IN THE COURT OF APPEALS OF IOWA
No. 14-1404
Filed November 12, 2015
MINGER CONSTRUCTION, INC.,
Plaintiff-Appellee,
vs.
CLARK FARMS, LTD., and KEVIN
W. CLARK, aka K.W. “CASEY” CLARK,
Defendants-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Dickinson County, David A. Lester,
Judge.
A subcontractor on a city’s sewer upgrade project and the sole
shareholder of the subcontracting company appeal a jury verdict in favor of the
contractor. AFFIRMED.
Andrea M. Smook of Cornwall, Avery, Bjornstad, Scott & Davis, Spencer,
for appellants.
Wade S. Davis of Stinson, Lenard & Street, L.L.P., Mankato, Minnesota,
for appellee.
Considered by Vaitheswaran, P.J., and Tabor and McDonald, JJ.
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VAITHESWARAN, Presiding Judge.
A subcontractor on a city’s sewer upgrade project and the sole
shareholder of the subcontracting company appeal a jury verdict in favor of the
contractor. They assert the evidence was insufficient to support (1) a finding that
the subcontractor breached its contract and (2) a finding that the shareholder
was personally liable for damages.
I. BACKGROUND FACTS AND PROCEEDINGS
Minger Construction, Inc. contracted with the City of Terril to upgrade its
sewer system. Minger subcontracted with Clarks Farms, Ltd. to remove
processed human and food grade waste, known as sludge. The subcontract
agreement required Clark Farms “to furnish all labor, material, skill and
equipment necessary or required and to perform all the work . . . necessary to
complete” the project.
Kevin Clark was “the sole owner, the shareholder, the sole board member
and the president” of Clark Farms. Clark Farms failed to comply with certain
prerequisites to working on the public project. The company was incorporated in
2001 but was administratively dissolved in 2012, the year Clark Farms entered
into the contract with Minger. The company did not have its corporate status
reinstated until 2013. The company also failed to maintain a certified payroll and
observe specified safety practices. Minger notified Clark of these omissions and,
on multiple occasions, attempted to obtain compliance. Clark Farms did not
respond.
Clark Farms began removing sludge, but ran into problems, including
equipment failure. On September 25, 2012, Minger transmitted a notice to Kevin
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Clark stating, “If you are not on the above-referenced project by tomorrow
morning 09-26-12 @ 7:00 AM—we will proceed to hire someone else and your
equipment will be held in escrow for reimbursement of added costs because you
are in breach of your contract.” Clark Farm employees went to the job site but,
according to Minger, did not perform their job duties.
Ten days after the September 25 notification, Minger terminated the
contract for failure to “satisfactorily meet[] the terms of the Default Notice.”
Minger hired a new company to complete the sludge removal and sued Clark
Farms and Clark for breach of the subcontract.
The case proceeded to a jury trial. The jury found Minger did what it was
required to do under the contract, Clark Farms breached its contract with Minger,
and Kevin Clark was personally liable for the breach. The jury awarded Minger
damages of $78,272.36. Clark Farms and Clark appealed.
II. Analysis
A. Breach of Contract
The jury was instructed Minger would have to prove the following
elements of its breach-of-contract claim:
(1) the existence of a contract, (2) the terms of the contract,
(3) [Minger] had done what the contract requires, (4) [Clark Farms
and Clark] breached the contract, and (5) the amount of any
damage [Clark Farms’ and Clark’s] breach caused [Minger].
The defendants take issue with the jury’s findings on the third and fifth elements.
Our review of the fact findings is for substantial evidence. See Iowa Mortg. Ctr.,
L.L.C. v. Baccam, 841 N.W.2d 107, 110 (Iowa 2013).
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1. Element 3
Clark Farms and Clark contend Minger did not do what the contract
required, as specified in the third element of the instruction and, specifically failed
to follow the default provision of the contract. The provision states:
17. (Default) That in case the Subcontractor shall fail when
and if required by the Contractor, to correct, replace and/or re-
execute faulty or defective work done and/or materials furnished
under this Subcontract, or repeatedly and persistently to complete
or proceed with this Subcontract within the schedule agreed to by
the parties or the time herein provided for, . . . or to comply with any
substantial term of this Subcontract, then the Contractor may give
the Subcontractor a written notice to cure the Subcontractor’s
default. If the Subcontractor fails within three (3) working days after
receipt of the notice of default to commence and continue
satisfactory correction of such default with diligence and
promptness, then the Subcontractor shall be in default of this
Subcontract and the Contractor, upon an additional three
(3) calendar days notice in writing to the Subcontractor, shall have
the right to terminate this Subcontract and finish the
Subcontractor’s Work, replace and/or re-execute such faulty or
defective Work or materials, either through its own employees or
through a contractor or subcontractor of its choice, and to charge
the cost thereof to the Subcontractor, together with any liquidated
or actual damages caused by a delay in the performance of this
Subcontract.
