Consumer's Co-op. of Walworth County v. Olsen

• Decision Date: 10 February 1988
• Docket Number: No. 86-1549,CO-OP,86-1549
• Citation: 142 Wis.2d 465,419 N.W.2d 211
• Parties: CONSUMER'SOF WALWORTH COUNTY, a Wisconsin cooperative, Plaintiff-Respondent, v. Christian E. OLSEN, a/k/a E. Christian Olsen, an individual, Defendant-Appellant, Jack Olsen, a/k/a John Olsen, an individual, Defendant.
• Court: Wisconsin Supreme Court

Page 211

419 N.W.2d 211

142 Wis.2d 465

CONSUMER'S CO-OP OF WALWORTH COUNTY, a Wisconsin cooperative, Plaintiff-Respondent, v. Christian E. OLSEN, a/k/a E. Christian Olsen, an individual Defendant-Appellant Jack Olsen, a/k/a John Olsen, an individual, Defendant.

No. 86-1549.

Supreme Court of Wisconsin.

Argued Nov. 3, 1987.

Decided Feb. 10, 1988.

David J. Nommensen, Elkhorn, argued, for defendant-appellant; Seymour, Kremer, Nommensen & Morrissy, Elkhorn, on brief.

Paul G. Bonneson, Delavan, argued, for plaintiff-respondent; Riemer Law Office, Delavan, on brief.

CECI, Justice.

This appeal is before this court on certification from the court of appeals pursuant to section (Rule) 809.61, Stats., and is from a judgment of the circuit court for Walworth county, Robert D. Read, Circuit Judge. The plaintiff-respondent, Consumer's Co-op of Walworth County, a Wisconsin cooperative (Consumer's Co-op), commenced this action against the defendant-appellant, Christian E. Olsen, a/k/a E. Christian Olsen (Chris Olsen), and defendant Jack Olsen, a/k/a John Olsen (Jack Olsen), seeking to impose liability on Chris and Jack Olsen for an unsatisfied judgment against a corporation, ECO of Elkhorn, Inc. (ECO), in which Chris Olsen owned a majority of the issued stock. The trial court entered judgment in favor of Consumer's Co-op for the sum of $38,851.42, having found the case at bar to be an "appropriate case to pierce the corporate veil...." We disagree and, therefore, reverse.

ECO was incorporated by Chris Olsen on January 14, 1980. There were 2,200 shares of common stock authorized; 1,125 shares were issued to Chris Olsen for $3,589.00 on the day of the corporation's inception, and the remaining 1,075 shares authorized were issued to Jack and Nancy Olsen. The total initial capitalization was $7,018.25. When ECO commenced operations, Chris Olsen remained employed elsewhere on a full-time basis, with his work at ECO constituting only a part-time endeavor. ECO initially serviced only one customer and employed only one individual on a part-time basis for this purpose. In July of 1980, Chris Olsen commenced full-time employment with ECO.

The corporate officers were elected at one of the two formal board of directors meetings and consisted of Chris Olsen, Jack Olsen, and Nancy Olsen. The majority stockholder, Chris Olsen, was at all times relevant to this action the president and general manager of ECO. Jack Olsen, the father of Chris Olsen, was the treasurer and accountant, and Nancy Olsen, the mother of Chris Olsen, was the secretary. While Chris and Jack Olsen testified that the board of directors met and conferred about four or five times each week, there exists formal record only of the first meeting at which the corporate officers were elected and the meeting authorizing a reorganization under Chapter 11 of the United States Bankruptcy Code.

In 1977, Chris Olsen had opened a personal charge account with Consumer's Co-op. Shortly after the incorporation of ECO in January of 1980, this personal charge account was changed to a corporate charge account. Chris Olsen testified that no personal charges were made on the corporate account, and all billings were thereafter to ECO. Additionally, there was testimony that abundant measures were taken to assure that all corporate business was done in the corporation's name: the corporate name was either affixed to, or printed on, virtually all of the property and equipment associated with the day-to-day operation of the corporation.

By the end of 1981, ECO's difficulties were manifested by a negative shareholder equity of $2,723.02. The situation worsened: at the end of 1982, ECO had a negative shareholder equity of $62,815.60; at the end of 1983, a negative shareholder equity of $148,927.92; and, finally, a negative shareholder equity of $189,362.26 at the end of 1984. No dividends were paid at any time.

Throughout the relevant period of ECO's corporate existence, Consumer's Co-op had extended credit to ECO on an open account primarily for the purchase of bulk fuel. Commencing in June or July of 1983, ECO failed to remain current in the monthly payments on its account with Consumer's Co-op. However, Consumer's Co-op continued to extend credit to ECO until March 21, 1984, notwithstanding its policy to terminate credit after sixty days and the fact that after charges become more than thirty days old, the monthly statements of account explicitly stated that "additional credit cannot be extended until your account is brought current."

