

                  Court of Appeals of Arkansas
                             En Banc
               Opinion delivered December 23, 1996


1.   Jurisdiction -- circuit courts -- scope. -- The issue of
     jurisdiction must be assessed within the narrow confines of
     equity jurisdiction under the Arkansas Constitution; unless a
     cause of action is confided by the constitution exclusively to
     another court, it belongs exclusively, or concurrently, to the
     circuit court; all unassigned jurisdiction under the
     constitution is vested in the circuit court.

2.   Jurisdiction -- chancery courts -- jurisdiction may not be
     enlarged. -- The General Assembly is without authority to give
     chancery courts any jurisdiction other than that which the
     equity courts could exercise at the time of the adoption of
     the Constitution of 1874.

3.   Jurisdiction -- circuit courts -- correct way to determine
     jurisdiction. -- Under the Arkansas Constitution, circuit
     courts are the reservoir of unassigned judicial power; they
     have original jurisdiction in all cases where jurisdiction is
     not expressly vested in another court; the correct way to
     determine the circuit court's jurisdiction is first to
     determine what class of cases are expressly entrusted to the
     jurisdiction of other tribunals, with the great residuum
     belonging concurrently or exclusively to the circuit court; to
     successfully attack the circuit court's jurisdiction, it must
     be shown that another court has been granted exclusive
     jurisdiction of the subject matter.  

4.   Jurisdiction -- piercing corporate veil -- appellant did not
     show that chancery court had been granted exclusive
     jurisdiction. -- Where appellant did not show that chancery
     court has been granted exclusive jurisdiction in matters
     regarding piercing the corporate veil, and, to the contrary,
     the supreme court had indicated that piercing the corporate
     veil may be an issue in circuit court, the appellate court
     could not agree that the circuit court was without
     jurisdiction to decide the issue of piercing the corporate
     veil.

5.   Motions -- judgment notwithstanding the verdict -- review of
     denial. -- On appeal, the appellate court will uphold the
     trial court's denial of a motion for judgment n.o.v. if there
     is any substantial evidence to support the jury's verdict;
     substantial evidence is evidence that is of sufficient
     certainty and precision to compel a conclusion one way or
     another, forcing or inducing the mind to pass beyond suspicion
     or conjecture.

6.   Jury -- weight and value of evidence lies within jury's
     exclusive province. -- In this case, the jury did not accept
     appellants' explanation of the evidence; the weight and value
     of the evidence lies within the exclusive province of the
     jury.

7.   Corporations -- conditions under which corporate entity may be
     disregarded vary with circumstances. -- The conditions under
     which the corporate entity may be disregarded or looked upon
     as the alter ego of the principal stockholder vary according
     to the circumstances of each case.

8.   Evidence -- substantial evidence supported jury verdict. --
     Judgment notwithstanding the verdict is proper only where
     there is no substantial evidence for the jury verdict and one
     party is entitled to judgment as a matter of law; the
     appellate court held that there was substantial evidence to
     support the jury verdict where there was evidence that
     appellee was injured by a spreader manufactured by appellants'
     corporation; that appellants were its sole incorporators,
     stockholders, and officers; that the corporation had no
     liability insurance in case someone was hurt by its equipment;
     that appellants dissolved the corporation and sold or
     transferred its assets subsequent to appellee filing suit
     against it; that, about a month before appellants resigned as
     officers of the old corporation, they formed a new corporation
     whose articles of incorporation stated that the purpose of the
     new corporation was to manufacture spreader beds þ- the same
     kind of equipment that was manufactured by the first
     corporation; and that appellants made no provision upon
     dissolution of the old corporation to provide for payment of
     any liability it might have to appellee as a result of the
     suit that was pending at that time; the appellate court
     affirmed the judgment of the circuit court.


     Appeal from Washington Circuit Court; Kim Smith, Judge;
affirmed.
     Davis & Watson, P.A., by: Jeff H. Watson, for appellants.
     Everett, Shemin, Mars & Stills, by: David D. Stills, for
appellee.

