Kansas Gas & Elec. Co. v. Ross

• Citation: 521 N.W.2d 107
• Decision Date: 11 January 1994
• Docket Number: No. 18386,18386
• Parties: KANSAS GAS & ELECTRIC COMPANY, Plaintiff and Appellant, v. Jeff ROSS, Defendant and Appellee, and Ross Service Company, Inc., a South Dakota Corporation, Defendant. . Considered on Briefs
• Court: Supreme Court of South Dakota

Page 107

521 N.W.2d 107

KANSAS GAS & ELECTRIC COMPANY, Plaintiff and Appellant, v. Jeff ROSS, Defendant and Appellee and Ross Service Company, Inc., a South Dakota Corporation, Defendant.

No. 18386.

Supreme Court of South Dakota.

Considered on Briefs Jan. 11, 1994.

Decided Aug. 24, 1994.

Leo J. Disburg of McCann, Martin & McCann, P.C., Brookings, for plaintiff and appellant.

Gary Pashby of Boyce, Murphy, McDowell & Greenfield, Sioux Falls, for defendant and appellee.

LOVRIEN, Circuit Judge.

This is an appeal by Kansas Gas & Electric Company (KG & E) from summary judgment granted to Jeff Ross in an action by KG & E to "pierce the corporate veil" of Ross Service Company, Inc. (Ross Service) and hold Jeff Ross individually liable for outstanding corporate debt. We affirm.

FACTS

Ross Service is a South Dakota corporation engaged in the scrap metal and wire salvaging business. KG & E is a Kansas corporation engaged in the supply of natural gas and electric power.

This controversy arose from a transaction initiated on June 27, 1990, when Ross Service submitted a bid of 38 cents per pound to KG & E for the purchase of approximately 1.9 million pounds of surplus wire. Ross Service was to provide trucking and pay KG & E weekly for wire received.

The bid was signed "Jeff Ross, Owner, Ross Service Company, Inc." KG & E accepted this bid on July 2, 1990. Pursuant to the agreement, KG & E, according to their records, provided Ross Service with surplus wire worth $706,977.72 from July to October of 1990. Ross Service failed to keep up with its weekly payments. Of the $706,977.72 owed under the contract, Ross Service did not pay $194,204.40. It claimed, among other things, that it had not received all the wire that KG & E's records indicated.

As a result of Ross Service's failure to pay the amount owed, KG & E sued Ross Service and Jeff Ross. ¹ KG & E later settled its dispute with Ross Service, but sought to recover from Jeff Ross individually by piercing the corporate veil. ²

Ross Service was incorporated in March of 1979 by John and Edith Ross. John Ross is president and Edith Ross is vice president and secretary of the corporation. They are the parents of Jeff Ross. It is undisputed that Jeff Ross was employed by the corporation from 1979 to July of 1991. Rodney Ross, Jeff's brother, was the treasurer of the corporation until his death in 1984.

At the time of incorporation, an initial subscription of 640 shares of stock was issued by John Ross. He then kept 319 shares for himself, gave 319 shares to Edith Ross and the remaining two shares to Rodney Ross.

Although Jeff Ross never received any of the original subscription shares, there is a dispute of fact regarding Jeff Ross's status as a shareholder. Edith Ross testified that after Rodney's death in 1984, his two shares were given to Jeff Ross. This testimony is the only evidence that Jeff Ross was ever a shareholder in Ross Service. Jeff Ross denies that he has ever been a shareholder in the company. Even when we view this factual issue in favor of KG & E and assume that the transfer was made to Jeff Ross, his ownership interest amounts to only .3125% of the outstanding stock.

The facts are also in dispute whether Jeff Ross served as an officer and/or director of Ross Service. The corporation's annual reports for 1989 and 1990 list Jeff Ross as a director for Ross Service. These reports were prepared entirely by Edith Ross. Jeff Ross denies that he was ever informed or consented to serving as a director of Ross Service. The annual report for 1991, which was filed on March 25, 1990, does not list Jeff Ross as a director even though he did not leave the employment of Ross Service until July of 1991.

Jeff Ross admits that two corporate notes bear his signature as treasurer of Ross Service. However, he claims to have no recollection of having signed these notes and states that he most likely did so at the direction of his parents or the bank.

The evidence also reveals that Ross Service's tax returns for 1989 and 1990 show all the officers who were compensated by the corporation and list only John and Edith Ross as officers of Ross Service. Jeff Ross is not listed as an officer.

In addition to his employment with Ross Service, Jeff Ross operated his own trucking company. The trucking company maintained a checking account at Norwest Bank in Dell Rapids, South Dakota. Ross Service maintained its corporate account with Dakota State Bank in Colman, South Dakota.