The defendants concede Minger’s September 25 notice “would be seen as the
notice of default required under Paragraph 17.” They argue Clark Farms
“show[ed] up on site and started working” as required by the default notice, “thus
curing their default within three working days.” In light of their actions, they
assert Minger “was required to give [them] an additional three day[] notice before
termination of the contract.”
A reasonable juror could have found otherwise. Patrick Minger testified
simply being at the job site was not enough; “[c]ommon sense” would dictate the
employees also had to be “producing.” Minger said “they weren’t producing.”
5
The jurors could have credited his testimony over Clark’s, who said he “had guys
over there working on the transfer of the material.” See Brokaw v. Winfield-Mt.
Union Cmty. Sch. Dist., 788 N.W.2d 386, 394 (Iowa 2010) (stating the fact finder
determines witness credibility and the weight of the evidence). The jury could
have surmised Clark Farms’s failure to perform productive work was essentially
the straw that broke the camel’s back.
Patrick Minger stated the engineering company on the project was giving
him “heat” to get the sludge cleared. Clark Farms did not accomplish this goal
and, in addition, failed to obtain the proper contractor certification, failed to pay
for the repair of its equipment, failed to pay its employees statutorily required
wages, failed to train its employees, failed to take proper safety precautions,
failed to perform the work in an “orderly and efficient manner,” and failed to use
the “means and methods necessary to accomplish the job.” In light of these
numerous omissions, the jury could have found the defendants did not cure the
default on the day after the default notice was issued and, under the contract,
Minger could terminate the agreement in another three days. Minger waited nine
days before terminating the contract.
Clark Farms and Clark also contend Minger failed to timely notify them of
claims Minger had against Clark Farms, as required by another provision of the
contract. Again, the jury reasonably could have found from Patrick Minger’s
testimony that Minger provided this notification as soon as it was able to
determine the amount of its claims.
We conclude there was substantial evidence to support the third element
of the breach-of-contract claim.
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2. Element 5
Clark Farms next contends Minger failed to prove the amount, if any, of
damages. The jury was instructed:
The measure of damages for breach of a contract is an
amount that would place [Minger] in as good a position as it would
have enjoyed if the contract had been performed by [Clark Farms
and Clark.] The damages you award must be foreseeable or have
been reasonably foreseen at the time the parties entered into the
contract.
The instruction went on to specify certain types of damages the jury could
consider.
As noted, the jury awarded $78,272.36. The award was supported by
substantial evidence in the form of Patrick Minger’s testimony that he was forced
to hire a replacement company to complete the sludge removal and the company
incurred costs for equipment rental. The amount the jury awarded was less than
Minger requested.
B. Clark’s Personal Liability
Kevin Clark contends there was insufficient evidence to support the
imposition of personal liability on him. The pertinent jury instruction stated:
Under Iowa law, a shareholder can be personally liable for
the obligations of his or her corporation in certain circumstances.
[Minger] claims that . . . Kevin W. Clark must be held legally
responsible for the acts of Defendant Clark Farms, Ltd.
To establish this claim, Plaintiff must prove all of the following
propositions:
1. Defendant Kevin W. Clark is a shareholder of Clark Farms,
Ltd.
2. Defendant Clark Farms, Ltd., is liable to Plaintiff.
3. Defendant Kevin W. Clark has abused the corporate
privilege.
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4. The amount owed by Defendant Clark Farms, Ltd. to
Plaintiff.
The instructions went on to define “corporate privilege” as “the right of a
shareholder of a corporation to avoid personal liability for the financial obligations
of the corporation.” The instructions set forth factors the jury could consider in
deciding whether an abuse of the corporate privilege was established, including
undercapitalization, the failure to maintain separate books, and failure to follow
corporate formalities. See Boyd v. Boyd & Boyd, Inc., 386 N.W.2d 540, 544
(Iowa Ct. App. 1986). Our review of the jury’s finding of personal liability is for
substantial evidence. C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do Acad.,
Inc., 412 N.W.2d 593, 596 (Iowa 1987).
A reasonable juror could have found the existence of these factors. As
noted, Kevin Clark allowed the corporate registration to lapse. Clark admitted he
made $530,000 in loans to the company to “keep the company funded.” Clark
also agreed he lost $837,264 over the life of the company. Substantial evidence
supported the jury’s imposition of personal liability on Kevin Clark.
We affirm the jury’s findings and the judgment in favor of Minger.
AFFIRMED.
Tabor, J., concurs; McDonald, J., concurs in part and dissents in part.
