C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do Academy, Inc.

• Decision Date: 23 September 1987
• Docket Number: No. 86-135,KRAGIE-NEWELL,86-135
• Citation: 412 N.W.2d 593
• Parties: C. MAC CHAMBERS COMPANY, INC., Appellee, v. IOWA TAE KWON DO ACADEMY, INC.; Acta Fitness Center, Ltd.; In Mook Kim and Ki Tae Kim, Appellants.ADVERTISING, INC., Appellee, v. IOWA TAE KWON DO ACADEMY, INC.; Acta Fitness Center, Ltd.; In Mook Kim and Ki Tae Kim, Appellants.
• Court: Iowa Supreme Court

Page 593

412 N.W.2d 593

C. MAC CHAMBERS COMPANY, INC., Appellee, v. IOWA TAE KWON DO ACADEMY, INC.; Acta Fitness Center, Ltd.; In Mook Kim and Ki Tae Kim, Appellants.

KRAGIE-NEWELL ADVERTISING, INC., Appellee, v. IOWA TAE KWON DO ACADEMY, INC.; Acta Fitness Center, Ltd.; In Mook Kim and Ki Tae Kim, Appellants.

No. 86-135.

Supreme Court of Iowa.

Sept. 23, 1987.

Rehearing Denied Oct. 22, 1987.

Mark Godwin, Des Moines, for appellants.

Kevin M. Reynolds, and Robert M. Holliday, Des Moines, for appellees.

Considered en banc.

HARRIS, Justice.

A closely held corporation failed and was immediately supplanted by a separate corporation. Both were owned and operated by members of the same family. The business continued without interruption. Creditors of the failed corporation brought actions on several theories, seeking to recover against the succeeding corporation and the family member who was its sole shareholder and director. We think the creditors may recover actual but not punitive damages.

For more than fifteen years In Mook Kim, a native of Korea, has operated physical fitness and martial arts teaching centers in Iowa. Incorporating his businesses under several different names, Kim has served as their sole shareholder, officer, and director. The defendant Iowa Tae Kwon Do Academy, Inc. [hereafter Academy I] ¹ was one such enterprise. When it became heavily indebted to the small business administration (SBA) and various other creditors, some of its equipment (the subject of an SBA security agreement) was repossessed and sold at auction.

Plaintiff C. Mac Chambers sold insurance protection to Academy I in the amount of $2861.43. Plaintiff Kragie-Newell provided advertising services totaling $9711.95.

In the winter months of 1983 Kim's business was on the brink of bankruptcy. Deeply in debt and unable to satisfy its creditors, the corporation and its principal officer began searching desperately for a solution. Kim's son, defendant Ki Tae Kim, offered to help his father "hit upon a plan which ... would satisfy his family obligations" to the community.

On the advice of counsel, Ki Tae Kim filed for a change of the corporation's name on January 31, 1984. On the same day, the newly named corporation ceased doing business. ² On February 1, 1984, Ki Tae Kim formed a new corporation, the defendant ACTA Fitness Center, Ltd. [Academy II], in which he was to serve as sole shareholder, director, and corporate officer. The purpose of these changes was to avoid Academy I's debts and to help the Kim family continue operating its business, unencumbered by past obligations.

In February 1984 Academy II purchased the accounts receivable from Academy I for about $10,000. The former corporation's remaining inventory, encumbered by the secured claims of other creditors, was purchased by Academy II for approximately $20,000. In Mook Kim was installed as Academy II's vice president and principal instructor, remaining responsible for the venture's "day-to-day operations." At the time of sale Academy II claims to have assumed no debts from Academy I; however the evidence is clear that Academy II paid Academy I's rent, overhead expenses, utility bills, tax obligations, and some back wages. Academy II also paid personal expenses of the Kim family. Academy II retained all of Academy I's employees and instructors, operating the business at the same location and with the same equipment as before (except for the equipment repossessed by the SBA).

Plaintiffs brought separate actions naming Academy I, Academy II, In Mook Kim and Ki Tae Kim as defendants. Both suits sought compensatory and punitive damages against the defendants, alleging they had failed to pay on open accounts, violated various principles of the bulk sales law, and effectuated various financial transfers in an attempt to defraud, delay, and hinder creditors.

The cases were consolidated for a bench trial. The trial court dismissed the bulk sales counts, but entered judgments against all defendants on all remaining counts. Because the trial court concluded the defendant corporations were undercapitalized and changed ownership only nominally, it pierced the corporate veils of Academy I and Academy II, rendering defendants In Mook Kim and Ki Tae Kim jointly and severally liable on the judgment. The trial court decision also assessed punitive damages of $5000 against each of the four defendants.

We transferred the case to the court of appeals which reversed the judgment against Academy II and Ki Tae Kim on the ground plaintiffs were not damaged because their accounts were without value at the time of the alleged fraudulent transfer. The court of appeals limited the plaintiffs' recovery to amounts due on account, plus interest, against defendants In Mook Kim and Academy I.

