SPECTRUM PROSTHETICS AND ORTHOTICS, INC., TODD A. SCHWEIZER, MARK A. MCDONALD and JEFFREY J. BRUCE, Plaintiffs-Appellees, vs. BACA CORPORATION, ANDREW SHIRLEY, RHODA SHIRLEY, ELIZABETH J. ANDERSON, and AIMEE C. GRENSTEINER Defendants-Appellants.
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IN THE COURT OF APPEALS OF IOWA
No. 9-416 / 08-0811
Filed October 7, 2009
SPECTRUM PROSTHETICS AND
ORTHOTICS, INC., TODD A.
SCHWEIZER, MARK A. MCDONALD
and JEFFREY J. BRUCE,
Plaintiffs-Appellees,
vs.
BACA CORPORATION, ANDREW
SHIRLEY, RHODA SHIRLEY,
ELIZABETH J. ANDERSON, and
AIMEE C. GRENSTEINER
Defendants-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Joel D. Novak, Judge.
Appellant appeals the district court‟s inclusion of a jury instruction of
piercing the corporate veil. AFFIRMED.
Kathryn Barnhill of Barnhill & Associates, West Des Moines, for
appellants.
Michael Lewis of Lewis Law Firm, Cambridge, for appellees.
Heard by Vogel, P.J., and Potterfield, J. and Mahan, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2009).
2
VOGEL, P.J.
BACA Corporation (Corporation), Andrew Shirley, Rhoda Shirley,
Elizabeth Anderson, and Aimee Grensteiner (collectively the BACA defendants)
appeal the district court‟s inclusion of jury instructions of piercing the corporate
veil. The BACA defendants claim that Spectrum Prosthetics and Orthotics, Inc.,
with principals, Todd Schweitzer, Mark McDonald, and Jeffrey Bruce, (Spectrum)
made no claim or allegation in a pleading or responsive discovery that would
have alerted the BACA defendants to the issue and eliminated unfair surprise at
trial. Because we agree with the district court that the BACA defendants were on
notice as to Spectrum‟s theory of recovery, we affirm.1
I.
Background Facts and Proceedings
In January 2003, the Corporation leased commercial office space to
Spectrum.
Spectrum asserted that after signing the lease, the property had
significant and ongoing problems, including a leaking roof, and need for a new
heating and cooling system. The poor maintenance by the Corporation created
inadequate working conditions for Spectrum employees. Unable to work out their
differences, the animosity between the parties escalated. The Corporation filed a
small claims action against Spectrum in January 2007; Spectrum served a notice
of termination of lease on the Corporation on February 1; and the Corporation
changed all the locks on the leased premises on February 26. In response,
Spectrum sought immediate injunctive relief against the Corporation, Andrew
Shirley, and Rhoda Shirley.
Spectrum asserted that the manager, Rhoda
Shirley, entered the leased premises at “odd times of the day and night, without
1
The named defendants are Rhoda Shirley and her three children.
3
notice, without permission, and while in the premises turned down the thermostat
to the premises.” On February 27, temporary injunctive relief was granted, giving
Spectrum possession of the leased premises and imposing a no contact order
between the Spectrum plaintiffs and Rhoda Shirley. The Corporation asserted a
counterclaim on March 20, alleging breach of contract and various other claims
against Spectrum. After being granted leave to amend its petition, Spectrum
added Elizabeth Anderson and Aimee Grensteiner as defendants and alleged
additional claims against all of the BACA defendants. In response, Elizabeth
Anderson and Aimee Grensteiner each filed a motion to dismiss, asserting that
Spectrum did not allege facts that would pierce the corporate veil or impose
personal liability on either of them. Both motions were reserved for consideration
until trial.
At trial, the district court instructed the jury on the definition of piercing the
corporate veil in jury instruction twenty, and in instruction twenty-one instructed
the jury:
Plaintiffs allege that BACA Corporation was a sham corporation
and that the acts or omissions of the directors, shareholders, or
officers make them personally liable to the plaintiffs. To find
personal liability against the officers, directors, or shareholders of
the corporation, the plaintiffs must pierce the corporate veil. To
pierce the corporate veil the plaintiff must prove all of the following
propositions:
1. A defendant is a shareholder, officer or director of BACA
Corporation.