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MCDONALD, Judge. (concurring in part and dissenting in part)
This is a simple breach of contract case, and the jury’s verdict is
supported by substantial evidence on that claim. This case is not one of the
exceptional circumstances in which liability should be imposed on a shareholder
for what is otherwise a corporate obligation. I thus concur in part and dissent in
part.
It has been long accepted a corporation is a legal entity with jural
existence separate and distinct from its shareholders. See Iowa Code § 4.1(20)
(defining a person to include a corporation); Wyatt v. Crimmins, 277 N.W.2d 615,
616 (Iowa 1979).. It has been long accepted a corporation’s shareholders are
not personally liable for the obligations of the corporation solely because of their
status as shareholders. See Iowa Code § 490.622(2) (“Unless otherwise
provided in the articles of incorporation, a shareholder of a corporation is not
personally liable for the acts or debts of the corporation.”); 5 Matthew Doré, Iowa
Practice Series: Business Organizations § 15.3(1), at 454 (2014-2015) (stating
limited liability is the presumptive rule.). It also has been long accepted courts
will disregard the presumptive rule of limited liability under exceptional
circumstances and impose liability on an individual or individuals for what would
otherwise be a corporate obligation. See Wade & Wade v. Cent. Broad. Co., 288
N.W. 441, 443 (Iowa 1939).
While the rule allowing for the imposition of personal liability on a
shareholder for a corporate obligation is long accepted, the rationale underlying
the rule is not well developed. See 5 Doré, Iowa Practice § 15:3, at 458 (“In
Iowa, as elsewhere, it is difficult to make sense of the case law governing
9
disregard of the corporate entity.”); Mark A. Olthoff, Beyond the Form—Should
the Corporate Veil be Pierced?, 64 UMKC L. Rev. 311, 312 (1995) (“Courts and
commentators have struggled for many years to develop principles that, when
applied, would reveal whether a separately existing corporate organization
should be disregarded.”); Robert B. Thompson, Piercing the Corporate Veil: An
Empirical Study, 76 Cornell L. Rev. 1036, 1036 (1991) (“Piercing the corporate
veil is the most litigated issue in corporate law and yet it remains among the least
understood.”). Our cases speak only in metaphor and generalities, holding the
“corporate veil can be pierced” when the corporation is a “mere shell,” “sham,”
“intermediary,” “instrumentality,” or “alter ego” of the shareholders. “This
language is inherently unsatisfactory since it merely states the conclusion and
gives no guide to the considerations that lead a court to decide that a particular
case should be considered an exception to the general principle of nonliability.”
Robert W. Hamilton, The Corporate Entity, 49 Tex. L. Rev. 979, 979 (1971).
Ultimately, the issue “is one that is still enveloped in the mists of metaphor.”
Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926).
The metaphor of piercing the corporate veil has incorrectly framed the
relevant question. See id. (“Metaphors in law are to be narrowly watched, for
starting as devices to liberate thought, they end often by enslaving it.”). Our
cases treat the question of “veil piercing” as if it were a cause of action proved by
evidence of one or more of the following:
1) the corporation is undercapitalized, (2) the corporation lacks
separate books, (3) its finances are not kept separate from
individual finances, or individual obligations are paid by the
corporation, (4) the corporation is used to promote fraud or
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illegality, (5) corporate formalities are not followed, or (6) the
corporation is a mere sham.
See C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d
593, 598 (Iowa 1987). The metaphor does not capture the truth or spirit of the
matter. In a veil piercing case, the “corporate veil” is not actually pierced and the
corporate entity is not disregarded; instead, judgment is entered against the
corporation, as the judgment entry in this case reflects, and the district court
takes the additional step of imposing judgment against a shareholder for the
corporation’s liability where liability otherwise would not exist. See Int’l Fin.
Servs. Corp. v. Chromas Techs. Canada, Inc., 356 F.3d 731, 736 (7th Cir. 2004)
(“Piercing the corporate veil, after all, is not itself an action; it is merely a
procedural means of allowing liability on a substantive claim.”). As one
commentator noted:
In no area is the misleading character of the entity metaphor more
evident than in that of shareholder liability for corporate debts.
Much of the language of the cases dealing with shareholder liability
starts with the proposition that the existence of the corporate entity
requires the denial of such liability, and therefore any case which
imposes such liability can only do so by disregarding the corporate
entity. Instead of dealing with the proper question of when, if ever,
shareholders will be liable for corporate obligations, decisions are
made in terms of the question of whether the corporate entity exists
or is to be disregarded.
