Jones & Trevor Mktg., Inc. v. Lowry

• Decision Date: 29 June 2012
• Docket Number: No. 20100449.,20100449.
• Citation: 2012 UT 39,284 P.3d 630
• Court: Utah Supreme Court
• Parties: JONES & TREVOR MARKETING, INC., Plaintiff and Petitioner, v. Jonathan L. LOWRY, Nathan Kinsella, Financial Development Services, Inc., Jeremy Warburton, John Neubauer, and Esbex.com, Inc., Defendants and Respondents.

284 P.3d 630

2012 UT 39

JONES & TREVOR MARKETING, INC., Plaintiff and Petitioner,

v.Jonathan L. LOWRY, Nathan Kinsella, Financial Development Services, Inc., Jeremy Warburton, John Neubauer, and Esbex.com, Inc., Defendants and Respondents.

No. 20100449.

Supreme Court of Utah.

June 29, 2012.

Stephen Quesenberry, Jessica Griffin Anderson, Provo, for petitioner.

Earl Jay Peck, R. Christopher Preston, Salt Lake City, for respondents.

On Certiorari to the Utah Court of Appeals

Justice PARRISH, opinion of the Court:

INTRODUCTION

¶ 1 In this case, petitioner Jones & Trevor Marketing (J & T Marketing) appeals the dismissal of its suit alleging various contract and tort claims based on an alter ego theory of liability. The district court held that J & T Marketing had not demonstrated sufficient facts to support its alter ego theory. It therefore granted summary judgment against J & T Marketing on its tort and contract claims that rested on its alter ego theory. On appeal, the Utah Court of Appeals affirmed. We granted certiorari to address whether the court of appeals erred in affirming the district court's grant of summary judgment on the alter ego theory. We affirm the dismissal of J & T Marketing's suit.

¶ 2 On certiorari, J & T Marketing contends that the court of appeals erred in applying the factors set forth in Colman v. Colman, 743 P.2d 782 (Utah Ct.App.1987). In Colman, the Utah Court of Appeals articulated eight factors to aid courts in determining whether to pierce the corporate veil. Id. at 786. In this case, the Utah Court of Appeals affirmed summary judgment against J & T Marketing because J & T Marketing had provided evidence of only one of the eight Colman factors. Jones & Trevor Mktg., Inc. v. Lowry, 2010 UT App 113, ¶¶ 8, 10, 233 P.3d 538. J & T Marketing claims that this was in error and contends that evidence supporting even a single Colman factor may be sufficient to raise a disputed issue of material fact that would preclude summary judgment.

¶ 3 We address three related issues. First, because we have never addressed the Colman factors, we consider their usefulness in determining whether to pierce the corporate veil. We adopt the factors, but emphasize that they are merely useful tools for assessing claims of alter ego liability rather than required elements of such claims. Second, we determine that there is no particular formula for the number of factors a party must demonstrate to establish alter ego liability or to avoid summary judgment on a claim based on an alter ego theory of liability. Instead, courts must examine the entire relationship between a corporation and its officers and determine whether there are any genuine issues of material fact regarding the party's alter ego theory that would prevent summary judgment. Finally, we apply these concepts to this case and hold that J & T Marketing failed to present a genuine issue of material fact that would preclude summary judgment. We therefore affirm the summary judgment order dismissing J & T Marketing's claims for alter ego liability.

BACKGROUND

¶ 4 This case arises from a contract dispute between J & T Marketing and the owners of Financial Development Services (FDS), Jonathan Lowry and Nathan Kinsella. Lowry and Kinsella incorporated FDS as a company dedicated to providing sales and telemarketing services. Later, Lowry and Kinsella created the company Esbex.com (Esbex) to fill FDS's orders.

¶ 5 FDS entered into an agreement with J & T Marketing. J & T Marketing developed courses that purported to instruct people how to make money by purchasing tax lien certificates. Under the agreement, FDS would market and sell J & T Marketing's courses in exchange for commissions. The relationship quickly dissolved, and FDS sent a letter to J & T Marketing purporting to cancel the agreement. J & T Marketing responded by filing a complaint against FDS and Esbex for breach of contract.

