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COURT OF APPEALS DECISION DATED AND RELEASED April 17, 1996 |
NOTICE |
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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. 94-3291
STATE
OF WISCONSIN IN COURT OF
APPEALS
DISTRICT II
PEKIN INSURANCE
COMPANY,
Plaintiff-Appellant,
v.
H. FULLER & SONS,
INC.,
Defendant,
KENNETH D. FULLER and
JUDITH FULLER,
Defendants-Respondents.
APPEAL from a judgment
of the circuit court for Waukesha County:
ROBERT G. MAWDSLEY, Judge. Affirmed.
Before Brown, Nettesheim
and Snyder, JJ.
PER
CURIAM. Pekin Insurance Company appeals from a judgment
dismissing its complaint against Kenneth and Judith Fuller after the circuit
court determined that it would not disregard the H. Fuller & Sons, Inc.
corporate entity to permit Pekin to collect unpaid insurance premiums directly
from the Fullers.[1] On appeal, Pekin argues: (1) that the circuit court should have
granted Pekin a default judgment when the Fullers failed to comply with
discovery demands and court orders relating to discovery; (2) that the circuit
court should have required Kenneth to satisfy the debt to Pekin under a debt
subordination theory; (3) that because the Fullers failed to follow corporate
formalities, the corporate veil of H. Fuller & Sons (the corporation)
should have been pierced to allow Pekin to recover the unpaid insurance
premiums from the Fullers personally; and (4) that the circuit court should
have found that the Fullers, as directors of the corporation, breached a
contract entered into between the corporation and Pekin, thereby rendering them
personally liable for the insurance premiums.
We reject these arguments and affirm.
A default judgment is a
remedy available to the circuit court when a party has failed to comply with
the discovery statutes or court orders on discovery. See Johnson v. Alice Chalmers Corp., 162
Wis.2d 261, 273-74, 470 N.W.2d 859, 863 (1991). Such a sanction is within the circuit court's discretion. Id. A circuit court's discretionary decision in addressing an alleged
discovery violation will be sustained if the court examined the relevant facts,
applied a proper legal standard and reached a conclusion that a reasonable
judge could reach using a demonstrated rational process. Id. at 273, 470 N.W.2d at
863.
Our review of the record
of the August 2, 1993, hearing on Pekin's motion to compel discovery reveals
that the circuit court properly exercised its discretion in declining to grant
Pekin a default judgment and requiring the Fullers and the corporation to comply
with the discovery requests made of them.[2] We also conclude that Pekin's complaints
about the manner in which the circuit court handled the hearing are not
supported by the record.
Pekin complains that the
circuit court admitted at the hearing that it had not had an opportunity to
review Pekin's motion and that it did not allow its counsel to make an argument
before the Fullers' counsel responded to the motion. When Pekin's counsel was given an opportunity to address the
court, the Fullers' counsel "interrupted repeatedly." Finally, the court did not listen to
counsel's arguments.
It is true that the
circuit court stated that it had not had a chance to review the motion. However, there is no indication from the
transcript of the hearing that the court proceeded in a vacuum when ruling on
Pekin's sanction motion. The court
heard the argument of Pekin's counsel which mirrored the facts alleged in
Pekin's motion. There is no indication
in the record that the circuit court prohibited Pekin's counsel from addressing
the court first. Rather, the Fullers'
counsel first addressed the court to respond to the motion. Then Pekin's counsel addressed the
court. The court then questioned
counsel regarding the specifics of the discovery requested and the extent to
which the Fullers had responded to it.
After listening to counsel argue between themselves regarding the nature
of the discovery request and the level of the Fullers' compliance, the court
understandably stated that it had "stopped listening a couple of minutes
ago."
The court found that the
Fullers' responses to discovery were "long overdue" and assessed the
status of each document requested to determine what efforts had been made or
would be made to make them available to Pekin.
Based upon counsels' representations, the court concluded that the
documents were available and that efforts had to be made to give Pekin access
to them. Considering fairness to both
sides and the history of the case, the court concluded that granting a default
judgment would not be the appropriate sanction.
We do not see any error
in the court's discretionary decision not to grant Pekin a default
judgment. The court listened to the
arguments of counsel and determined that the best way to resolve the dispute
was to clarify, item by item, which documents existed and how they would be
produced.
Pekin complains on
appeal that discovery problems continued after this hearing and that it was
forced to seek an adjournment of the trial to obtain and review records. However, Pekin's appellate briefs never
identify which documents were not provided to it such that its trial
preparation was hampered.[3] In the absence of demonstrated prejudice, we
are not inclined to conclude that the circuit court should have granted a
pretrial default judgment to Pekin as a result of the difficulties in
discovery.
