J.L. Brock Builders, Inc. v. Dahlbeck

• Decision Date: 01 August 1986
• Docket Number: No. 84-961,84-961
• Citation: 391 N.W.2d 110,223 Neb. 493
• Parties: J.L. BROCK BUILDERS, INC., a Nebraska Corporation, Appellant, v. Eric DAHLBECK, Jr., and Viking Construction, Inc., Appellees.
• Court: Nebraska Supreme Court

Page 110

391 N.W.2d 110

223 Neb. 493

J.L. BROCK BUILDERS, INC., a Nebraska Corporation, Appellant, v. Eric DAHLBECK, Jr., and Viking Construction, Inc., Appellees.

No. 84-961.

Supreme Court of Nebraska.

Aug. 1, 1986.

Syllabus by the Court

1. Corporations: Equity: Fraud. In equity, the corporate entity may be disregarded and held to be the mere alter ego of a shareholder or shareholders in various circumstances where necessary to prevent fraud or other injustice.

2. Corporations: Equity: Liability. Proceedings seeking disregard of corporate entity, that is, piercing the corporate veil to impose liability on a shareholder for a corporation's debt or other obligation, are equitable actions.

3. Corporations. A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but when the notion of a legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.

4. Corporations: Debtors and Creditors: Liability: Fraud. A creditor, seeking to pierce the corporate veil and impose on a shareholder liability for a corporation's debt, has the burden to show, by a preponderance of evidence, that corporate entity must be disregarded to prevent fraud or injustice to the creditor.

5. Fraud: Proof: Circumstantial Evidence. Fraud may be proved by circumstantial evidence.

6. Corporations. Relevant circumstances or factors in determining existence of fraud in order to disregard corporate entity may include (1) grossly inadequate capitalization, (2) insolvency of the debtor corporation at the time the debt is incurred, (3) diversion by the shareholder or shareholders of corporate funds or assets to their own or other improper uses, and (4) the fact that the corporation is a mere facade for the personal dealings of the shareholder and that the operations of the corporation are carried on by the shareholder in disregard of the corporate entity.

7. Corporations: Words and Phrases. Inadequate capitalization of a corporation, measured at the time of corporate formation, means capitalization very small in relation to the nature of the business of the corporation and the risks the business necessarily entails.

8. Corporations: Words and Phrases. Insolvency means the inability of a corporation to pay its debts as they become due in the usual course of its business, or an excess of liabilities of the corporation over its assets at a fair valuation. Neb.Rev.Stat. § 21-2002(15) (Reissue 1983).

9. Corporations: Debtors and Creditors: Fraud. Stockholders of an insolvent corporation cannot participate in the distribution of its assets until creditors' claims against the corporation are paid. A shareholder's withdrawal of corporate assets leaving corporate debts unpaid is contrary to fundamental principles and may be considered as a circumstance in determining whether fraud exists.

10. Corporations. Whenever one in control of a corporation uses that control, or uses the corporate assets, to further his or her own personal interests, the fiction of the separate corporate identity may properly be disregarded.

Robert F. Martin, P.C., Blair, for appellant.

Eric Dahlbeck, Jr., pro se.

KRIVOSHA, C.J., and BOSLAUGH, WHITE, HASTINGS, CAPORALE, SHANAHAN, and GRANT, JJ.

SHANAHAN, Justice.

Between 1971 and 1977, J.L. Brock Builders, Inc., provided supplies, materials, and services for painting properties owned by Viking Construction, Inc. When Viking failed to pay its account, Brock filed suit in the district court for Douglas County, seeking judgment for $15,895 against Viking and Eric Dahlbeck, Jr., Viking's president and sole shareholder. When Viking admitted liability for the debt of $15,895, judgment was entered for Brock against Viking, and the sole issue submitted to the district court was whether, in disregard of Viking's corporate entity, Dahlbeck was liable for the debt which Viking owed Brock. The district court decided in favor of Dahlbeck and dismissed Brock's action to impose liability on Dahlbeck by piercing Viking's corporate veil.

"In equity, the corporate entity may be disregarded and held to be the mere alter ego of a shareholder or shareholders in various circumstances where necessary to prevent fraud or other injustice." United States Nat. Bank of Omaha v. Rupe, 207 Neb. 131, 135, 296 N.W.2d 474, 477 (1980). In Workman v. Workman, 174 Neb. 471, 501, 118 N.W.2d 764, 782 (1962), we stated:

"A court of equity will not permit mere corporate forms to serve as a cloak and a shield to the perpetration of a fraud, but will examine the whole transaction, looking through corporate forms to the substance of things, to protect the rights of innocent parties, or to circumvent fraud."

