Jablonsky v. Klemm, 10921

• Decision Date: 21 November 1985
• Docket Number: No. 10921,10921
• Citation: 377 N.W.2d 560
• Parties: Terrence R. JABLONSKY, Employee Transfer Corporation, C.O. Parsons and Doris Parsons, Reubin E. Bitz and Viola G. Bitz, Bertha Anton, Robert J. Jablonsky and Margaret M. Jablonsky, First Federal Savings and Loan Association of Bismarck, Rose Frenzel and Randy J. Frenzel, Edwin A. Ficek and Mary Ann Ficek, Richard Privratsky and Bernadette Privratsky, Thomas F. Ehli and Tess R. Ehli, Mike Cozad and Susan Cozad, Wilbur W. Bohrer and Audrey M. Bohrer, Jeffrey J. Conlon, Joseph G. Lupo and Virginia Lupo, Curtis P. Martin, Marvin M. Morel, Ida G. Butler, Randall J. Decker and Linda R. Decker, Plaintiffs, Appellees and Cross-Appellants, v. Robert A. KLEMM and Design Innovation and Development, Inc., a corporation, Defendants, Appellants and Cross-Appellees. Civ.
• Court: North Dakota Supreme Court

Page 560

377 N.W.2d 560

Terrence R. JABLONSKY, Employee Transfer Corporation, C.O Parsons and Doris Parsons, Reubin E. Bitz and Viola G. BitzBertha Anton, Robert J. Jablonsky and Margaret M. Jablonsky First Federal Savings and Loan Association of Bismarck, Rose Frenzel and Randy J. Frenzel, Edwin A. Ficek and Mary Ann Ficek, Richard Privratsky and Bernadette Privratsky, Thomas F. Ehli and Tess R. Ehli, Mike Cozad and Susan Cozad, Wilbur W. Bohrer and Audrey M. Bohrer, Jeffrey J. Conlon, Joseph G Lupo and Virginia Lupo, Curtis P. Martin, Marvin M. Morel, Ida G. Butler, Randall J. Decker and Linda R. Decker, Plaintiffs, Appellees and Cross-Appellants, v.Robert A. KLEMM and Design Innovation and Development, Inc., a corporation, Defendants, Appellants and Cross-Appellees.

Civ. No. 10921.

Supreme Court of North Dakota.

Nov. 21, 1985.

Howe, Hardy, Galloway & Maus, Dickinson, for plaintiffs, appellees and cross-appellants; argued by Gary A. Ficek.

Mackoff, Kellogg, Kirby & Kloster, Dickinson, for defendants, appellants and cross-appellees; argued by James D. Geyer.

ERICKSTAD, Chief Justice.

DefendantsRobert A. Klemm and Design Innovation and Development, Inc.[DID], appeal from a district court judgment awarding 21 of 28 members of the Hillside Village Condominium Association a total of $96,865.90, plus interest.Those 21 members, along with seven members of the condominium association who had their claims dismissed with prejudice [plaintiffs], have cross-appealed from the judgment.

The plaintiffs are owners of condominium units in the Hillside Village Condominium in Dickinson.After a wooden retaining wall located behind the units failed, the plaintiffs brought this action against DID, the corporate developer of the condominium project, and Klemm, an officer and stockholder of DID, based on theories of negligence and breach of warranty.Following a bench trial, the district court ruled that DID, through its agents, negligently designed and constructed the retaining wall and that such conduct was the proximate cause of the wall's failure.The court also found that DID was liable under the implied warranty theory.

The district court concluded that the measure of damages was the cost of repairing the wall in a suitable fashion, and found that the cost of reconstructing in concrete the wooden portion of the wall would be $135,000.The court found, however that seven of the plaintiffs were "100 percent negligent" in purchasing their units with knowledge of the defective retaining wall and were therefore not entitled to relief.The court awarded the remaining plaintiffs approximately $97,000 and found that, under the circumstances, it was proper to pierce the corporate veil of DID and hold Klemm personally liable for the damages.

On appeal Klemm and DID do not challenge the trial court's findings of negligence and breach of implied warranty, but assert that the trial court erred in piercing the corporate veil and that it applied an inappropriate measure of damages.The plaintiffs assert in their cross-appeal that the district court erred in failing to find Klemm directly liable under their theories of recovery; that the court erred during pretrial proceedings in ordering that the case be dismissed unless the individual condominium owners were substituted as plaintiffs in place of the condominium association; and that the court erred in apportioning the damages between the unit owners.

FACTS

The condominium project was conceived by Klemm and Ed Anheluk in 1976, and DID was incorporated to be the developer.Klemm served as president and general manager of DID while his wife and father were listed as the other officers of the corporation.Klemm was authorized a $1,500 per month salary as general manager, but he did not collect his salary.The initial capitalization of the corporation was $19,000, and Klemm and his wife were the sole shareholders.

