PUBLISHED OPINION
Case No.: 93-3302
†Petition for
Review filed.
Complete
Title
of
Case:DOUGLAS W. OLEN,
Plaintiff-Respondent,
v.
FRANK K. PHELPS,
Defendant,
PROFESSIONAL ACCOUNTING SERVICES, LTD.,
AND JULIE PHELPS DILLON,
Garnishees-Defendants-
Appellants. †
Submitted
on Briefs: September 14, 1994
COURT COURT OF
APPEALS OF WISCONSIN
Opinion
Released: February 8, 1996
Opinion
Filed: February
8, 1996
Source
of APPEAL Appeal from a judgment
Full
Name JUDGE COURT: Circuit
Lower
Court. COUNTY: Jefferson
(If
"Special" JUDGE: Jacqueline
R. Erwin
so
indicate)
JUDGES: Eich,
C.J., Sundby and Vergeront, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSFor the garnishee-defendants-appellants the cause was submitted
on the briefs of Eric S. Darling of Schmidt, Darling & Erwin
of Milwaukee.
Respondent
ATTORNEYSFor the plaintiff-respondent the
cause was submitted on the brief of Ralph A. Weber of Kravit, Gass
& Weber, S.C. of Milwaukee.
COURT OF
APPEALS DECISION DATED AND
RELEASED February
8, 1996 |
NOTICE |
A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 93-3302
STATE OF WISCONSIN IN
COURT OF APPEALS
DOUGLAS
W. OLEN,
Plaintiff-Respondent,
v.
FRANK
K. PHELPS,
Defendant,
PROFESSIONAL
ACCOUNTING SERVICES, LTD.,
AND
JULIE PHELPS DILLON,
Garnishees-Defendants-Appellants.
APPEAL
from a judgment of the circuit court for Jefferson County: JACQUELINE R. ERWIN, Judge. Affirmed in part and reversed in part.
Before
Eich, C.J., Sundby and Vergeront, JJ.
SUNDBY,
J. Garnishee defendants Professional
Accounting Services (PAS) and its owner Frank K. Phelps and Julie Phelps Dillon
appeal from a judgment entered September 20, 1993, in favor of Douglas W.
Olen. The trial court found that Phelps
had fraudulently conveyed assets to avoid garnishment, contrary to
§ 242.04(1)(a), Stats. It appointed a receiver to recover those
assets. Defendants claim that the trial
court's finding that Phelps fraudulently transferred assets is clearly
erroneous. They further argue that the
trial court erred when it made PAS's future profits subject to garnishment
without further process. We conclude
that the trial court's findings are not clearly erroneous and affirm the
judgment in that respect. However, we
further conclude that PAS's contingent future profits are not subject to
garnishment until realized and reverse the judgment in that respect.
BACKGROUND
1. The Parties
a. Plaintiff-Respondent
Olen is a private investor who in the 1980s asked Phelps to invest money for
him. He brought action in the United
States District Court for the Eastern District of Wisconsin against PAS and
Phelps to recover funds placed with Phelps.
On October 16, 1991, the court entered a default judgment in favor of
Olen in the amount of $213,600.75.
b. Garnishee
defendant-appellant PAS is an accounting firm in Watertown, Wisconsin. Prior to 1991, the firm was known by a
series of other names and had various shareholders. However, Phelps is currently the sole shareholder and director.[1] He receives all of PAS's profits. PAS was not involved in the Olen
investments. PAS is a party solely as a
garnishee defendant under § 812.19(7), Stats.
2. PAS Funds
PAS
handles its recordkeeping informally, with no minute books or ledgers showing
the transfer of funds between various bank accounts. A PAS check usually does not describe its purpose. The record shows that Phelps had control of
PAS's funds. He had no personal bank
account; he paid profits from PAS's operations to his wife's personal account
and directly to his creditors to satisfy personal and business debts.
3. Findings of
the Trial Court
Mr. and Mrs. Phelps
transferred PAS's Watertown office building and a Boca Raton condominium to
their daughter, Julie Phelps Dillon, as a gift, although she was unaware of the
gift until this action.
The
trial court found that the conveyance of the Watertown office building to
Dillon was fraudulent and declared the conveyance void. The court concluded that the pre-garnishment
distributions of PAS profits directly to personal creditors and to Mrs. Phelps
for "household expenses" were fraudulent and directed the receiver to
recover those profits.
The
trial court made the judgment applicable to PAS's contingent future profits
without further process.
THE ISSUES
(1) Is the trial court's finding that Phelps
conveyed the PAS office building to Dillon to hinder, delay or defraud a
creditor clearly erroneous? We conclude
that it is not.