William P. Hackney & Tracy G. Benson, Shareholder Liability for Inadequate
Capital, 43 U. Pitt. L. Rev. 837, 843 (1982). Framing the question around the
existence of the entity rather than the imposition of liability as an equitable
remedy has hindered development of the law in this area in several respects, one
of which deserves further consideration here. Specifically, framing the question
around the existence of the entity rather than the equitable and remedial nature
11
of the rule has precluded discussion of whether the issue should be decided by
the jury at law or the district court in equity.
There is no doubt the district court was required to submit the veil-piercing
inquiry to the jury in this case; our cases hold veil piercing is a question of fact for
the jury. See Team Cent., Inc. v. Teamco, Inc., 271 N.W.2d 914, 923 (Iowa
1978) (“We mention briefly Team Central’s additional argument that whether or
not the corporate veil should be pierced is a question of law to be decided by the
court, not the jury. We do not believe that this is a correct statement and several
of our cases hold otherwise.”); Spectrum Prosthetics & Orthotics, Inc. v. Baca
Corp., No. 08-0811, 2009 WL 3337600, at *4 (Iowa Ct. App. Oct. 7, 2009)
(holding jury instruction was required where there was sufficient evidence to
support at least one Briggs Factor). Our cases, however, have not addressed
the rationale for submitting the question to the jury. Upon examination, the
rationale for the rule and practical considerations support the conclusion that the
question should be one reserved for the court subject to de novo review and not
a question of fact for the jury subject to correction for legal error.
The decision to impose liability on a shareholder for corporate obligations
where there is no basis for liability at law, see Iowa Code § 490.622(2), is
necessarily an equitable remedy within the province of the district court and not
the jury. See Benson v. Richardson, 537 N.W.2d 748, 762 (Iowa 1995) (stating
“[w]here equity requires us to examine the purposes of a corporation, we are not
bound by forms, fiction, or technical rules”); Wescott & Winks Hatcheries v. F. M.
Stamper Co., 85 N.W.2d 603, 607 (Iowa 1957) (stating disregard of the corporate
entity is “an equitable prerogative to circumvent its improper use”); Boyd v. Boyd
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& Boyd, Inc., 386 N.W.2d 540, 543-44 (Iowa Ct. App. 1986) (noting the equitable
nature of the remedy); 5 Doré, Iowa Practice § 15:4, at 467 (“[P]iercing analysis
is equitable in nature.”).
Reserving this question for the district court does not infringe the right to
trial by jury. “[T]he right to a jury trial preserved by the Iowa Constitution, article I,
section 9, is the right that existed at common law.” Iowa Nat’l Mut. Ins. Co. v.
Mitchell, 305 N.W.2d 724, 728 (Iowa 1981). The common law distinguished
between actions arising at law tried to a jury and actions arising in equity tried to
the court and without a jury. See id. at 727; see also Katchen v. Landy, 382 U.S.
323, 337 (1966) (stating that “the right of trial by jury, considered as an absolute
right, does not extend to cases of equity jurisdiction”). This distinction between
actions arising at law and actions arising in equity survived the procedural
unification of courts of law and courts of equity. The imposition of personal
liability for a corporate obligation is not a common law claim requiring trial by jury.
See Int’l Fin. Servs. Corp., 356 F.3d at 737 (discussing Illinois Law and stating
veil piercing is an equitable remedy to be decided by the court); Nelson v.
Brunswick Corp., 503 F.2d 376, 381 n.10 (9th Cir. 1974) (“The question of
whether to disregard a corporate entity under Washington law is one for the court
to decide.”); Dow Jones Co. v. Avenel, 198 Cal. Rptr. 457, 460 (Cal. Ct. App.
1984) (stating the question “is essentially an equitable one and for that reason is
particularly within the province of the trial court” and the “constitutional guaranty
of the right to a jury trial does not apply to actions involving the application of
equitable doctrines and the granting of relief that is obtainable only in courts of
equity”); Chin v. Roussel, 456 So. 2d 673, 678 (La. Ct. App. 1984) (“Whether the
13
corporate veil should be pierced is primarily a finding of fact best made by the
trial judge.”); Atlas Constr. Co. v. Slater, 746 P.2d 352, 359 (Wyo. 1987)
(“Whether a corporate structure should be disregarded is peculiarly a question for
courts to determine from evidence. We conclude that there exists no right to a
jury trial on the issue of piercing the corporate veil.”)