At trial, the parties
again addressed the discovery disputes and the court found that while some
discovery responses were late, no remedy was required posttrial. The court noted that certain disputes arose
because the discovery requests were not specific enough.[4] The court found that the "discovery
process more or less clunked along" and that neither party could agree as
to how documents were to be produced or where they were located. The court was unable to determine which
party was at fault in the discovery disputes, noting that each party insisted
on conducting discovery in its own way, sacrificing expediency as a
result. The court declined to grant a
judgment to Pekin as a sanction for alleged discovery abuses and specifically
found that "the court has not been given any indication of the fact that
the problems in getting items and documents have caused any issue to go
unearthed in terms of the equitable decision that the court has to make." We have reached the same determination with
regard to presentation of the discovery disputes on appeal.
Pekin next argues that
the circuit court should have pierced the corporate veil of the corporation to
allow it to recover unpaid insurance premiums from the Fullers personally. Piercing the corporate veil is an equitable
remedy which we review under an erroneous exercise of discretion standard. Consumer's Co-op of Walworth County v.
Olsen, 142 Wis.2d 465, 472, 419 N.W.2d 211, 213 (1988). We review whether the circuit court relied
upon the relevant facts, applied a proper legal standard and used a rational
process to reach a reasonable decision.
See Johnson, 162 Wis.2d at 273, 470 N.W.2d at
863. The trial court's findings of fact
will be upheld unless they are clearly erroneous. See § 805.17(2), Stats.
Piercing the corporate
veil or disregarding the corporate fiction is an exception to the general
principle of shareholder nonliability.[5] Consumer's Co‑op, 142
Wis.2d at 475, 419 N.W.2d at 214.
However, the corporate veil can be pierced and shareholders held liable
where "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). Absent such evidence, "the fundamental precept of limited
liability must not give way wherever a close corporation fails to precisely
observe corporate formalities." Consumer's
Co‑op, 142 Wis.2d at 476, 419 N.W.2d at 214.
Inadequate
capitalization is also relevant to determining whether the corporate veil
should be pierced to hold shareholders personally liable for corporate
debts. See id. at
477, 419 N.W.2d at 215. However,
"undercapitalization is not an independently sufficient ground to pierce
the corporate veil." Id.
at 482, 419 N.W.2d at 217.
With these principles in
mind, we turn to the trial court's findings of fact. The court assessed the
Fullers' credibility and financial facts involving the corporation, including
its informal accounting system. The
court found insufficient evidence (1) that the corporation was undercapitalized
at the time it contracted with Pekin for insurance or (2) that the Fullers, the
corporation's shareholders, disregarded the corporate form and treated the
corporation's assets as their own or held themselves out as being personally
liable for the corporation's debts. The
court found that although there was a failure to observe corporate formalities
in all instances, the shareholders still treated the corporation as a separate
entity as evidenced by the filing of corporate tax returns and the ultimate
sale of the corporation's assets at a public auction.
The court found that
there was no evidence of "a draining off or siphoning of corporate
funds." Judith's explanations
regarding specific cash outlays from the corporation related to a business
reason. While the court noted that the
accounting for expenses left something to be desired, Judith's testimony
regarding the expenses was hampered by the manner in which these expenses were
investigated in discovery. The court
accepted her testimony that had the expense documents been presented to the
court in the manner in which they had been maintained, she would have been able
to account for all of them. The court
found that Kenneth made "a substantial commitment of personal funds"
to keep the corporation going and pay its bills and Judith made loans to the
corporation which were repaid.
Considering that the
purpose of piercing the corporate veil is to avoid an injustice or fraud, the
court stated that it could not find any intent to defraud Pekin of insurance
premiums. The court found that the
insurance premiums and other creditors' obligations went unpaid due to the
corporation's general business reverses and not some specific intent to defraud
Pekin or other creditors. The court
considered that the corporation was a closely-held corporation and, after
applying the principles set forth in Consumer's Co‑op,
concluded that the evidence at trial did not warrant piercing the corporate
veil.
Pekin challenges these
findings on appeal. The findings are
based upon the trial court's assessment of the credibility of the Fullers and
it was the ultimate arbiter of witness credibility. See Village of Big Bend v. Anderson, 103
Wis.2d 403, 410, 308 N.W.2d 887, 891 (Ct. App. 1981).
Pekin argues that the
facts found by the trial court support another inference: that the corporation did not function
independently of the Fullers.