     Melvin Mayfield, Judge.
     Appellants Jesse and Verda Winchel appeal from a judgment
entered against them and Winchel Enterprises, Inc., jointly and
severally, in the amount of $19,250, plus costs.  The damages were
assessed for an injury sustained by the appellee caused, in part,
by Winchel Enterprises, Inc.  The appellants were found liable
under the doctrine of "piercing the corporate veil."  On appeal the
appellants argue only two points: (1) the trial court lacked
subject-matter jurisdiction to decide the issue of piercing the
corporate veil; and (2) the trial court erred in denying their
motion for judgment notwithstanding the verdict as there was no
substantial evidence to support the jury's decision to pierce the
corporate veil.
     Robert Craig, who was employed by Mike Traylor to operate an
apparatus, used to spread fertilizer, which was manufactured by
Winchel Enterprises, Inc., was injured on April 16, 1992, when he
stuck his hand into the sprocket and chain area of the spreader
motor while it was operating.  On December 17, 1992, Craig filed a
complaint in circuit court against Traylor and Winchel Enterprises
alleging strict liability, negligence, and breach of an implied
warranty of merchantability.       
     In June 1993, the appellants resigned as officers of Winchel
Enterprises and the corporation was officially dissolved by filing
a certificate of dissolution in the office of the Secretary of
State on December 7, 1993.  Thereafter, on May 16, 1994, Craig
filed a "Second Amended and Substituted Complaint" adding the
appellants as defendants and asking for judgment jointly and
severally against Traylor, Winchel Enterprises, and the appellants. 
The complaint alleged, among other things, that because the
corporation was a sham corporation, because it was inadequately
capitalized, and because of the way its business was transacted and
its records were kept its corporate veil should be pierced.
     After a trial held April 25 and 26, 1995, a jury returned a
verdict on interrogatories.  The jury found against Winchel
Enterprises as to liability, that it was 55% at fault, and that the
affairs of the corporation were conducted in such a manner that the
corporate entity should be disregarded and the appellants held
personally liable.  On May 2, 1995, the trial court entered the
judgment from which this appeal comes.
     At trial, Jesse Winchel testified that he bought the spreader
business in 1983; that they incorporated for the purpose of
manufacturing spreaders; and that he and his wife were the sole
incorporators, stockholders, and officers.  They purchased
inventory, which they eventually sold to the corporation, and
equipment, which they leased to the corporation.  The corporation
paid them $3,000 per month for the equipment and they drew a
salary.  For a period of time, the corporation held annual
meetings, kept records, paid corporate taxes, paid Arkansas
franchise tax, and was in good standing with the state.
     In January 1992, the appellant Jesse Winchel stopped drawing
wages because the company was in bad financial straits and could
not afford to pay him.  Between 1990 and 1993 he loaned money to
the corporation in an attempt to keep it afloat.  He testified that
he always made a promissory note to himself when he loaned the
company money, and the company paid some of the notes.  He said the
company had no assets and could not afford liability insurance. 
Winchel testified further that when the lawsuit was filed against
Winchel Enterprises on December 13, 1992, he had already taken
steps to close down the company; that they should have closed down
two years previously, but they were trying to make it work.  He
said that they did not provide for any payment to Craig because
they did not know at that time that they had any liability to him. 
At liquidation the company had assets of some $12,000 in the form
of a forklift which was sold and the proceeds went to pay off the
bank indebtedness on the forklift.  Appellants received no assets
at dissolution.  
     On May 20, 1993, appellants formed a new corporation, Shamrock
Spreaders, Inc.  Although the Articles of Incorporation stated that
the purpose of this new corporation was to manufacture spreader
beds, Winchel testified that it could not manufacture the beds
because it had no equipment, and the corporation never went into
business.
     Dan Downing, appellants' accountant, testified that his
