Laya v. Erin Homes, Inc.

• Citation: 352 S.E.2d 93,177 W.Va. 343
• Decision Date: 16 December 1986
• Docket Number: No. 16965,16965
• Parties: John LAYA and Thelma Laya, His Wife, v. ERIN HOMES, INC., a Corporation, Michael Ferns, Individually, and Mike Ferns, dba Erin Homes, Inc.
• Court: West Virginia Supreme Court

Page 93

352 S.E.2d 93

177 W.Va. 343

John LAYA and Thelma Laya, His Wife, v. ERIN HOMES, INC., a Corporation, Michael Ferns Individually, and Mike Ferns, dba Erin Homes, Inc.

No. 16965.

Supreme Court of Appeals of West Virginia.

Dec. 16, 1986.

Syllabus by the Court

1. "The law presumes ... that corporations are separate from their shareholders." Syl. pt. 3 (in part), Southern Electrical Supply Co. v. Raleigh County National Bank, --- W.Va. ---, 320 S.E.2d 515 (1984).

2. "While, legally speaking, a corporation constitutes an entity separate and apart from the persons who own it, such is a fiction of the law introduced for purpose of convenience and to subserve the ends of justice; and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences." Syl. pt. 10, Sanders v. Roselawn Memorial Gardens, [Inc.,] 152 W.Va. 91, 159 S.E.2d 784 (1968).

3. In a case involving an alleged breach of contract, to "pierce the corporate veil" in order to hold the shareholder(s) actively participating in the operation of the business personally liable for such breach to the party who entered into the contract with the corporation, there is normally a two-prong test: (1) there must be such unity of interest and ownership that theseparate personalities of the corporation and of the individual shareholder(s) no longer exist (a disregard of formalities requirement) and (2) an inequitable result would occur if the acts are treated as those of the corporation alone (a fairness requirement).

4. Generally, the presumption is that the party dealing with the corporation did not assume the risk of grossly inadequate capitalization.

5. Grossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation.

6. The propriety of piercing the corporate veil should rarely be determined upon a motion for summary judgment. Instead, the propriety of piercing the corporate veil usually involves numerous questions of fact for the trier of the facts to determine upon all of the evidence.

A. Dana Kahle, Wheeling, for appellants.

McHUGH, Justice:

This action is before this Court upon appeal by the plaintiffs/appellants, John Laya and Thelma Laya, husband and wife, from a final order entered by the Circuit Court of Ohio County, West Virginia (the trial court), dismissing two of the named defendants, namely, Michael Ferns, individually, and Mike Ferns doing business as Erin Homes, Inc., leaving as a defendant only Erin Homes, Inc., a corporation. The appellants contend that the dismissal of these two defendants upon a motion for summary judgment was improper. We agree and reverse and remand.

I

Michael Ferns and Lawrence Finneran were the incorporators of Erin Homes, Inc. in May, 1978. Ferns was one of the initial directors of the corporation and initially was secretary-treasurer of the corporation. Finneran was one of the initial directors of the corporation and initially was president of the corporation. Finneran's wife was also one of the initial directors of the corporation. There is nothing in the record to indicate that any meetings of the directors or shareholders were held prior to January 2, 1980. On that date, at a special meeting of the shareholders, Finneran and his wife resigned as directors, Finneran resigned as president, and Ferns, his wife, and his then personal secretary, Rosemary Bodey (she is no longer an employee) were elected as the new directors. At that meeting Ferns became the president and his wife became the secretary-treasurer. There is no evidence that there have been any meetings of the directors or shareholders after January 2, 1980.

According to the stock records of the corporation, Ferns and Finneran on June 1, 1979 were each issued a stock certificate representing 100 shares of capital stock. The corporation was authorized to issue 500 shares of stock at a par value of $10.00. Finneran gave a promissory note for $1,000.00 to the corporation for his stock. ¹ There is no evidence that the corporation ever received any cash payments from Finneran for his stock, and his promissory note was canceled upon his resignation as a director and president. Similarly, there is no evidence that Ferns ever paid any portion of the $1,000.00 for his 100 shares of $100.00 par stock.

