Peschel Family Trust v. Colonna, 02-730.

• Decision Date: 21 August 2003
• Docket Number: No. 02-730.,02-730.
• Citation: 2003 MT 216,317 Mont. 127,75 P.3d 793
• Parties: PESCHEL FAMILY TRUST, Plaintiff and Respondent, v. Mark P. COLONNA, Individually and Mark P. Colonna, D.D.S., P.C., Defendant and Appellant, v. Herbert C. Peschel, individually and as trustee of the Peschel Family Trust, Counterclaim Defendant.
• Court: Montana Supreme Court

75 P.3d 793

2003 MT 216

317 Mont. 127

PESCHEL FAMILY TRUST, Plaintiff and Respondent, v. Mark P. COLONNA, Individually and Mark P. Colonna, D.D.S., P.C., Defendant and Appellant, v. Herbert C. Peschel, individually and as trustee of the Peschel Family Trust, Counterclaim Defendant.

No. 02-730.

Supreme Court of Montana.

Submitted on Briefs May 22, 2003.

Decided August 21, 2003.

For Appellant: Bruce Fredrickson, Angela K. Jacobs, Crowley, Haughey, Hanson, Toole & Dietrich, P.L.L.P., Kalispell, Montana.

For Respondent: Sean S. Frampton, Morrison & Frampton, Whitefish, Montana.

Justice JOHN WARNER delivered the Opinion of the Court.

¶ 1 Respondent, Peschel Family Trust, the "Trust", sued the Appellants, Dr. Mark P. Colonna, "Colonna", and Mark P. Colonna, D.D.S., P.C., the "Corporation", for damages arising out of the breach of a lease. The District Court entered summary judgment that the Corporation breached the lease by vacating the leased building and fixed damages, including attorney's fees. Then, following a non-jury trial, the District Court entered judgment piercing the corporate veil and held Colonna personally liable for those damages.

¶ 2 Colonna appeals from the judgment of the District Court. The Trust demands attorney's fees on appeal. We affirm the District Court and grant the Trust's prayer for fees on appeal.

¶ 3 The following issues are raised:

¶ 4 1. Did the District Court err when it pierced the corporate veil and held Colonna personally liable for breaching the lease with the Trust?

¶ 5 2. Is the Trust entitled to attorney's fees on appeal?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 6 Dr. Mark Colonna, a dentist, formed Mark P. Colonna, D.D.S., P.C., the Corporation, to render professional dental services on September 9, 1993. Colonna and Laura, his former wife, were named as the Corporation's directors in the articles of incorporation. Colonna was also the president and sole shareholder. Laura served as the vice-president, secretary and treasurer. However, the corporate by-laws were signed only by Colonna. He did not have a formal employment agreement with the Corporation and did not receive wages; nor did the Corporation issue him W-2 forms. Instead of receiving a salary, Colonna, from time-to-time, received interest payments on the loans discussed below in paragraphs ten and eleven.

¶ 7 About the same time the Corporation was formed, Colonna began practicing dentistry in a building owned by the Trust. The building was shared with Dr. Herbert Peschel and Dr. Pam Lilly. Dr. Peschel also served as the trustee for the Trust.

¶ 8 On July 12, 1996, the Colonnas separated and Laura resigned from her duties with respect to the Corporation. Subsequently, the articles of incorporation were amended and Colonna became the sole director of the Corporation. He assumed the positions of vice-president, secretary and treasurer. Laura's resignation was formally documented.

¶ 9 In September of 1996, the Corporation entered the lease at issue with the Trust for dental office space and equipment located in the Trust's building. The lease provided that the Corporation would lease the property and dental equipment from September 1, 1996, through August 31, 2001, for $1,700 per month. The Corporation's decision to enter into the lease was not documented in the corporate records.

¶ 10 After the lease was executed, Colonna shared the building with two other dentists, Dr. Peschel and Dr. Dale Bax. According to Colonna's testimony, his business had grown significantly by the fall of 1998. He then demanded possession of the entire property by letter. Neither Dr. Peschel nor the Trust responded and Colonna vacated the building on November 30, 1998. The Corporation's decision to vacate, and discontinue paying rent, was not formally documented in the Corporation's records. The District Court determined that the lease was not intended to include the entire property, which conclusion has not been challenged on appeal.

¶ 11 At nearly the same time, Colonna personally purchased another building to which he moved his practice. He caused the Corporation to enter into a ten-year lease, as a tenant, with himself as landlord, on December 1, 1998, whereby the Corporation rented the new property. Rent was to be paid on a graduated scale beginning at $4,000 per month. Colonna assigned his personal liability to make payments on the new building to the Corporation. The Corporation made Colonna's mortgage payments on that property directly to the bank. Again, no formal corporate resolution authorized this arrangement.