accounting firm had done the bookkeeping for Winchel Enterprises
since 1983 when appellants came to him for advice on how to operate
the business they had acquired.  Downing said his counsel was to
incorporate primarily for income tax purposes.  Downing said that
the corporate structure had never been abused; that Winchel
Enterprises was a solid entity from 1983 through liquidation; and
that the corporate records were kept at his office.  He testified
that the company was bankrupt, had no operating funds, and its
dissolution had nothing to do with Craig's lawsuit.  Downing said
the liquidation plan was a standard plan "taken right out of the
Internal Revenue manuals," and the appellants received no money
when the company was dissolved.  However, he also testified that
there was a transfer of assets upon liquidation, but he said the
purpose was to clean up the books in order to file a final income
tax return showing zero assets.
     In regard to the Articles of Incorporation of Shamrock
Spreaders, Inc., Downing testified that he assisted appellants in
setting up the corporation; that it was never activated; that its
purpose was to market parts and supplies; and that the Articles of
Incorporation contained a clerical error regarding the manufacture
of spreaders.
                 I.  Circuit Court Jurisdiction
     On appeal, appellants first argue that piercing the corporate
veil is an equitable remedy, and the circuit court lacked subject-
matter jurisdiction to decide that issue.  
     Appellants contend chancery has exclusive jurisdiction in
areas of substantive law developed by equity and cite In re Long
Trust v. Holk, 315 Ark. 112, 864 S.W.2d 869 (1993), and J.W.
Reynolds Lumber Co. v. Smackover State Bank, 310 Ark. 342, 836 S.W.2d 853 (1992), in support of this argument.  However, the
exclusive jurisdiction in those cases involved trusts, and the
construction, interpretation, and operation of trusts are matters
within the jurisdiction of the courts of equity, Holk, supra, and
courts of equity have inherent and exclusive jurisdiction of all
kinds of trusts and trustees, Spradling v. Spradling, 101 Ark. 451,
142 S.W. 848 (1911).
     Appellants also cite Cummings v. Fingers, 296 Ark. 276, 753 S.W.2d 865 (1988).  But, the equitable jurisdiction in that case
was based upon a statute, that authorized an action "by equitable
proceedings" to be filed in aid of execution for the discovery of
assets that could be subjected to payment of the judgment on which
the execution was issued.  The court held that the appellees had
"instituted this action to satisfy their judgment through a remedy
which, under the circumstances presented, required an equitable
proceeding as authorized under [the statute]." 296 Ark. at 281, 753 S.W.2d  at 868.  And the court remanded for the circuit court to
transfer the cause to chancery court.  The instant case, however,
was not brought in aid of execution and the statute involved in
Cummings is not involved in the case at bar.      
     In Bates v. Bates, 303 Ark. 89, 793 S.W.2d 788 (1990), our
supreme court discussed the issue of jurisdiction.  The court said
this must be assessed within the "narrow confines of equity
jurisdiction under the Constitution of Arkansas."  It explained:
          Article 7, section 11 provides:  "The circuit court
     shall have jurisdiction in all civil and criminal cases
     the exclusive jurisdiction of which may not be vested in
     some other court provided for by this Constitution." 
     This provision means that unless a cause of action is
     confided by the Constitution exclusively to another
     court, it belongs exclusively, or concurrently, to the
     circuit court.  In other words "[a]ll unassigned juris-
     diction under the Constitution is vested in the circuit
     court. . . ."  Article 7, section 15, provides:  "until
     the General Assembly shall deem it expedient to establish
     courts of chancery the circuit court shall have jurisdic-
     tion in matters of equity, subject to appeal to the
     Supreme Court, in such manner as may be prescribed by
     law."  By Act 166 of 1903, Ark. Code Ann.  16-13-301
     (1987), separate courts of chancery were established by
     the General Assembly.  However, the General Assembly is
     without authority to give chancery courts any jurisdic-
     tion other than that which the equity courts could
     exercise at the time of the adoption of the Constitution
     of 1874.