(2) Is the trial court's finding that the
distributions of PAS's profits by Phelps were fraudulent clearly
erroneous? We conclude that it is not.
(3) Did the trial court correctly include in the
judgment PAS's contingent future profits?
We conclude that the trial court erred in this respect.
STANDARD OF REVIEW
Issue
(1) presents a mixed question of law and fact, issue (2) is factual, and issue
(3) presents a question of law.
Findings
of fact shall not be set aside unless clearly erroneous. Section 805.17(2), Stats.; see also Chmill v. Friendly Ford-Mercury,
144 Wis.2d 796, 803, 424 N.W.2d 747, 750 (Ct. App. 1988).
The
construction of a statute or the application of a statute to the undisputed or
found facts presents a question of law.
Kania v. Airborne Freight Corp., 99 Wis.2d 746, 758, 300
N.W.2d 63, 68 (1981). We are not bound
by the trial court's conclusions of law and decide the matter de novo. See First Nat'l Leasing Corp. v.
City of Madison, 81 Wis.2d 205, 208, 260 N.W.2d 251, 253 (1977).
I.
TRANSFER OF THE OFFICE BUILDING
The trial court found
that Mr. and Mrs. Phelps conveyed the Watertown office building to their
daughter, Julie Dillon, with the intent to hinder, delay or defraud a creditor
within the meaning of § 242.04(1)(a), Stats. Phelps argues that this finding is clearly
erroneous. The statute provides:
(1) A
transfer made or obligations incurred by a debtor is fraudulent as to a
creditor, whether the creditor's claim arose before or after the transfer was
made or the obligation was incurred, if the debtor made the transfer or
incurred the obligation:
(a) With actual intent to hinder, delay or
defraud any creditor of the debtor ....
A
real estate conveyance is not fraudulent per se, but the circumstances
surrounding a transfer may strongly suggest a fraudulent intent. The transfer of the Watertown office
building from Mr. and Mrs. Phelps to their daughter was made less than two
months after a meeting between Mr. Phelps and Olen to arrange payment of
Phelps's debt, under threat of legal action.
Further, Julie Dillon was unaware of the transfer, and PAS continued to
pay the mortgage and taxes on the building as if it were still the owner. Finally, Dillon gave no consideration for the
transfer.
PAS
and Phelps argue that even if all of the elements of a fraudulent transfer are
present, the office building is not subject to garnishment because if the
conveyance is voided, the building will revert to PAS and Phelps will have no
ownership interest. The trial court
concluded that declaring the transfer void would leave the asset free for
future garnishment because PAS was Phelps's alter ego.
The
trial court noted numerous unusual and questionable characteristics of PAS
which support a conclusion that the corporation was Phelps's alter ego. He was PAS's sole shareholder and
director. PAS handled all decisions on
an informal basis and did not keep minutes of its meetings. Phelps treated PAS funds as his, and
commonly directed PAS funds to satisfy both corporate and personal debts. He treated the corporate assets as his
own. He used PAS funds to make the
mortgage payments on both the firm's office building and his own
properties. Phelps treated PAS as a
corporation only when it was convenient.
Phelps admitted that he had gifted the property to his daughter to
provide a "nest egg" for her, while at the same time he claimed that
he never owned the property.
The
veil of a corporation may be pierced when the evidence shows that the corporation
is merely the alter ego of its owner or owners:
The general rule
is that a corporation is treated as a legal entity distinct from its members
and is not liable for the personal debts of a shareholder. However a shareholder's act will be treated as
a corporate act and the existence of the corporation as an entity apart from
the natural persons comprising it will be disregarded, if corporate affairs are
organized, controlled and conducted so that the corporation has no separate
existence of its own and is the mere instrumentality of the shareholder and the
corporate form is used to evade an obligation, to gain an unjust advantage or
to commit an injustice.
Wiebke v. Richardson & Sons, Inc., 83 Wis.2d 359, 363, 265 N.W.2d 571, 573 (1978).
"The
alter ego doctrine enables a court to disregard the corporate form when it is
used to accomplish an improper [or unlawful] purpose." Select Creations, Inc. v. Paliafito
America, Inc., 852 F. Supp. 740, 773 (E.D. Wis. 1994). A court will apply the following factors to
determine whether the corporate form is a mere sham: failure to observe corporate formalities, non-payment of
dividends, siphoning of funds of the corporation by the dominant stockholder,
non-functioning of other officers or directors, and the absence of corporate
records. United States v. Pisani,
646 F.2d 83, 88 (3rd Cir. 1981). The alter
ego doctrine can be applied in reverse, as the court in Select
Creations explained:
Although the alter
ego doctrine is typically employed to pierce the corporate veil of a controlled
entity to reach the assets of the controlling party ... the doctrine can also
be applied in reverse to reach the assets of a controlled entity. It is particularly appropriate to apply the
alter ego doctrine in "reverse" when the controlling party uses the
controlled entity to hide assets or secretly to conduct business to avoid the
pre-existing liability of the controlling party.
