Moss v. Associated Underwriters, Inc.

• Decision Date: 18 August 2020
• Docket Number: No. A-19-380.,A-19-380.
• Citation: 948 N.W.2d 273,28 Neb.App. 739
• Parties: Marjorie MOSS, appellee, v. ASSOCIATED UNDERWRITERS, INC., et al., appellants.
• Court: Nebraska Court of Appeals

28 Neb.App. 739

948 N.W.2d 273

Marjorie MOSS, appellee,

v.ASSOCIATED UNDERWRITERS, INC., et al., appellants.

No. A-19-380.

Court of Appeals of Nebraska.

Filed August 18, 2020.

Kathryn J. Derr, Omaha, of Berkshire & Burmeister, for appellants.

John P. Weis, Omaha, and Andrew Wurdeman, Senior Certified Law Student, of Wolfe, Snowden, Hurd, Ahl, Sitzmann, Tannehill & Hahn, L.L.P., for appellee.

Pirtle, Riedmann, and Bishop, Judges.

Riedmann, Judge.

INTRODUCTION

The appellants appeal the judgment of the district court in favor of Marjorie Moss on her claims of piercing the corporate veil and successor liability. We reverse the award of $22,000 of taxable costs awarded to Moss. However, finding no error in the court's decision to pierce the corporate veil and hold the appellants jointly and severally liable, we otherwise affirm the district court's judgment.

BACKGROUND

Moss was an employee of Associated Underwriters, Inc. (AU), and her employment was terminated in 2009. She filed a complaint in the U.S. District Court for the District of Nebraska alleging employment discrimination. In June 2015, a jury awarded her a judgment in the amount of $257,361.56 plus interest, attorney fees, and costs of $138,720.92 for a total of $396,082.48.

After Moss was unable to recover from AU on the federal court judgment, she commenced the instant action in October 2016 in the district court for Sarpy County against AU; Relinco, Inc.; C-Tek Insurance Agency, Inc. (C-Tek); Roll the Bones, LLC; C-Notes, LLC; and Gregory Gurbacki, individually (collectively the appellants). In the causes of action relevant to the issues presented on appeal, Moss sought to hold the appellants liable for the federal court judgment against AU under the theories of piercing the corporate veil and successor liability.

A bench trial was held in November 2018. At the outset of trial, C-Notes was dismissed as a defendant, and trial proceeded against the remaining defendants. The evidence presented revealed that AU was incorporated in 1979 and operated as an independent insurance broker with contracts to sell property and liability insurance through several insurance companies. In 2007, Gurbacki and another individual became shareholders, officers, and directors of AU. Gurbacki became the sole shareholder in 2011.

To fund the original stock purchase of AU, Gurbacki and his co-owner obtained a loan for $5.9 million. Security State Bank, along with several other banks, took over the loan in 2008. The loan was refinanced in 2010 and was personally guaranteed by Gurbacki. In December 2015, AU sold substantially all of its assets to Farmers National Company for $400,000 and ceased all business activity.

Roll the Bones was formed as a Nebraska limited liability company in 2008. Gurbacki was one of two original members, and he became the sole member in 2010. Roll the Bones obtained a loan of approximately $440,000 in 2008 to purchase a piece of real property. The note was guaranteed by AU and Gurbacki, individually. Roll the Bones initially made interest-only payments, using funds from the initial investments. Once that money was depleted, AU made the $500 per month payments, because it had guaranteed the note, and C-Tek made some payments on the note as well. The real property was sold in a foreclosure sale in 2015, leaving a deficiency balance owed to the bank. C-Tek paid the deficiency to the bank. Thereafter, Roll the Bones had no further business operations or assets.

Relinco was the largest producing asset of AU, operating under a managing general agent agreement with Travelers Indemnity Company. In 2011, Relinco was spun off into its own corporation for the sum of $300,000 plus the assumption of approximately $862,000 in debt directly related to the Relinco business. Gurbacki is the sole shareholder of Relinco. In 2012, Relinco was added as a co-borrower on AU's Security State Bank loan. Relinco began paying management fees to AU of $33,000 per month in order to provide cash for AU to make the loan payments. Relinco also loaned additional money to AU beyond the management fees. Travelers Indemnity Company ended its contract with Relinco, causing Relinco to close in October 2014. As of December 2014, AU owed Relinco $529,000.