Ross Service experienced financial difficulties in the spring of 1990. As a result, Dakota State Bank began to apply all deposits made to the corporate account to existing loan balances Ross Service owed to the bank. To avoid this, Edith Ross asked Jeff Ross whether the corporation could use Jeff's trucking business account. Jeff agreed.

From April of 1990 to January of 1991, both Ross Service and Jeff Ross used the trucking company's account. Different size checks were used in an effort to distinguish Jeff Ross's personal expenses from Ross Services's corporate expenses.

In October of 1990, Ross Service issued two checks drawn on the trucking company's account in the amount of $7,500 for the purchase of a 1976 Ford truck and $2,200 for the purchase of a trailer. Jeff Ross kept the truck and trailer for his own personal use. The record shows that he reimbursed the account for these items by depositing $10,000 into the trucking company account in October of 1990 from a loan he received from Norwest Bank. The record also shows that the truck and trailer were listed on the loan documents as the items being purchased and as the items in which a security interest was being granted to Norwest Bank.

At the close of discovery, Jeff Ross moved for summary judgment. A hearing was held by the trial court on December 21, 1992, where the motion was granted. ³ The court concluded that even though Jeff Ross may have had some control over the corporation as a manager, he was such a minor shareholder that the court could not say that he was operating the business as his alter ego. KG & E appeals the judgment.

The only issue raised on appeal is whether the trial court erred in granting summary judgment to Jeff Ross. KG & E argues that summary judgment is improper because there are genuine issues of material fact to be determined in this case.

DECISION

I. SUMMARY JUDGMENT STANDARD

Our standard of review for a grant or denial of summary judgment is well settled:

In reviewing a grant or a denial of summary judgment under SDCL 15-6-56(c), we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. The nonmoving party, however, must present specific facts showing that a genuine, material issue for trial exists. Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. If there exists any basis which supports the ruling of the trial court, affirmance of a summary judgment is proper.

Ashby v. Northwestern Public Service Co., 490 N.W.2d 286, 288 (S.D.1992); Waddell v. Dewey County Bank, 471 N.W.2d 591, 593 (S.D.1991); Garrett v. Bankwest, Inc., 459 N.W.2d 833, 836-37 (S.D.1990); Pickering v. Pickering, 434 N.W.2d 758, 760-61 (S.D.1989). With this standard in mind, we have carefully reviewed the record and find that no genuine issue of material fact exists. The trial court properly granted Jeff Ross's motion for summary judgment.

II. PIERCING THE CORPORATE VEIL

A firmly entrenched doctrine of American law is the concept that a corporation is considered a legal entity separate and distinct from its officers, directors and shareholders ⁴ until there is sufficient reason to the contrary. 1 Charles R.P. Keating & Gail O'Gradney, Fletcher Cyclopedia of the Law of Private Corporations Sec. 25 (perm. ed. 1990); 18 Am.Jur.2d Corporations Sec. 43 (1985); 18 C.J.S. Corporations Sec. 8 (1990).

We have long recognized this doctrine as well. See Mobridge Community Industries v. Toure, 273 N.W.2d 128, 132 (S.D.1978); Farmers Feed & Seed v. Magnum Enterprises, 344 N.W.2d 699, 702 (S.D.1984); Ethan Dairy Products v. Austin, 448 N.W.2d 226, 230 (S.D.1989); Baatz v. Arrow Bar, 452 N.W.2d 138, 141 (S.D.1990).

This concept of "limited liability" is considered the central purpose for choosing the corporate form because it permits corporate shareholders to limit their personal liability to the extent of their investment. ⁵ Ross v. Playle, 505 N.W.2d 515, 517 (Iowa App.1993); and see Keating & O'Gradney, supra, at Sec. 14; Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 537-38, 88 L.Ed. 793 (1944) ("Limited liability is the rule not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted.")

The principal exception to the limited liability rule is the doctrine of "piercing the corporate veil." This doctrine is equitable in nature and is used by the courts to disregard the distinction between a corporation and its shareholders to prevent fraud or injustice. See Keating & O'Gradney, supra, Sec. 41.25 at 652; 18 C.J.S. Corporations Sec. 10 at 277-78. The general rule which has emerged is that a corporation will be looked upon as a legal entity separate and distinct from its shareholders, officers and directors unless 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, then sufficient reason will exist to pierce the corporate veil. United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (C.C.E.D.Wis.1905); Baatz, 452 N.W.2d at 141; Global Credit Services v. AMISUB, 244 Neb. 681, 508 N.W.2d 836, 842 (1993)...