303 Ark. at 91, 793 S.W.2d  at 790 (citations omitted).  

     And, in Pinckney v. Mass Merchandisers, Inc., 16 Ark. App.
151, 698 S.W.2d 310 (1985), the appellants argued the circuit court
lacked subject-matter jurisdiction because the complaint sought
injunctive relief and an accounting.  We said:
          Under the Arkansas Constitution, circuit courts are
     the reservoir of unassigned judicial power; they have
     original jurisdiction in all cases where jurisdiction is
     not expressly vested in another court.  The correct way
     to determine the circuit court's jurisdiction is to first
     determine what class of cases are expressly entrusted to
     the jurisdiction of other tribunals, with the great
     residuum belonging concurrently or exclusively to the
     circuit court.  In order to successfully attack the
     circuit court's jurisdiction, it must be shown that
     another court has been granted exclusive jurisdiction of
     the subject matter.  

16 Ark. App. at 153-54, 698 S.W.2d  at 312 (citations omitted).

     Here, appellant has not shown that chancery court has been
granted exclusive jurisdiction in matters regarding piercing the
corporate veil.  To the contrary, our supreme court has indicated
that "piercing the corporate veil" may be an issue in circuit
court.  
     In Black and White, Inc. v. Love, 236 Ark. 529, 367 S.W.2d 427
(1963), an appeal from circuit court, the appellants appealed from
the trial court's action in allowing certain testimony to be
presented.  Our supreme court found no error, and said that "the
plaintiffs were making an effort to pierce the fiction of the
corporate entities of Black & White, Inc. and Checker Cab Company;
and that the way the two corporations operated -- like a joint
venture -- was a cogent fact which the plaintiffs were entitled to
show."  The appellants also objected to an instruction given by the
trial court.  Our supreme court found no error regardless of
whether the instruction complained of was given on the theory of
joint venture or the theory of piercing the corporate veil.  The
supreme court held that the giving of the instruction was justified
and found "no error in the entire case."     
     Therefore, we cannot agree that the circuit court was without
jurisdiction to decide the issue of piercing the corporate veil.
                    II.  Substantial Evidence
     Appellants also argue that the trial court erred in denying
their motion for judgment notwithstanding the verdict because there
was no substantial evidence to support the jury's decision to
pierce the corporate veil.
     By jury verdict, returned upon interrogatories, the jury found
"from a preponderance of the evidence that the corporate affairs of
Winchel Enterprises, Inc. were conducted in such a manner that the
corporate entity should be disregarded so as to render Jesse R.
Winchel and Verda Winchel personally liable for Robert Craig's
damages."   The trial court subsequently denied appellants' motion
for judgment notwithstanding the verdict on the basis that the jury
was correctly instructed on the issue of piercing the corporate
veil, and there was substantial evidence to support the jury's
verdict in that regard.  In the court's letter decision, the court
said there was also substantial evidence to support a finding that
Arkansas law was violated when the shareholders took no steps to
provide for the contingent liability resulting from the filing of
the suit for personal injuries against the corporation and which
was pending at the time of its dissolution.  Moreover, the court
said, evidence regarding the formation of the new corporation,
Shamrock Spreaders, Inc., constituted substantial circumstantial
evidence concerning the intentions and motives of the shareholders.
     On appeal, the appellate court will uphold the trial court's
denial of a motion for judgment n.o.v. if there is any substantial
evidence to support the jury's verdict.  Arkansas Power and Light
Co. v. Adcock, 281 Ark. 104, 661 S.W.2d 392 (1983).  Substantial
evidence is evidence that is of sufficient certainty and precision
to compel a conclusion one way or another, forcing or inducing the
mind to pass beyond suspicion or conjecture.  Croom v. Younts, 323
Ark. 95, 913 S.W.2d 283 (1996).
     Appellants argue that there was no evidence of illegal or
fraudulent abuse of the corporate form; no evidence that the
dissolution of the corporation came about because of the filing of
the appellee's personal injury lawsuit; no evidence that the
corporation was undercapitalized; and no evidence that a new
corporation was formed with the intention of avoiding the liability
of the old one.  We do not agree.  The appellants' problem is that
the jury did not accept the appellants' explanation of the
evidence, but the weight and value of the evidence lies within the
exclusive province of the jury.  Garrett v. Brown, 319 Ark. 662,
666, 893 S.W.2d 784, 787.      
     As to the law, in Humphries v. Bray, 271 Ark. 962, 611 S.W.2d 791 (1981), the Workers' Compensation Commission had combined all
the employees who worked at the appellant's separate businesses to
hold that the appellant had enough employees to be subject to the
workers' compensation law.  When the appeal of the holding reached
our supreme court, it said the issue was whether there was
substantial evidence to find that a corporation was the alter ego
of the appellant, and that it was so managed and controlled by him
as to constitute a sole proprietorship.  The court stated that the
conditions under which the corporate entity may be disregarded or
looked upon as the alter ego of the principal stockholder vary
according to the circumstances of each case.
     In Fausett Co. v. Rand, 2 Ark. App. 216, 619 S.W.2d 683
(1981), this court considered the issue of piercing the corporation
veil and said that all three cases cited by one party contained the
statement: "It is only when the privilege of transacting business
in a corporate form has been illegality abused to the injury of a
third person that the corporate entity should be disregarded."  And
we said that all three cases cited by the other party held that
such liability will be imposed only where the corporate structure
has been illegally or fraudulently abused to the injury of a third
person.  All six cases are listed in the Fausett Co. v. Rand
opinion.  See 2 Ark. App. at 221, 619 S.W.2d  at 686.  
     In Arkansas Bank & Trust Co. v. Douglass, 318 Ark. 457, 885 S.W.2d 863 (1994), our supreme court held that the insurance
commissioner did not err in piercing the corporate veil.  Although
that case involved a parent corporation and its subsidiaries, the
principle is the same.  In that case, our supreme court discussed
the case of Woodyard v. Arkansas Diversified Ins. Co., 268 Ark. 94,
594 S.W.2d 13 (1980), a case in which our supreme court held that
courts will ignore the corporate form of a subsidiary where
"fairness" demands, and said that this is usually where it is
necessary to prevent wrongdoing and where the subsidiary is the
mere tool of the parent.  
     In the instant case, one of the jury instructions said:  
     You are instructed that under Arkansas law, after
     dissolution and after paying for or adequately providing
     for the payment of its liabilities, the corporation, if
     authorized at a meeting of shareholders, may sell its
     remaining assets and distribute the same among the
     shareholders according to their respective shares.