Gurbacki Insurance Services, Inc., was incorporated in 2004 and changed its name to C-Tek in 2013. Gurbacki and his wife each originally owned 33 percent of the shares of C-Tek stock, with the remaining shares divided between their two adult sons. As of January 2016, however, Gurbacki relinquished his shares of C-Tek, leaving his wife as the majority shareholder. Prior to December 1, 2015, C-Tek brokered insurance through AU for which it paid AU a commission.

In June 2014, AU and Relinco began to have difficulty making the loan payments to Security State Bank. Thereafter, as part of a restructuring settlement, C-Tek agreed to guarantee the loan to help AU. According to Gurbacki's wife, adding C-Tek as a guarantor was the best option, because Gurbacki was personally obligated on the loan and because they wanted to get the loan paid in order to protect Gurbacki's assets in the event of foreclosure. In January 2015, AU and Relinco began making interest-only payments, and as of June, the balance of the loan remained more than $4.2 million. In November, AU, Relinco, and C-Tek entered into a forbearance agreement with Security State Bank, wherein the bank agreed to accept $800,000 in satisfaction of the debt, and in exchange, Gurbacki, his wife, and C-Tek were released from the note. The $800,000 that AU paid was comprised of $400,000 from the sale of AU's assets to Farmers National Company and $400,000 from C-Tek.

Chris Best, a certified public accountant, testified at trial, and his report was received into evidence. He testified that AU "was grossly inadequately capitalized" as of June 2015. As of June 30, AU had assets of approximately $279,000 and liabilities greater than $5 million.

Best opined that from a general accounting principle and best business practices point of view, AU, Relinco, and C-Tek were under the control of Gurbacki and did not treat each other as separate entities. According to Best, there were an inordinate number of intercompany transactions with companies making payments for other companies, assets being recorded in the books of one account and being transferred to another account, and the booking of intercompany receivables and payables. Then, when AU ultimately sold its assets to Farmers National Company, there were significant remaining balances in those intercompany accounts, so the companies were never made whole in terms of what they should have received from AU or AU should have received from the other companies. In Best's 40 years of experience, he has never seen commingling of accounts, interdependency of one entity on the operations of another entity, and interrelationship of companies in the manner and to the extent he saw here.

Specifically, with respect to C-Tek, Best opined that although it was a separate entity, the parties did not treat it as such. He explained that typically a corporation that is a separate entity does not pay the expenses of another entity and certainly does not make loan payments for that entity. He stated that the general ledger of C-Tek for the year ending December 31, 2018, shows more than 60 transactions in which AU paid expenses or made payments on notes for C-Tek. He testified he has never seen that done in any other company he has worked on; thus, in his opinion, that was very unusual and not in the ordinary course of business.

With regard to the Security State Bank loan, Best explained that the bank continued to add entities and take security interests in order to prevent AU from defaulting on the loan. Relinco's assets, which were previously unencumbered, were pledged to the bank, and then C-Tek was brought in. Those actions were done so that AU did not default, which would result in the obligation falling to Gurbacki, personally. Best agreed that the forbearance agreement was a benefit to AU and Gurbacki, who was a personal guarantor on the loan, noting that the agreement itself indicates the parties’ acknowledgment that it was a personal benefit to Gurbacki.

Certified public accountant William Kenedy works for the accounting firm who prepared the tax returns for the corporations for years other than 2012 and 2013. He testified that in his experience, it is not uncommon to see companies owned by related parties making intercompany loans back and forth between entities. He opined that it is extremely common to see intercompany transactions such as loans from one business to the other or one company buying goods or services from the other and having payables back and forth. In his opinion, if the companies have kept track of the intercompany loans, their actions do not constitute commingling of assets. He explained that commingling occurs where there are "two businesses operating out of one set of books," which is not the case here. He did not believe that the level of intercompany transactions between AU, Relinco, and C-Tek was unusually high.

Subsequent to trial, the district court entered a written order. The court found that AU was grossly undercapitalized and insolvent at all relevant times. Even more evident to the court was the disregard of the corporate entities of AU, Relinco, C-Tek, and Roll the Bones. The court concluded that there were repeated instances of shifting of corporate assets and liabilities, with no real discernible benefit to any of the corporations. Further, it determined that there was evidence of corporate assets being made available for the use of Gurbacki or for the other entities he owned, as well as business dealings done in disregard of the business entities.

The court held that Gurbacki exercised control over all of the corporations; therefore, the corporate entities should be disregarded in order to avoid injustice. Accordingly, the court found in Moss’...