¶ 6 Months after the suit was filed, FDS and Esbex became insolvent and were voluntarily dissolved. J & T Marketing then amended its complaint against FDS to add claims against Lowry and Kinsella in their individual capacities. In its amended complaint, J & T Marketing alleged five causes of action against Lowry and Kinsella, including theft by conversion, fraudulent misrepresentation, constructive fraud, fraudulent nondisclosure, and intentional interference with business relations. Lowry and Kinsella moved for summary judgment on each of these claims. J & T Marketing opposed summary judgment. Specifically, J & T Marketing opposed the constructive fraud and fraudulent nondisclosure claims on the merits and opposed the conversion, fraudulent misrepresentation, and intentional interference claims by arguing that Lowry and Kinsella were the alter egos of FDS. The district court granted summary judgment in favor of Lowry and Kinsella on all claims. The district court addressed the constructive fraud and fraudulent nondisclosure claims on the merits and then determined that because J & T Marketing could not prove its alter ego theory of liability, it could not sustain its underlying claims for conversion, fraudulent misrepresentation, and intentional interference against Lowry and Kinsella.¹ Subsequently, the district court entered a default judgment against the insolvent companies, FDS and Esbex.

¶ 7 J & T Marketing appealed the district court's summary judgment order. The Utah Court of Appeals affirmed. Jones & Trevor Mktg., Inc. v. Lowry, 2010 UT App 113, ¶ 18, 233 P.3d 538. Applying the eight factors that it had first enunciated in its 1987 decision, Colman v. Colman, 743 P.2d 782 (Utah Ct.App.1987), the court of appeals held that Lowry and Kinsella were entitled to summary judgment on the alter ego theory because J & T Marketing could not point to sufficient evidence to support that theory. Jones & Trevor Mktg., 2010 UT App 113, ¶¶ 5–10, 233 P.3d 538. Specifically, while J & T Marketing had offered evidence that Lowry and Kinsella took money from the corporations for their personal use, there was no evidence suggesting that these withdrawals were improperly accounted for. Id. ¶ 9. The court found that the absence of any such evidence was fatal to J & T Marketing's alter ego theory because the mere fact that Lowry and Kinsella took money from the company for their personal use was “not enough, by itself, to suggest applicability of the alter ego theory, especially in the absence of any facts bearing on the other elements and factors required to prove the alter ego theory.” Id. ¶ 6;see alsoid. ¶ 10.

¶ 8 J & T Marketing petitioned for certiorari review. Specifically, it asked that we review the court of appeals' dismissal of both its alter ego theory and its fraudulent misrepresentation claim. We granted the petition only as to the alter ego theory.²

STANDARD OF REVIEW

¶ 9 “On certiorari, we review the decision of the court of appeals for correctness, giving no deference to its conclusions of law.” Richards v. Brown, 2012 UT 14, ¶ 12, 274 P.3d 911 (internal quotation marks omitted). Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Utah R. Civ. P. 56(c). “An appellate court reviews a [lower] court's legal conclusions and ultimate grant or denial of summary judgment for correctness and views the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party.” Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (internal quotation marks omitted).

ANALYSIS

¶ 10 J & T Marketing argues that the court of appeals erred in affirming summary judgment in favor of Lowry and Kinsella. First, J & T Marketing argues that the court of appeals erred in its application of the Colman factors. Second, J & T Marketing argues that the court of appeals erred in affirming summary judgment because there were material issues of disputed fact that precluded judgment on its alter ego theory.

¶ 11 This appeal requires us to address three related issues. First, we must determine whether to adopt the Colman factors relied on by the Utah Court of Appeals in its consideration of the alter ego theory. Second, we must decide whether a disputed issue of fact going to a single factor is sufficient to defeat a motion for summary judgment on an alter ego theory. Finally, we must determine whether there are material disputed facts in this case that rendered summary judgment improper.

I. WE ADOPT THE COLMAN FACTORS AS USEFUL GUIDELINES TO AID COURTS IN DETERMINING WHETHER TO PIERCE THE CORPORATE VEIL

¶ 12 In Colman v. Colman, the Utah Court of Appeals articulated eight factors to be considered in evaluating claims predicated on a theory of alter ego liability. 743 P.2d 782, 786 (Utah Ct.App.1987). In this case, both parties assume the applicability of the Colman factors, but they disagree as to how many factors are necessary to establish alter ego liability. Because this court has never considered the Colman factors, we take this opportunity to address them.

¶ 13 “Ordinarily a corporation is regarded as a legal entity, separate and apart from its stockholders.” Dockstader v. Walker, 29 Utah 2d 370, 510 P.2d 526, 528 (1973). “The purpose of such separation is to insulate the stockholders from the liabilities of the corporation, thus limiting their liability to only the amount that the stockholders voluntarily put at risk.” Salt Lake City Corp. v. James Constructors, Inc., 761 P.2d 42, 46 (Utah Ct.App.1988). The alter ego doctrine is an exception to the general rule that limits stockholders' liability for obligations of the corporation. See, e.g., Dockstader, 510 P.2d at 528 (noting that “[t]he term ‘alter ego’ is used to describe a situation where the courts go behind the corporate entity and hold a stockholder liable for the debts of the corporation”). If a party can prove its alter ego theory, then that party may “pierce the corporate veil” and obtain a judgment...