Proceedings seeking disregard of corporate entity, that is, piercing the corporate veil to impose liability on a shareholder for a corporation's debt or other obligation, are equitable actions. See, United States Nat. Bank of Omaha v. Rupe, supra; Slusarski v. American Confinement Sys., 218 Neb. 576, 357 N.W.2d 450 (1984).

An appeal to the Supreme Court in an equitable action is a trial of factual questions de novo on the record, requiring the Supreme Court to reach a conclusion independent of the findings of the trial court. Neb.Rev.Stat. § 25-1925 (Reissue 1985). The Supreme Court's de novo review of the record is subject to the rule that, where credible evidence is in conflict on a material issue of fact, the Supreme Court will consider the fact that the trial court observed the witnesses and accepted one version of facts over another. American Sec. Serv. v. Vodra, 222 Neb. 480, 385 N.W.2d 73 (1986).

In 1971 Gail Koch and Dahlbeck incorporated Viking to develop real estate. Viking was capitalized with $3,000, $2,250 in cash by Dahlbeck for 75 percent of the stock and $750 in services by Koch for 25 percent of the stock. At the first meeting of the board of directors, a $7,000 loan from Dahlbeck to Viking was approved. Viking's capital account never changed throughout its existence. Viking developed two South Omaha subdivisions involving 65 lots, 25 of which cost $10,000 each, with the remaining 40 at $4,500 an acre. Federal income tax returns for Viking were introduced into evidence. During its first 4 years, Viking had average real estate sales of $1,259,260. From 1975 to 1978, however, Viking's sales decreased from $458,393 to $169,432. Other annual averages throughout Viking's existence included a net operating loss--$9,519, accounts payable--$147,072, assets--$738,794, and liabilities--$833,312. According to balance sheets accompanying Viking's federal income tax returns, Viking's average liabilities at book value throughout its existence exceeded its average assets at book value.

In 1972 Viking paid $15,000 salaries to Dahlbeck, as president, and Koch, as secretary-treasurer, of the corporation. Dahlbeck's salary in 1973 was $5,750, while Koch's was $13,000. In 1974 Dahlbeck and Koch each received a salary of $2,500. Viking paid no salaries from 1975 to 1978. Koch severed his relationship with Viking as an officer and shareholder in 1976, and his stock was bought by Viking and reported as treasury stock on its financial statements.

On January 11, 1977, on behalf of Viking, Dahlbeck wrote a letter to the corporation's creditors:

Even with the activity that we have at the present time, it will be at least April or May before we will have any cash flow with which to pay any old accounts. At that time, I am sure we will be able to resume some kind of a reasonable payment schedule. Until then we are still hanging on by our fingernails. Let's all hope no one clips them off.

When Viking's business continued to decline during the remainder of 1977, Brock made a demand for payment. Early in 1978, Viking commenced winding up its business and, on March 31, transferred assets valued at $11,000, its entire net worth, to Dahlbeck in satisfaction of his loans to the corporation. At the time of the transfer of assets to Dahlbeck, Viking owed other creditors, including Brock, $78,000. Viking made its last payment to Brock in April 1978, leaving a balance of $15,895 owed on the debt to Brock. In July, Viking notified homeowners that it would no longer be able to do work or make repairs on houses acquired from the corporation. On November 2 Dahlbeck assigned his personal assets, which included property he had received from Viking on March 31, to a bank in partial payment of a loan to Viking for which Dahlbeck was the guarantor.

After Viking dissolved in 1980, Brock filed suit, alleging that Dahlbeck had used Viking's assets for his personal purposes and had thereby defrauded Brock as one of Viking's creditors.

Brock presented testimony from an expert, Gilbert Ragan, an accountant and a professor of accounting and economics. Ragan expressed an opinion that Viking was "grossly inadequately capitalized for the size of its operation" and that the purpose of capitalization for $3,000 was a "liability shield." Although he acknowledged that it was not unusual for a home developer to enter business somewhat undercapitalized, Ragan testified that he did not recall any developer, with sales as extensive as Viking's, going into business with "just $3,000 worth of capital." Referring to a home construction business such as Viking's, Ragan testified the industry standard called for a net equity ratio (ratio of corporate debt to net corporate equity) of 61.2 percent, that is, $612 of debt for every $1,000 of equity. For Viking the net equity ratio was zero precent. Concerning his examination and analysis of Viking's books, Ragan testified that Dahlbeck had received preferential treatment as one of Viking's creditors because the transfer of Viking's assets to Dahlbeck had "cleaned out the assets of Viking.... They did have remaining at that particular time other creditors, accounts payable of...