While this inference may be possible, we are bound to uphold the trial
court's findings because it was the trial court's function to draw inferences
from the evidence. The trial court's
inferences and findings are not clearly erroneous. See Leon's Frozen Custard, Inc. v. Leon Corp.,
182 Wis.2d 236, 243, 513 N.W.2d 636, 640 (Ct. App. 1994). We conclude that the circuit court properly
interpreted Consumer's Co‑op and applied it to the facts
and inferences found. The court did not
misuse its discretion in declining to pierce the corporate veil to hold the
Fullers personally liable for the corporation's insurance premium debt to
Pekin.
Pekin also argues that
the court erred in declining to hold Kenneth liable to Pekin on a debt
subordination theory. The court
declined to apply that theory to this case after concluding that a leading case
in this area, Gelatt v. DeDakis, 77 Wis.2d 578, 254 N.W.2d 171
(1977), was distinguishable. We agree
with the circuit court that Gelatt does not apply to this case.
Gelatt
involved an attempt to subordinate a shareholder's claim to that of other general
creditors of an insolvent corporation.
In Consumer's Co‑op, the court noted that
"[w]hile the doctrines of subordination and piercing the corporate veil
are conceptually distinct, there are congruencies between the theory justifying
subordination of a loan and piercing the corporate veil, to the extent that
both concepts arise from the notion that there exists a minimal proprietary
risk which should be borne by shareholders." Consumer's Co‑op, 142 Wis.2d at 477, 419
N.W.2d at 215. Both remedies deny
shareholders "the separate entity privilege" of a corporation. Id. at 478, 419 N.W.2d at 215
(quoted source omitted).
In Gelatt,
a trade creditor of an allegedly insolvent retail clothing business sought the
appointment of a receiver to administer assets pursuant to ch. 128, Stats.
The receiver objected to a claim filed against the proceeds of a bulk
transfer of the corporation's assets by shareholders who had made loans to the
corporation. Gelatt, 77
Wis.2d at 582, 254 N.W.2d at 175. The
circuit court subordinated the shareholders' claims to the claims of other
general creditors because the shareholders' "loans" were more in the
nature of capital contributions. Id. One shareholder appealed. Id.
On review, the supreme
court noted that merely being an officer, director and/or shareholder who has
lent money to a corporation is not sufficient to permit subordination of a
claim. Id. at 602, 254
N.W.2d at 185. Subordination is
intended to prevent the transfer to outside general creditors of risks properly
borne by equity capital. Id.
at 608, 254 N.W.2d at 188. This is
particularly true where the corporation was undercapitalized. Id. at 607-08, 254 N.W.2d at
187-88. However, if a corporation has
been adequately capitalized, "the shareholders have assumed an appropriate
proprietary risk for the nature of the business involved, and the law has not
required more." Id.
at 608, 254 N.W.2d at 188. In Gelatt,
the supreme court reversed the trial court's decision to subordinate the
shareholder's loans on the ground that the corporation was adequately
capitalized. Id. at 610,
254 N.W.2d at 189.
In this case, the trial
court found that the corporation was adequately capitalized and that the
financial reverses it suffered resulted from outside business losses, not from
any improper conduct on behalf of the shareholders. Therefore, the factual basis for subordination is not present even
if we were to conclude that Gelatt applies to this case. See id. at 611, 254 N.W.2d at
189.
Finally, Pekin argues
that the Fullers should be personally liable as directors of the corporation
for authorizing and participating in a breach of contract between the
corporation and Pekin. A corporate
officer can be held personally liable for procuring, causing or authorizing a
breach of contract by the corporation. Sprecher
v. Weston's Bar, Inc., 78 Wis.2d 26, 39-40, 253 N.W.2d 493, 499
(1977). An improper motive on behalf of
the corporate officer must be shown. Id.
at 41, 253 N.W.2d at 500.
Pekin argues that the
evidence shows that the Fullers did not have a proper motive when they declined
to pay the premiums owed to Pekin. The
trial court did not ascribe an improper motive to the Fullers. The inferences drawn by the trial court are
not clearly erroneous.
By the Court.—Judgment
affirmed.
This opinion will not be
published. See Rule 809.23(1)(b)5, Stats.
[2] Pekin challenges the circuit court's decision. Accordingly, Pekin was required to include in its appendix to its appellant's brief the court's oral ruling in this matter. See Rule 809.19(2), Stats. In the future, counsel shall include such materials in the appendix as required by the rule. Failure to do so may result in the imposition of sanctions on counsel.