There are sound practical reasons for having the district court resolve the
issue rather than a jury. The issue of corporate governance is complicated. See,
e.g., Weltzin v. Nail, 618 N.W.2d 293, 301 (Iowa 2000) (concluding in a corporate
derivative suit a “judge is simply better equipped to hear the complicated
corporation and duty claims” than a jury). For example, in this case, the jury was
asked to decide if corporate formalities were followed. However, Minger
Construction offered no testimony and the district court gave no instruction on the
corporate formalities required for a closely held corporation electing S-
corporation tax treatment. Judges are familiar with the legal requirements based
on training and experience and can better address the issue. Our supreme court
has thus concluded that some equitable questions regarding corporate
governance should be presented to the district court in equity rather than to a jury
at law:
Much has been written about the necessity of having equitable
cases heard by a judge. Disregarding the traditions which underlie
the jury as an institution, the use of twelve individuals drawn at
random with diverse education, intellectual ability, and occupations,
but lacking the specialized knowledge and ability to evaluate
testimony, is clearly not an ideal system for determining facts in
litigation. No matter how kindly one views the jury there is no
question that at times its verdict represents fiction and not fact. Our
jurisprudence has never provided an absolute right to a jury trial in
every case.
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Id. at 302.
It is also exceedingly difficult to craft instructions that provide meaningful
guidance to the jury. See id. (identifying “juror competence as one of the
considerations to be used when determining if a jury is warranted”). Here, the
district court submitted the “veil piercing” question to the jury. The jury
instructions set forth relevant factors but provided little guidance on how the
factors were to be reconciled. Is the evidence sufficient to pierce the corporate
veil if the plaintiff proves only one of the six factors? It is unclear. Compare HOK
Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 936 (8th Cir. 2007) (“A party
seeking to pierce the corporate veil need not prove all six factors, but it must
prove at least one of the factors.”); and Fazio v. Brotman, 371 N.W.2d 842, 846
(Iowa Ct. App. 1985) (“The instruction tells the jury they can pierce the corporate
veil only when there are exceptional circumstances and when any one of the six
items is established. This accurately sets out Iowa law in this area.”); with Ross
v. Playle, 505 N.W.2d 515, 517-18 (Iowa Ct. App. 1993) (holding the failure to
follow corporate formalities, standing alone, was not sufficient ground to pierce
the corporate veil). What about other factors not addressed by the six factor
test? For example, one court considers at least nineteen factors, plus any other
evidence that might be relevant in a totality of the circumstances test. See Laya
v. Erin Homes, Inc., 352 S.E.2d 93, 98-99 (W. Va. 1986). In Boyd, the court
recognized the six factors usually identified as being relevant are not exclusive
and that the test is simply ad hoc:
Where Gene’s argument fails is in his characterization of these
factors as the only factors which warrant “piercing the corporate
veil.” Nowhere in Lakota is its listing claimed to be an exclusive or
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even an exhaustive one. Rather, no precise formula is available to
predict when a court should disregard the corporate entity as
Fletcher explains after a more extensive listing of factors than
Lakota’s: The conclusion to disregard the corporate entity may not,
however, rest on a single factor but often involves a consideration
of the mentioned factors; in addition, the particular situation must
generally present an element of injustice or fundamental unfairness
. . . . It seems clear that no hard and fast rule as to the conditions
under which the entity may be disregarded can be stated as they
vary according to the circumstances of each case and that factors
adopted as significant in a decision to disregard the corporate entity
should be treated as guidelines and not as a conclusive test.
Fletcher, § 41.30 at 430-31. Additionally, at least two other noted
treatises on corporate law state that one of the circumstances
which may move a court to disregard corporate entity is where
limited liability would be inequitable. 6 Hayes, Iowa Practice
Business Organizations § 882 at 298 (1985); Hornstein,
Corporation Law and Practice § 752 at 265 (1959). Hayes further
specifies that “[t]he corporate veil may be disregarded when
recognition would work inequitably against one or more groups of
creditors of the enterprise . . . .” Hayes, § 886 at 308.
386 N.W.2d at 543-44. The jury cannot be given meaningful instruction when the
case law provides there is no “hard and fast rule” to resolve the issue.
In sum, the gestalt inquiry makes the question particularly ill-suited for jury
determination:
The substantive law of veil-piercing, therefore, necessitates
the analysis of a variety of factors and the weighing or balancing of
a combination of those factors that are present. However, when a
jury is to be instructed on the basis of ultimate facts, rather than
evidentiary facts, a proper jury instruction becomes very difficult to
draft. If a jury is to consider the evidence in light of various factors
indicating “control,” all or some of which may be determinative, the
final decision is left to the wandering vicissitudes and suppositions
of the jury. Thus, an instruction on the issue of piercing the
corporate veil can create a “roving commission.” Such a “roving
commission” instruction is inherently prejudicial and may be
presumptively erroneous. Because it may be difficult to submit a
proper instruction on veil-piercing to the jury, the trial judge should
review and examine the evidence, and, ultimately, reach a
conclusion on whether to disregard the corporate veil. The trial
judge is also uniquely situated to make the veil-piercing
determination. The judge is trained in the law and is more apt to
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consider all of the evidence presented by all of the parties. The
court is less likely to be swayed by emotion or adept argument,
particularly in highly publicized or devastating tort cases. Further, a
separate hearing of the piercing issue, away from the jury, may
prevent potentially prejudicial (and otherwise irrelevant) financial
information from being revealed to the jury. Finally, the trial judge
is more likely to be familiar with the facts of the case and, more
generally, the body of law involving disregard of corporations,
particularly the concepts of “control” and “improper use.” Each of
these reasons weighs in favor of the trial judge deciding the veil-
piercing question.