Finally, there was no evidence to indicate that corporate funds were used to pay personal expenses. There was, however, ample evidence that substantial personal assets were used to subsidize the operation of the corporation in the form of unprofitable leasing agreements and foregone salaries and rent.

I.

As noted by the respondent, piercing the corporate veil is an equitable remedy. Wiebke v. Richardson & Sons, Inc., 83 Wis.2d 359, 364, 265 N.W.2d 571 (1978). Moreover, the respondent correctly asserts that a decision in equity will be reviewed for abuse of discretion. Cf. Paterson v. Paterson, 73 Wis.2d 150, 154, 242 N.W.2d 907 (1976). See also Production Credit Association v. Jacobson, 131 Wis.2d 550, 555, 388 N.W.2d 655 (Ct.App.1986); Mulder v. Mittelstadt, 120 Wis.2d 103, 115, 352 N.W.2d 223 (Ct.App.1984). However, while it is true that an appellate court will not find an abuse of discretion if there is a reasonable basis for the trial court's determination, it must be further recognized that the discretionary determination must be based upon "the appropriate and applicable law." Hartung v. Hartung, 102 Wis.2d 58, 66, 306 N.W.2d 16 (1981). Thus, a discretionary determination based upon an erroneous view of law is not entitled to any deference.

The decision of the trial court articulated as significant to its decision to disregard the corporate existence of ECO its factual finding of "control" of ECO by Chris Olsen and its finding that the corporation was "undercapitalized." The court expressly found no fraud to have been involved in the transaction at bar. The appellant contends on appeal that (1) control is not a factor significant in a determination of whether to pierce the corporate veil where the corporation under consideration is operated as a close corporation; (2) undercapitalization is not a factor relevant to a determination of whether to pierce the corporate veil where the action arises from a contract as opposed to tortious conduct; and (3) even if a relevant factor, undercapitalization does not constitute a sufficient basis to justify a decision to disregard the corporate entity. ¹

Our analysis of the questions before us today commences with an examination of extant Wisconsin case law. In Milwaukee Toy Co. v. Industrial Commission of Wisconsin, 203 Wis. 493, 495, 234 N.W. 748 (1931), this court articulated the following fundamental premise implicated with respect to the imposition of personal liability on shareholders for corporate debts: "By legal fiction the corporation is a separate entity and is treated as such under all ordinary circumstances." That the "legal fiction" of a corporation is not one to be lightly disregarded remains the law in Wisconsin as well as in most other jurisdictions. Indeed, the significance of the doctrine of limited liability has been described by one commentator as follows:

"According to firmly established legal principles, the corporation is recognized as a legal entity, separate and distinct from its shareholders. The obligations of the corporation are the responsibility of the corporate entity, not the shareholders, who are liable only for the amount they voluntarily put 'at risk' in the business venture. The insulation of shareholders is known as 'limited liability.' The purpose of limited liability is to promote commerce and industrial growth by encouraging shareholders to make capital contributions to corporations without subjecting all of their personal wealth to the risks of the business. This incentive to business investment has been called the most important legal development of the nineteenth century." Barber, Piercing the Corporate Veil, 17 Willamette L.Rev. 371, 371-72 (1981) (Footnotes omitted.)

Notwithstanding the unwavering adherence to the general principle of shareholder nonliability, there exist exceptions justifying, metaphorically, the "piercing of the corporate veil" or, stated otherwise, "disregarding the corporate fiction." The circumstances in which exceptions to the general rule of limited shareholder liability were described in Milwaukee Toy to be present where "applying the corporate fiction would accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim...." 203 Wis. at 496, 234 N.W. 748. However, the court in Milwaukee Toy cautioned with the well-heeded admonition: "the fiction of corporate entity is not to be lightly regarded." Id.

The principles announced in Milwaukee Toy were reaffirmed in Sprecher v. Weston's Bar, Inc., 78 Wis.2d 26, 253 N.W.2d 493 (1977), and later in Wiebke, 83 Wis.2d at 363, 265 N.W.2d 571: "The general rule is that a corporation is treated as a legal entity distinct from its members...." Nevertheless, in both Sprecher and Wiebke, the court found disregard of the corporate fiction to be warranted. The evidence found controlling in Sprecher consisted of the following: "that the individual defendants made no serious attempt to hold corporate meetings or to maintain records of corporate meetings and that [the corporation] had no substantial assets and that the individual defendants have taken out in salary basically all of the corporate profits." 78 Wis.2d at 38-39, 253 N.W.2d 493. Likewise, in Wiebke, the circumstances supporting disregard of the corporation as an entity were undoubtedly present: the shareholder used the corporate checking account as his personal account and did not...