The matter is before us on a grant of plaintiff's petition for further review.

I. We view the evidence in the light most favorable to sustaining the district court judgment. Murray v. Conrad, 346 N.W.2d 814, 817 (Iowa 1984). The trial court's findings are construed liberally in order to support its result. Koehler v. State, 263 N.W.2d 760, 761-62 (Iowa 1978). A finding is supported by substantial evidence if it may be reasonably inferred from the evidence. Briggs Transp. Co. v. Starr Sales Co., 262 N.W.2d 805, 808 (Iowa 1978). If supported by substantial evidence and justified under the law, the findings are binding on us and the judgment will not be disturbed on appeal. Carson v. Mulnix, 263 N.W.2d 701, 705 (Iowa 1978). We may of course inquire into the correctness of the trial court's legal conclusions. Id. at 706.

The possibility of drawing inconsistent conclusions from the same body of evidence does not prevent a finding from being supported by substantial evidence. Baty v. Binns, 354 N.W.2d 777, 780 (Iowa 1984). If the meaning of a trial court's decree is "obscure or ambiguous, resort may be had to the pleadings and other proceedings in the case in order to determine its meaning." Sutton v. Schnack, 224 Iowa 251, 257, 275 N.W. 870, 873 (1937).

II. The judgment should be affirmed if any of the various theories of liability found by the trial court were valid and supported by substantial evidence. The court of appeals, as noted, reversed the judgment against Academy II and Ki Tae Kim and, insofar as the reversal was based on a fraudulent conveyance theory, it was correct. For a conveyance to be set aside as a fraud on creditors, it is necessary to show they were prejudiced, even where there was actual fraudulent intent. McClelland v. Snouffer, 194 Iowa 1387, 1396, 189 N.W. 808, 814 (1923). We have interpreted prejudice or injury to mean the creditors must be able to show they would have received something which has become lost to them by reason of the conveyance. See Hagge v. Gonder, 222 Iowa 954, 270 N.W. 371 (1936); Hewitt v. Blaise, 202 Iowa 1109, 211 N.W. 479 (1926); Willey v. Hite, 175 Iowa 657, 149 N.W. 250 (1916).

Plaintiffs cannot show they would have received anything had Academy I not conveyed its assets to Academy II. The value of the assets transferred totaled about $7000. All were subject to a perfected security interest held by the SBA in an amount exceeding $30,000. Because both plaintiffs had unperfected security interests, SBA's claim to the transferred assets was superior to either of the plaintiffs'. Since the amount of assets transferred is less than the amount of the perfected security interest, plaintiffs would not have received any money had the assets been sold at public auction and the creditors paid with the proceeds.

III. Plaintiffs' suits include a continuing corporation theory. ³

A successor corporation will be held liable for the debts of its predecessor when: (1) there is an express agreement to assume liability; (2) there is a consolidation or a merger; (3) the purchasing corporation is a "mere continuation" of the selling corporation; or (4) the transaction is fraudulent. Nelson v. Pampered Beef-Midwest, Inc., 298 N.W.2d 281, 287 (Iowa 1980).

Defendants insist that, to find liability under a continuing corporation theory, two things must be shown: (1) there must be a common identity of officers, directors, and shareholders; and (2) only one corporation must exist at the completion of the sale of the assets. Because In Mook Kim was the sole director, officer, and shareholder of Academy I and Ki Tae Kim is the sole director and shareholder of Academy II, and because both corporations were still in existence after the sale of assets, defendants contend Academy II cannot be deemed a mere continuation of Academy I.

We disagree. While the two foregoing factors are traditional indicia of a continuing corporation, neither is essential. Weaver v. Nash Intern., Inc., 562 F.Supp. 860, 863 (S.D.Iowa 1983); see also Tucker v. Paxson Machine Co., 645 F.2d 620, 623 (8th Cir.1981). In Arthur Elevator Co. v. Grove, 236 N.W.2d 383 (Iowa 1975), a corporation was held to be a mere continuation of a prior partnership even though there was not common identity of directors, officers, and shareholders. Id. at 392.

In Mook Kim testified that his business remained the same after the sale of the assets of Academy I to Academy II. Substantial evidence supports this statement. The location of the business, the identity of its employees and instructors, the equipment used to carry out the business, and even the corporation's telephone number remained unchanged after the sale. There was also the same lease, the same trade name, the same books, and the same students. In Mook Kim is an officer of both corporations. The mere fact that Ki Tae Kim is the sole director and shareholder of Academy II is of little significance here, given the fact that In Mook Kim is really the person in charge. Ki Tae Kim did not pay for any of the shares of stock issued to him, nor is he involved in the running of the business.

It is apparent that Ki Tae Kim was made the sole director and shareholder for...