2. BACA Corporation is indebted to the plaintiffs as a result
of its breach of contract and/or abuse of process.
3. The defendants, Andrew Shirley, Elizabeth J. Anderson,
Rhoda Shirley, and Aimee C. Grensteiner have abused
the corporate privilege.
4. The amount owed by the corporation to the plaintiff.
4
If the plaintiff has failed to prove all of these propositions, the
plaintiff is not entitled to damages in some amount.
The jury found that the BACA defendants had breached the contract, and
returned a verdict for Spectrum. It also found that the corporate veil had been
pierced. The BACA defendants filed a motion for judgment notwithstanding the
verdict and a motion for a new trial; both motions were denied. The BACA
defendants appeal.
II.
Scope of Review
We review the district court‟s giving of jury instructions for the correction of
errors at law. Iowa R. App. P. 6.4. We review the disputed jury instructions to
determine if they are correct statements of the law based on the evidence
presented. Le v. Vaknin, 722 N.W.2d 412, 414 (Iowa 2006). The district court‟s
denial of a motion for judgment notwithstanding the verdict and a motion for new
trial are also reviewed for correction of errors at law. Iowa R. App. P. 6.4.
III.
Jury Instruction
The BACA defendants contend the district court erred in instructing the
jury on piercing the corporate veil.2 They argue there was insufficient information
in the pleadings or record pertaining to personal liability of the named defendants
to allow the corporate veil to be pierced, and further that they were not alerted to
Spectrum‟s theory of recovery. “Under Iowa law, a court is required to give a
requested instruction when it states a correct rule of law having application to the
facts of the case and when the concept is not otherwise embodied in other
instructions.” Herbst v. State, 616 N.W.2d 582, 585 (Iowa 2000). “Parties to
2
The BACA defendants failed to specify which numbered jury instructions they assert
the district court erred in instructing.
5
lawsuits are entitled to have their legal theories submitted to a jury if they are
supported by the pleadings and substantial evidence in the record.” Sonnek v.
Warren, 522 N.W.2d 45, 47 (Iowa 1994). “When weighing the sufficiency of the
evidence to support a requested instruction, we view the evidence in a light most
favorable to the party seeking the instruction.” Herbst, 616 N.W.2d at 585.
In order to pierce the corporate veil, exceptional circumstances must be
presented, for example, where the corporation is a mere shell. Briggs Transp.
Co. v. Starr Sale Co., 262 N.W.2d 805, 810 (Iowa 1978). Factors that would
support such a finding include:
(1) the corporation is undercapitalized, (2) without separate books,
(3) its finances are not kept separate from individual finances,
individual obligations are paid by the corporation, (4) the
corporation is used to promote fraud or illegality, (5) corporate
formalities are not followed or (6) the corporation is merely a sham.
Id.
In determining whether the district court was correct in its instructions
pertaining to piercing the corporate veil, we look to the record and determine
whether there are facts sufficient to support these instructions and whether
defendants were alerted to this theory of recovery.
When Spectrum filed the initial petition, the Corporation was not the only
named party; Rhoda Shirley and Andrew Shirley were also individually named as
defendants.
Naming these individuals should have alerted them as to their
liability exposure apart from the Corporation. Without the possibility of personal
liability, individual defendants would not be included, and the Corporation alone
would have been named as defendant. See Fazio v. Brotman, 371 N.W.2d 842,
846 (Iowa Ct. App. 1985) (stating that when the corporate veil is pierced,
individual defendants can be found liable).
6
After filing the initial petition, Spectrum filed a motion for leave to amend
the petition, in order to “ascertain the relationships between various owners of
the building at issue in the hopes of identifying the relationships between the true
parties in interest.” With no resistance by the Corporation, Spectrum amended
its petition, adding Anderson and Grensteiner as individual defendants. Both
responded by filing a motion to dismiss for failure to state a claim based on
personal liability.
Anderson and Grensteiner each separately asserted that
Spectrum “stated no cause of action or theory to impose personal liability . . . and
alleged no facts whatsoever that would pierce the corporate veil.”
By these
statements, Anderson and Grensteiner acknowledged the possibility that
Spectrum was seeking recovery from them personally by piercing the corporate
veil.