Olthoff, 64 UMKC L. Rev. at 335-36.
For the above-stated reasons, I would be in favor of reserving the liability
question for the court in equity subject to de novo review. Controlling case law,
however, dictates our review is for the correction of legal error on substantial
evidence review. The standard of review is not dispositive of the claim in this
case, however. Substantial evidence review “does not preclude inquiry into the
question whether, conceding the truth of the facts found, a conclusion of law
drawn therefrom is correct, nor are we bound by the trial court’s determination of
the law.” Briggs Transp. Co., Inc. v. Starr Sales Co., 262 N.W.2d 805, 811 (Iowa
1978). Even when the evidence is viewed in the light most favorable to the
plaintiff, there is not substantial evidence in support of the verdict. Indeed, there
is no evidence in support of the verdict.
I begin with the proposition that a court will impose personal liability on a
shareholder for the corporation’s obligations only in the most exceptional of
circumstances. See C. Mac Chambers Co., Inc., 412 N.W.2d at 597. “Plaintiffs
bear the burden of proving that exceptional circumstances exist which warrant
piercing the corporate veil.” Id. at 598. And the burden is significant. See HOK
Sport, Inc., 495 F.3d at 935 (“Disregarding the entity’s corporate form under
17
either the alter ego doctrine or the remedy of piercing the corporate veil is an
extraordinary measure that should be reserved for exceptional circumstances,
. . . and the party seeking to do so bears the burden of proof.”); Morgan v. O’Neil,
652 S.W.2d 83, 85 (Ky. 1983) (“Holding a shareholder in a corporation
individually liable for a corporate debt is an extraordinary procedure and should
be done only when the strict requirements for imposing individual liability are
met.”); White v. Winchester Land Dev. Corp., 584 S.W.2d 56, 62 (Ky. Ct. App.
1979) (“Generally speaking, the corporate veil should only be pierced reluctantly
and cautiously. . . .”); see also Wallace ex rel. Cencom Cable Income Partners II,
Inc., L.P. v. Wood, 752 A.2d 1175, 1183 (Del. Ch. 1999) (“Persuading a
Delaware court to disregard the corporate entity is a difficult task.”); TNS
Holdings, Inc. v. MKI Sec. Corp., 703 N.E.2d 749, 751 (N.Y. 1998) (stating that
“[t]hose seeking to pierce a corporate veil . . . bear a heavy burden”). This is a
heavy burden. The majority makes no effort to explain why the burden has been
met in this case. Instead, the majority summarily dismisses Clark’s argument by
rattling off three facts immaterial to the question.
There is no evidence supporting a finding Clark Farms was
undercapitalized. See Briggs Transp. Co., Inc., 262 N.W.2d at 810 (identifying
undercapitalization as a relevant factor). The relevant inquiry is the capital
structure of the entity at or near the time of incorporation. See Gilleard v. Nelson,
No. 03-1496, 2005 WL 2756042, at *3 (Iowa Ct. App. Oct. 26, 2005) (affirming
imposition of liability on individual where entity “was undercapitalized at its
moment of incorporation”); Midwest Fuels, Inc. v. JP & K, Inc., No. 03-0218, 2004
WL 358291, at *2 n.1 (Iowa Ct. App. Feb. 27, 2004) (recognizing the relevant
18
inquiry is “initial capitalization of the corporation); see also Pierson v. Jones, 625
P.2d 1085, 1087 (Idaho 1981) (“However, financial inadequacy is measured by
the nature and magnitude of the corporate undertaking or the reasonableness of
the cushion for creditors at the time of its inception of the corporation.”); Global
Credit Servs., Inc. v. AMISUB (Saint Joseph Hosp.), Inc., 508 N.W.2d 836, 839
(Neb. 1993) (“Inadequate capitalization means capitalization very small in
relation to the nature of the business of the corporation and the risks the
business entails measured at the time of formation.”). “Clearly, a corporation
adequately capitalized at its inception can become undercapitalized at a later
time for any of a variety of legitimate reasons.” Pierson, 625 P.2d at 1087.