The instruction is taken directly out of the Arkansas Business
Corporation Act, specifically Ark. Code Ann.  4-26-1103 (Repl.
1991), which provides that after dissolution:
          (3) After paying or adequately providing for the
     payment of its liabilities:

          (A)(i) The corporation, if authorized at a meeting
     of shareholders which is to be held on notice to all
     shareholders, whether or not entitled to vote, by a vote
     of a majority of all outstanding shares entitled to vote
     thereon, may sell its remaining assets or any part
     thereof for cash or for shares, bonds, or other securi-
     ties of another corporation, or partly for cash and
     partly for such securities, and distribute the same among
     the shareholders according to their respective rights.

     In the instant case, there is evidence that the appellee was
injured by a spreader manufactured by the corporation Winchel
Enterprises; that appellants were its sole incorporators, stock-
holders, and officers; that the corporation had no liability
insurance in case someone was hurt by its equipment; that the
appellants dissolved Winchel Enterprises and sold or transferred
its assets subsequent to appellee filing suit against the corpora-
tion; that about a month before the appellants resigned as officers
of Winchel Enterprises, they formed a new corporation whose
Articles of Incorporation stated that the purpose of the new
corporation was to manufacture spreader beds þ and this is the same
kind of equipment that was manufactured by the first corporation;
and that appellants made no provision upon dissolution of the old
corporation to provide for payment of any liability it might have
to appellee as a result of this suit which was pending at that
time.
     Judgment notwithstanding the verdict is proper only where
there is no substantial evidence for the jury verdict and one party
is entitled to judgment as a matter of law.  Findley v. Time
Insurance Co., 269 Ark. 257, 599 S.W.2d 736 (1980).  There is
substantial evidence to support the jury verdict, and we affirm the
judgment of the circuit court.
     Robbins, Stroud, Neal, and Griffen, JJ., agree.
     Rogers, J., dissents.

==================================================================


                 Judith Rogers, Judge, dissents.
     