Both motions were reserved for consideration until trial, but neither
Anderson nor Grensteiner reasserted their motions to dismiss during trial. We
agree with the district court‟s post-trial ruling, that “[t]he amendment alone should
have put the defendants on notice the plaintiffs were seeking to assign personal
liability to individual defendants as well as the defendant corporation.” 3
During the trial, Spectrum attempted to illustrate that the Corporation was
a mere shell, thereby leaving the named defendants personally liable to
Spectrum on the various claims asserted in its amended petition.
The
Corporation was incorporated on August 20, 2001. At trial, none of the named
defendants, claiming to be various officers of the Corporation, could offer proof of
3
We note the Corporation, as well as the individual defendants, all appeared to be
represented by the same attorney, although no answers were filed by the named
individuals.
7
any corporate documents or financial records.
Grensteiner, claiming to be
treasurer of the Corporation, testified that she had never seen any corporate
documents for the Corporation, could not estimate the corporation‟s net worth,
and had no knowledge of the corporate bank account. Andrew Shirley, claiming
to be vice president, testified that he had never seen the financial records or
corporate books, and stated that no by-laws existed. Anderson, claiming to be
president, also testified that she did not recall ever seeing a corporate document.
All testified that they informally discussed matters concerning the corporation.
However, “BACA Corporation” was administratively dissolved by the Secretary of
State on August 2, 2004, for “failure to file the 2004 annual/biennial corporation
report”.4 See Beck v. Equine Estates Dev. Co., 537 N.W.2d 798, 800 (Iowa Ct.
App.
1995)
(“Continued
corporate
activity
by
shareholders
following
administrative dissolution may also result in personal liability.”).
Testimony is conflicting as to Rhoda‟s role in the Corporation. Prior to
trial, Rhoda identified herself as the Corporation‟s unpaid manager, but at trial
she stated that she became a vice president in August 2007.
Grensteiner
testified that Rhoda was the building manager; Andrew Shirley testified that
Rhoda became a vice president of the Corporation in 2006; and Anderson
testified that Rhoda became vice president in 2005. No corporate records to
verify any of these assertions were produced at trial.
Rhoda testified the
corporate documents sought by Spectrum in its discovery requests were either
4
The only documents recorded by the Secretary of State were the Articles of
Incorporation, filed on August 20, 2001, and a Biennial Report filed on January 8, 2002.
8
lost or the accountant had taken all the books to Arizona, including a document
purporting to make Rhoda a vice president of the Corporation.
In September 2007, Rhoda, apparently on behalf of the named
defendants, propounded interrogatories to Spectrum. Interrogatory twenty-one
asked Spectrum to “[i]dentify how allegations made in #77 of Plaintiff‟s amended
brief will allow Plaintiffs to pierce the corporate veil.” Spectrum responded that
“#77 does not speak of piercing the corporate veil.”
With an interrogatory
specifically directed at Spectrum‟s attempt to pierce the corporate veil, any
claimed surprise at trial by the BACA defendants as to that issue lacks credulity.
We agree with the district court‟s post-trial ruling that “there is no merit or basis to
support the „ambush‟ claim. . . .”5 It is clear from the record that the BACA
defendants were alerted to or should have been aware of the potential of
personal liability.
Spectrum elicited sufficient testimony from the named defendants such
that the validity of the Corporation was called into question and the court
correctly gave the challenged instructions. Sufficient evidence demonstrated that
one, if not more, of the Briggs factors was met to support the exceptional
circumstances necessary to pierce the corporate veil. Briggs, 262 N.W.2d at
810. Therefore, the district court did not err in instructing the jury on piercing the
5
Out of the presence of the jury, defense counsel stated on the record, “I knew he was
trying to pierce the corporate veil to get director - - I mean, that is self-evident. But the
grounds for that piercing the corporate veil is for their participation in the torts of the
corporation.”
9
corporate veil, denying the motion for judgment notwithstanding the verdict, or
denying the motion for a new trial on the same grounds.6
AFFIRMED.
6
The testimony was difficult to follow in the appendix, as each witness‟s name was not
designated at the top of each page where the witness‟s testimony appears. Although
not applicable to this appeal, effective January 1, 2009, the rules of appellate procedure
require the name of each witness whose testimony is included in the appendix to appear
at the top of each page where the witness‟s testimony appears. See Iowa R. App. P.
6.905(7)(c) (2009).
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