852 F. Supp. at 774.
Application
of the "reverse" alter ego doctrine to pierce the corporate
veil is supported by the facts found by the trial court: Phelps fraudulently conveyed title of the
building to frustrate collection proceedings, and he manipulated the assets of
the entity under his control, PAS, to avoid his own pre-existing
liabilities. A case closely analogous
is United States v. Taylor, 688 F. Supp. 1163 (E.D. Tex.
1987). In that case, a taxpayer
transferred title of real estate to his daughter, but continued to live on the
property, did not pay rent, and continued to make the mortgage payments. The court found that the transfer was
intended to delay, hinder or defraud the United States as a tax creditor, and
declared the transfer void. Id.
at 1164-65.
We conclude that the trial court correctly
found that the office building is a profit owing to Phelps and is garnishable
as such to satisfy the judgment against Phelps. The building may be described as a "profit" or an
"asset" for the purposes of this analysis. If it is classified as a "profit," it is garnishable as
a debt owed to Phelps. If it is an
"asset," it is garnishable under the alter ego doctrine.
II.
THE
PRE-GARNISHMENT TRANSFER OF FUNDS
The
trial court found that PAS's distributions of pre-garnishment funds to Phelps's
creditors were fraudulent transfers. It
concluded that Phelps had arranged the transfers in anticipation of the
garnishment action. The inadequate
bookkeeping, the lack of a personal bank account by Phelps, and the transfers
into various personal and company accounts pointed to an ongoing intent to
delay, defraud or hinder collection attempts.
The court stated that the totality of the circumstances surrounding the
transfers supported the inference that they were fraudulent.
PAS
argues that the distribution of profits directly to Phelps's creditors and his
wife for "household expenses" constituted no more than a decision by
Phelps as to which of his creditors would receive the profits of PAS. However, the trial court correctly found
that Phelps failed to show that he had a good faith intent to satisfy claims of
creditors instead of an intent to shield his assets from the legitimate claims
of his creditors. According to Phelps's
logic, he could avoid legal process as long as he was choosing which creditors
would be paid. Unfortunately for
Phelps's theory, creditors may use legal process to enforce their just claims
and the debtor may not avoid accountability by transferring his or her assets
to delay or hinder that process.
PAS
failed to show that the trial court's finding that it and Phelps transferred assets
to avoid creditors' claims is clearly erroneous.
III.
FUTURE
PROFITS OF PAS
In
addition to voiding the fraudulent transfers, the trial court also made the
contingent future profits of PAS subject to the judgment if the proceeds of the
voided transfers did not satisfy the judgment.
Contingent liabilities are not subject to garnishment. Section 812.19(1)(d), Stats.
A contingent interest is one in which liability is not certain and
absolute, but depends on some independent event. Fico, Inc. v. Ghingher, 411 A.2d 430, 436 (Md.
1980). We adopt the generally accepted
test stated in the following decision:
The only debts from a garnishee to a defendant which are
subject to garnishment under the Alabama statute are those which may be made
the basis of an action of debt or indebitatus assumpsit by the defendant
against the garnishee, so that the test here is whether, at the time of service
of the writ or at some time subsequent thereto, the defendant had or will
certainly have in the future such a cause of action against the garnishee.
Schaefer v. Post & Flagg, 10 F. Supp. 827, 828-29 (N.D. Ala. 1935).
A
liability which is merely unmatured at the time of the garnishment action is
subject to garnishment. One type of
unmatured interest exists when there is no question about the fact of the
garnishee's liability, although the amount of that liability may be
uncertain. Fico, 411 A.2d
at 436-37.
The
difference between an unmatured obligation and one which is contingent has been
explained as follows:
The possibility that a condition subsequent may defeat
the payment of a presently owing obligation has no effect on the availability
of garnishment. If the debt has come
into existence, a debtor-creditor relationship exists and the time and manner
of payment are immaterial for the purpose of garnishment. It is the existence of the liability itself
that must not be contingent.
Stephen L. Beyer, Garnishment: Contingent Interests, 47 Marq. L. Rev. 221, 223 (1963) (footnote omitted).
We
conclude that the future profits of PAS are dependent on too many future events
to be classified as merely unmatured.
Before profits are owed a shareholder, the corporation must perform
services, collect payments and cover all of its overhead expenses such as
payroll, taxes and rent. We therefore
reverse that part of the judgment which subjects future profits of PAS to
garnishment without further process.
By
the Court.—Judgment affirmed
in part and reversed in part.