     I am in agreement with appellant's argument that the circuit
court lacked jurisdiction to afford equitable relief.  Therefore,
I respectfully dissent to the majority's decision rejecting
appellant's argument.
     The issue of which court, law or equity, has jurisdiction to
grant the relief known as "piercing the corporate veil" is one of
first impression.  The majority relies, in part, on the decision of
Black and White, Inc. v. Love, 236 Ark. 529, 367 S.W.2d 427 (1963),
where the supreme court, upon review of a circuit court case, found
no error in the admission of evidence or an instruction touching
upon the issue of piercing the corporate entity.  Although the
court found "no error in the entire case," that finding is not
equivalent to a ruling that jurisdiction in circuit court was
proper.  That issue was simply not raised or even remotely
discussed by the court, just as the propriety of the circuit
courts' transfer of the issue of piercing the corporate veil to
equity was not at issue in the cases of Parker v. Point Ferry, 249
Ark. 764, 461 S.W.2d 587 (1971), and Banks v. Jones, 239 Ark. 396,
340 S.W.2d 108 (1965).  Consequently, neither the decisions in
Black and White, Inc., Parker, nor Banks can be relied upon as
controlling authority on the issue of jurisdiction.  The question
is decidedly one of first impression, although it is not one for
which there is no guidance.
     The majority does not deny that piercing the corporate veil is
a remedy that is equitable in nature.  Indeed, in Farmers Gulf
Station v. Bray, 271 Ark. 962, 611 S.W.2d 791 (Ark. App. 1981),
this court observed that the doctrine of piercing the corporate
veil is founded in equity.  As observed by the majority, it is a
doctrine that is applied to prevent injustice and it is one that is
to be applied with great caution.  Additionally, the doctrine of
piercing the corporate veil is recognized as being an equitable
remedy, not a cause of action unto itself, which is used as a means
of imposing liability.  See 1 William Meade Fletcher, Fletcher
Cyclopedia of the Law of Private Corporations,  41 (1990).  With
this distinction in mind, the supreme court's decision in Cummings
v. Fingers, 296 Ark. 276, 753 S.W.2d 865 (1988), provides the
answer to the question of whether a circuit court has jurisdiction
to grant equitable relief, and that answer is in the negative.   
     In Cummings v. Fingers, id., the appellees sought to obtain
satisfaction of a judgment rendered in their favor in circuit court
by petitioning the court to compel the appellant to obtain and
deposit into the court's registry funds appellant was entitled to
receive, but which were being held by a government agency. 
Although the trial judge had recognized that the type of order
sought by appellees was cognizable in equity, the judge ruled that
he had the inherent authority to compel the appellant to act.  The
supreme court disagreed, holding in no uncertain terms that the
circuit court lacked jurisdiction to grant what amounted to
equitable relief.  The majority here dismisses the appellant's
reliance on Cummings by stating that the case was decided on the
basis of a statute.  However, I do not believe that the holding of
the court in Cummings can be distinguished with such facility.  It
is clear from the opinion that the focus of the decision was on the
compulsory aspect of the type of relief afforded by the statute,
which was said to be equitable in nature.  By this decision, the
court clearly took the position that circuit courts do not have the
power to afford equitable relief, as demonstrated by its rejection
of the dissenting viewpoint.  See, id., 296 Ark. at 280, n.2.  In
sum, the supreme court did hold that circuit courts do not have
jurisdiction to enforce their judgments by means of an equitable
remedy.  In other words, it was held that jurisdiction lies
exclusively in chancery court. See also Monette Road Improvement
Dist. v. Dudley, 144 Ark. 169, 222 S.W. 59 (1920) (where the
supreme court held that the creation of chancery courts in this
state left no vestige of equity jurisdiction in the circuit
courts), and Commission on Judicial Discipline and Disability v.
Digby, 303 Ark. 24, 29, 792 S.W.2d 594 (1990) (where the supreme
court stated matter of factly that injunctive relief is a remedy
exclusively cognizable in equity).
     The parallels between the instant case and the decision in
Cummings v. Fingers, supra, are striking, and I am at a loss to
conceive of any reason why the majority finds no application of the
holding in Cummings to this case.  As in Cummings, the appellee
here is seeking to enforce its judgment, in an effort to impose
individual liability, by means of an equitable remedy.  As did the
court in Cummings, we should hold that the circuit court had no
jurisdiction to grant equitable relief and reverse and remand with
directions to transfer the matter to chancery court.  Until the
distinction between equity and law courts is abolished in this
state, I feel constrained to not blur this separation.