According to undated "bills of sale," certain equipment (house-moving equipment, a highlift, a backhoe and miscellaneous equipment) was contributed to the corporation by Ferns shortly after incorporation. The house-moving equipment was purchased originally by Ferns for about $6,500-$6,700. The corporation according to the "bill of sale" assumed a debt of $5,220 on this equipment. Similarly, the corporation assumed liabilities of $5,995.94, $7,991.93 and $17,752.00, respectively, for the highlift, backhoe, and miscellaneous equipment. There is no record of any cash payments or issuance of shares of stock by the corporation for any of this equipment. The house-moving equipment was stored in Ferns' personal garage. The record is silent on where the other equipment was stored. The corporation purportedly paid $10,000.00 to an unrelated person for two parcels (five acres) of real estate, but there is no record of payment.

No corporate minutes were maintained after January 2, 1980. The corporate office was located in the same office as Ferns' other corporate business, Pike Homes, Inc., a dealer in mobile homes, formed in the year 1976. Ferns and Finneran are the only shareholders in Pike Homes, Inc. Erin Homes, Inc. was also a mobile home dealer until sometime in the year 1982, when the nature of the business was changed by Ferns to that of home remodeling.

The federal corporate income tax returns reflect "buildings and other assets." For example, at the beginning of the year 1980 such assets were listed at $61,455.00 and at the end of that year at $54,520.85. (The record does not indicate the amount of depreciation.) There is no evidence as to how these figures, or most of the other figures on the income tax returns for each year, were ascertained by the certified public accountant who prepared the tax returns. For example, there is no evidence of corporate records of any sales or other disposition of corporate assets. The 1980 federal corporate income tax return shows gross receipts of $463,987.65 from mobile home sales, and cost of goods sold in the amount of $374,256.62, for net sales proceeds of $89,731.03. The tax return shows $34,428.00 of interest incurred on loans to purchase the inventory of mobile homes. The record contains no information on these loans, such as the name of the lenders and whether there were any personal obligations for these loans imposed upon Ferns.

In his deposition testimony Ferns asserted that he never commingled his personal funds with the funds of Erin Homes, Inc. The corporation has always had its own checking account and all mobile home sales proceeds were deposited therein. The corporation leased in its own name from an unrelated person the real property upon which the mobile home sales business was located. Erin Homes, Inc. has filed federal income tax returns each year, using its own federal identification number. It has a West Virginia business registration certificate; it makes payments to the workers' compensation and unemployment compensation funds.

On October 1, 1980, John Laya and Thelma Laya, husband and wife, contracted with Erin Homes, Inc. to purchase from the latter a certain mobile home. Michael Ferns signed the contract as president of the corporation. The Layas "traded in" a certain pick-up truck and were given $5,000.00 credit toward the $17,500.00 purchase price of the mobile home; on October 31, 1980, the Layas also paid $12,500.00 in cash for the balance of the purchase price of the mobile home. The Layas shortly thereafter received the title to the mobile home.

The Layas allege that, contrary to the agreement, the mobile home was not subsequently delivered to them but was retained on the premises of Erin Homes, Inc. and was used by Erin Homes, Inc. as an unlocked exhibition model. The Layas allege that the trailer was allowed to fall into a state of disarray and disrepair, greatly impairing the value of the trailer.

In addition, the Layas incurred $8,500.00 in expenses for erection of a foundation for the trailer on their lot and for necessary excavation and earth moving to provide the proper ingress and egress to their lot for the equipment necessary to place the mobile home thereon.

The Layas also allege that the mobile home was moved by Erin Homes, Inc. at some time thereafter to another location, adjacent to a public highway, where it has been damaged by unknown persons (broken windows, stolen interior fixtures, etc.).

The Layas brought this action in August, 1981, against Erin Homes, Inc., a corporation, Michael Ferns, individually, and Mike Ferns, doing business as Erin Homes, Inc. For the alleged breach of contract by the defendants outlined above, the plaintiffs sought rescission of the contract and recovery of the $17,500.00 purchase price of the mobile home, together with the consequential damages of $8,500.00 for excavation and earth-moving.

The plaintiffs also sought $50,000.00 for pain, suffering and mental anguish caused by the defendants' conduct and $250,000.00 for punitive damages resulting from "the willful and deliberate misconduct of the defendants by refusing to perform the conditions of the contract and permitting the trailer to be wasted, for a total of $326,000.00 to be awarded unto the plaintiffs[...