The majority does not identify a single piece of evidence regarding the
capital structure of Clark Farms at or near the time of incorporation. Clark Farms
was incorporated in 2001. The only evidence regarding the corporation’s
finances is a 2012 federal tax return, which reflects the company’s tax
information eleven years after the relevant date. The exhibit does not provide
any evidence regarding Clark Farms’ capital structure at or near the time of
incorporation. At best, the tax return shows only the company reported negative
retained earnings. That fact does not allow for any inference regarding Clark
Farms’ capital structure at or near the time of incorporation. The jury was never
provided information regarding when the loss was sustained and why. Likewise,
the majority’s reliance on the fact Clark loaned his company money is misplaced.
There is no evidence of when the loan was made. Further, preferring debt
capital over equity capital is not improper. In short, Minger Construction failed to
19
introduce any evidence regarding the capital structure of the corporation at or
near the time of incorporation.
The majority’s analysis regarding undercapitalization is woefully
inadequate for another reason. Undercapitalization is a relational concept. The
relevant question is not whether the corporation had a specific amount of capital
at or near the time of incorporation but whether the capital structure was
adequate as measured by the nature and magnitude of the corporate
undertaking. See J-R Grain Co. v. FAC, Inc., 627 F.2d 129, 135 (8th Cir. 1980)
(“Adequate initial financing should not be confused with formal minimum paid-in
capital requirements applicable in several jurisdictions.”); Briggs Transp. Co.,
Inc., 262 N.W.2d at 810 (“If capital is illusory or trifling compared with the
business to be done and the risks of loss, this is a ground for denying the
separate entity privilege.” (emphasis added)). Minger Construction failed to
introduce evidence of the amount of capital needed given the nature and
magnitude of the business undertaking. See J-R Grain Co., 627 F.2d at 135
(“Inadequate capitalization . . . means capitalization very small in relation to the
nature of the business of the corporation and the risks the business necessarily
entails. Inadequate capitalization is measured at the time of formation of the
corporation. A corporation that was adequately capitalized when formed but has
suffered losses is not undercapitalized.”); Frank H. Easterbrook & Daniel R.
Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 113 (1985)
(“By ‘adequately’ capitalized we mean an amount of equity that is within the
ordinary range for the business in question. Both the absolute level of equity
investment and the debt-equity ratio will depend on the kind of business on which
20
the firm is embarked.”). No expert witness or any other witness testified
regarding the capital requirements necessary to engage in this kind of business.
For example, comparison with the capitalization of other
corporations in the same or a similar line of business may be made.
The capitalization of the corporation in question could be compared
with the average industry-wide ratios (current ratio, acid-test ratio,
debt/equity ratio, etc.) obtained from published sources . . . . These
average ratios could be buttressed by expert testimony from
certified public accountants, securities analysts, investment
counselors or other qualified financial analysts.
Laya, 352 S.E.2d at 101. On the record before us, there is simply no evidence
from which it could be inferred Clark Farms did not have capital to engage in the
business of dredging and the land application of biosolids.
The only reasonable inference to be drawn from this record is Clark Farms
was adequately capitalized given the nature of the business. At the time of trial,
Clark Farms had been in business for over twelve years. See Cass v. Sands,
No. 05-1008, 2006 WL 229033, at *4 (Iowa Ct. App. Feb. 1, 2006) (holding the
plaintiff failed to create a disputed issue of fact regarding capitalization where
evidence showed the business had sufficient capital to operate for one year). By
all indications, it was a going concern with assets, including an office and
equipment, employees, and business. At best, the evidence showed Clark
Farms may have had negative earnings for one or more years, but that fact is
largely immaterial. See Midwest Fuels, Inc., 2004 WL 358291, at *2 (holding the
plaintiff failed to create a triable issue of fact where the corporation had capital at
inception and was in business for a “period of time [but] the business was not
successful”). In sum, Clark Farms was a legitimate business in continuous
operation for more than a decade.
21
The majority concludes the jury’s verdict is supported by substantial
evidence because Clark Farms failed to maintain separate financial records. See
Briggs Transp. Co., Inc., 262 N.W.2d at 810 (identifying the maintenance of
separate books as a relevant factor). I do not find any evidence, let alone
substantial evidence in support of this factor. It is not disputed Clark and Clark
Farms maintained separate financial records. Clark testified the corporation kept
separate books and finances. Halverson, the officer manager, testified the
corporation kept separate books and finances. The 2012 tax return shows Clark
Farms filed a tax return separate from Clark. The payroll records admitted into
evidence show Clark Farms and not Clark paid the company’s employees.
When Clark loaned the corporation funds, the funds were documented in the
relevant financial records.