Klemm and Anheluk orally agreed that Anheluk would design and supervise construction of the project and that the profits would be divided between DID and Anheluk.Klemm obtained the necessary financing for the project and Anheluk collected $100 per week from DID as an advance on anticipated profits.

The project was built in three phases.DID borrowed $250,000 for phase one, $300,000 for phase two, and $500,000 for phase three.The construction work was done by employees of Klemm Design Innovations [KDI], a sole proprietorship owned and operated by Klemm, which also furnished the carpet and kitchen cabinets for the project.KDI earned a 13 percent profit on $78,000 in kitchen cabinets it furnished DID.There was $209,000 in total business volume between KDI and DID, but DID failed to pay KDI $22,000 of that amount.The construction workers were paid by KDI, which billed DID and received reimbursement from the lender.DID rented a one-room office in the KDI building for $250 per month, but those payments were not made to KDI.DID had no employees and owned no equipment.Construction equipment was obtained from KDI through an oral lease agreement.

Before disbursing the funds for the second and third phases of the project, the lender required that some of the units be sold.Klemm personally purchased two unfinished units for 20 percent less than their value.After the units were completed, Klemm sold the units and received a $27,000 profit which he personally retained.

The project took six years to complete and involved approximately $1,340,000 in sales.At the end of 1983, DID had a net deficit of $31,600.One of the last structures built was the wooden retaining wall which is the subject of this lawsuit.

The land on which the project was constructed is located on the side of a hill.The hill was leveled for construction purposes, leaving a high dirt and rock wall 20 to 25 feet behind the buildings.Anheluk designed the retaining wall and he and two KDI employees built it.Klemm gave final approval to the design.The lower portions of the wall were constructed with stone and the higher portions with wood.The wooden portion of the wall, which is 355 feet in length, varies in height from seven feet to 13 feet, in violation of Dickinson building code provisions prohibiting a wooden retaining wall more than six feet in height.Anheluk and Klemm admitted that the wall was built mainly for appearance and that no thought was given to lateral earth pressures or the strength of the building materials.Expert testimony established that the retaining wall was underdesigned and overstressed between 4 to 12 times more than its holding capacity.On June 10, 1982, a portion of the wall collapsed, threatening the common areas, decks and patios, and the interior space of some of the units.

PIERCING THE CORPORATE VEIL

In reaching its decision to pierce the corporate veil, the trial court analyzed this case under factors set forth in Hilzendager v. Skwarok, 335 N.W.2d 768(N.D.1983).The trial court found that although the minimum corporate formalities were observed, DID was insufficiently capitalized; DID became technically insolvent within a year of its incorporation; there was "some siphoning of funds" by Klemm; the other officers and directors of DID were nonfunctioning; and "the existence of DID was merely a facade for Klemm's individual dealings."The court also determined that "[t]he notion of D.I.D. as a legal entity is only being used to justify a wrong committed against the buyers of these condo units."

Klemm has launched a multifarious attack on the trial court's decision to pierce the corporate veil.His assertions generally relate to the elements necessary under North Dakota law for piercing the corporate veil, the adequacy of the plaintiffs' complaint with regard to these elements, and the evidentiary support for the trial court's findings.

In Hilzendager, supra, 335 N.W.2d at 774, we stated:

"It is the general rule that officers and directors of a corporation are not generally liable for the ordinary debts of the corporation.Danks v. Holland, 246 N.W.2d 86, 90(N.D.1976).However, in Schriock v. Schriock, 128 N.W.2d 852, 866(N.D.1964), our court stated:

' "... but, when the notion of 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."Fletcher, Private CorporationsSec. 41(1963 rev.vol.).'

"See alsoDanks v. Holland, supra;Family Center Drug v. North Dakota St. Bd. of Pharm., 181 N.W.2d 738, 745(N.D.1970).

"It has also been held that factors considered significant in determining whether or not to disregard the corporate entity include: insufficient capitalization for the purposes of the corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation at the time of the transaction in question, siphoning of funds by the dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and the existence of the corporation as merely a facade for individual dealings.Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512(Minn.1979)."

Klemm first asserts that proof of fraud is a prerequisite for piercing the corporate veil.Although fraud has been present in some of this court's decisions on piercing the corporate veil [seeHilzendager, supra;Schriock, supra ], other cases indicate that fraud did not exist under the facts presented.SeeLarson v. Unlimited Business Exch. of N.D., 330 N.W.2d 518, 521(N.D.1983);Family Center Drug, supra;Mahanna v. Westland Oil Company, 107 N.W.2d 353, 361-362(N.D.1960).We disagree with Klemm's assertion and follow the generally accepted rule that proof of fraud is not a necessary prerequisite for disregarding the corporate entity.E.g., 1 Fletcher, Cyclopedia of the Law of Private CorporationsSec. 41.30, at p. 19 (1984 Supp.);Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 538, 88 L.Ed....