¶ 12 Colonna testified that he loaned the Corporation $10,200.00 in 1996. The loan was not documented by a promissory note or security agreement. Colonna also said he loaned the Corporation $23,005.00 in 1998, and again loaned the Corporation $31,505.00 in 2000. Neither of the loans were documented in the Corporation's records. They were payable upon demand. At trial, Colonna's accountant attempted to correct the testimony of his client, stating that the payment of money in each case was a loan repayment to Colonna by the Corporation, rather than loans to the Corporation from Colonna. The District Court's findings indicate these transactions were, in fact, loans to the Corporation.

¶ 13 Colonna also loaned the Corporation $87,000.00 at an interest rate of 10%, which was documented by a promissory note dated December 14, 1998. Colonna loaned the Corporation an additional $60,185.81, at an interest rate of 15%, on May 31, 2001. The note provided that the loan would be paid in full by May 30, 2006. The two loans were payable upon demand as cash flow permitted. The Corporation's decisions to borrow money from Colonna were never documented through formal corporate minutes or resolutions.

¶ 14 The Corporation's records indicate that there were only three corporate meetings in its nine-year existence. No documentation indicates that the decisions to enter into and subsequently breach the lease with the Trust were made by formal corporate resolution. Nor is there documentation to indicate that the decision to lease Colonna's new property was arrived at through a formal corporate resolution. However, Colonna asserts that he made the decisions as the Corporation's president, not as an individual.

¶ 15 There is evidence that a lease on a pickup truck used by Colonna was paid, at least in part, by the Corporation. The doctor testified that the Corporation only paid for the use of the vehicle to the extent that it was related to his business travel. Yet, he also claimed that the Corporation sponsored his professional bowling career and he used the pickup for travel to tournaments. The decision to sponsor Colonna's bowling was not formally documented in the corporate records.

¶ 16 The amended complaint against both Colonna and the Corporation alleges they were one and the same and, thus, both breached the lease of the Trust's property. The Corporation and Colonna filed a counterclaim in which they raised numerous affirmative defenses and alleged that they had been damaged when the Trust refused to relinquish full possession the leased building pursuant to the lease.

¶ 17 Colonna filed a motion for summary judgment in which he maintained that the Trust failed to allege sufficient facts to pierce the corporate veil. The Trust filed a motion for summary judgment and requested the court to conclude that the undisputed facts established that Colonna had breached the lease. The District Court denied Colonna's motion and granted the Trust's motion for summary judgment. It concluded that Colonna and the Corporation were not entitled to sole possession of the Trust property and that they had breached the lease when they vacated the property and stopped paying rent.

¶ 18 After a two-day bench trial in June of 2002, the District Court concluded that Colonna was the alter ego of the Corporation and the real party in interest under the lease. The court further found that it would be inequitable to permit Colonna to use the Corporation as a subterfuge to defeat public convenience or justify wrong. Consequently, the corporate veil was pierced and Colonna was held personally responsible to the Trust for the damages arising from the breach plus attorney's fees.

STANDARD OF REVIEW

¶ 19 This court reviews a district court's findings of fact to determine whether they are clearly erroneous. Ace Leasing, Inc. v. Boustead, 2002 MT 213, ¶ 16, 311 Mont. 285, ¶ 16, 55 P.3d 371, ¶ 16. In determining whether a court's findings are clearly erroneous, we will examine whether: (1) the findings are supported by substantial credible evidence; (2) whether the district court misapprehended the effect of the evidence; and (3) whether we are left with a definite and firm conviction that a mistake has been committed. Berlin v. Boedecker (1994), 268 Mont. 444, 455-56, 887 P.2d 1180, 1187. It is not a matter of whether this Court agrees with the district court's findings and conclusions. Our review considers whether those findings, when viewed in a light most favorable to the prevailing party, are supported by substantial credible evidence. Stromberg v. Seaton Ranch Co. (1972), 160 Mont. 293, 306, 502 P.2d 41, 48.

¶ 20 We review a district court's conclusions of law to determine if they are correct. Ace Leasing, ¶ 16.

DISCUSSION

ISSUE 1

¶ 21 Did the District Court err when it pierced the corporate veil and held Colonna personally liable for breaching the lease with the Trust?

¶ 22 Colonna contends that the District Court was incorrect when it concluded that he should be held personally liable for breaching the lease with the Trust. He maintains that the court incorrectly interpreted and applied the law to the facts of the case when it concluded that he was the alter ego of the Corporation. In the alternative, he contends that the court was incorrect when it concluded that the Corporation had been used for a fraudulent or otherwise wrongful purpose....