The majority also concludes Clark Farms failed to follow corporate
formalities because it let its “corporate registration” lapse. See id. (identifying the
failure to follow corporate formalities as a relevant factor). It is unclear what that
means. In any event, there is no evidence, let alone substantial evidence in
support of this factor. First, there was no evidence or instruction provided to the
jury regarding the corporate formalities required. The jury thus had no guidance
on whether corporate formalities were actually followed. Beyond this, there was
no evidence establishing Clark Farms failed to adopt and adhere to its articles of
incorporation. See Iowa Code § 490.202. There was no evidence the
corporation failed to adopt and adhere to corporate bylaws. See Iowa Code
§ 490.206. There was no evidence showing the company failed to maintain a
registered office and agent. See Iowa Code § 490.501. There was no evidence
22
establishing the company failed to hold an annual meeting or take other
appropriate action. See Iowa Code § 490.701. There was no evidence the
corporation did not have a board of directors and officers. See Iowa Code
§§ 490.801, 490.840. There was no evidence establishing the corporation failed
to issue shares. While there was no evidence Clark Farms actually followed any
these formalities, it was the plaintiff’s burden to prove Clark Farms failed to follow
corporate formalities and not Clark Farms’ burden to prove it did follow corporate
formalities. The absence of evidence is not the evidence of absence. See Cass,
2006 WL 229033, at *4-5 (holding the plaintiff failed to generate a disputed issue
of fact where the record was silent as to most formalities and noting the failure to
follow formalities generally is insufficient to impose personal liability on a
shareholder).
The only relevant evidence regarding corporate formalities showed Clark
Farms did in fact follow corporate formalities. Clark Farms filed its articles of
incorporation with the Secretary of State. “The secretary of state’s filing of the
articles of incorporation is conclusive proof that the incorporators satisfied all
conditions precedent to incorporation.” Iowa Code § 490.203(2). Clark Farms
regularly filed its biennial reports. While Clark Farms did miss one filing resulting
in the administrative dissolution of the corporation, Clark Farms successfully
applied for reinstatement. The mere fact that Clark Farms was administratively
dissolved is not material to the question. This is because the entity continued as
a separate legal entity following administrative dissolution and the reinstatement
related back to the date of dissolution as if it had never occurred. See Iowa
Code § 490.1421(3) (“A corporation administratively dissolved continues its
23
corporate existence . . .”); Iowa Code § 490.1422(3) (“When the reinstatement is
effective, it relates back to and takes effect as of the effective date of the
administrative dissolution as if the administrative dissolution had never
occurred.”). The evidence also showed Clark Farms maintained separate books
and separate finances from Clark. Clark Farms and Clark filed separate tax
returns. In sum, there is just no evidence in support of the majority’s conclusion.
Finally, the jury was also asked to consider whether the corporation is
merely a sham or used to promote fraud or illegality. There is no evidence of
either. Clark Farms had been in business for twelve years at the time of this
transaction. It had over $1 million in assets. It had an office. It had equipment to
conduct its business. In this case, the company brought a dredge and other
equipment to the job site. Clark Farms had employees, and it paid its
employees. Clark Farms filed tax returns with the assistance of a professional
accountant. It was experienced enough in the industry to obtain a contract with
Minger Construction. The majority does not bother discussing this factor
because the only thing that can be inferred from this record is that Clark Farms
did not perform its contractual obligations in this case. The mere failure to
perform a contract is an insufficient reason to impose personal liability on a
shareholder for the corporation’s obligations. See Campisano v. Nardi, 562 A.2d
1, 7 (Conn. 1989) (holding the mere breach of a corporate contract cannot of
itself establish the basis for imposing personal liability).
There is simply no basis to impose liability on Clark for the corporation’s
obligations under the record in this case. The majority’s opinion is at odds with
the evidence, the equitable and remedial principles underlying the rule, and a
24
legion of cases declining to impose personal liability on similar facts. See, e.g.,
Nw. Nat’l. Bank of Sioux City v. Metro Ctr., Inc., 303 N.W.2d 395, 398-99 (Iowa
1981) (reversing judgment where there was no evidence of undercapitalization
and companies maintained separate financial records); King v. Wilson, No. 13-
2018, 2014 WL 6681609, at *2 (Iowa Ct. App. Nov. 26, 2014) (holding there was
no basis to impose personal liability where corporation was in business for fifteen
years and the plaintiff failed to show the corporation was undercapitalized, did
not follow corporate formalities, and did not maintain separate financial records);
CCS, Inc. v. K & M Enterprises, L.L.C., No. 12-1213, 2013 WL 751284, at *3
(Iowa Ct. App. Feb. 27, 2013) (affirming grant of summary judgment where the
plaintiff “presented no evidence to support assertions that K & M was
undercapitalized; lacked separate books; failed to keep separate finances, or
paid individual member obligations; or failed to follow corporate formalities”).
For the foregoing reasons, I respectfully concur in part and dissent in part.